Creating a successful estate plan requires you to consider much more than just how you want your estate assets distributed after you are gone. You must also protect those assets both during your lifetime and at the time of your death. Failing to consider claims that are likely to be filed against your estate during probate, for example, can be a costly mistake. To illustrate that point, the Londonderry estate planning attorneys at DeBruyckere Law Offices explain what happens if an estate lacks sufficient cash to pay claims.
The Probate Process
When you die you will leave behind assets owned by you at the time of your death. Those assets make up your estate. The legal process that oversees the eventual transfer of those estate assets to your beneficiaries and/or heirs of the estate is referred to as “probate.” In addition to ensuring that your assets are distributed according to your wishes or according to the state intestate succession laws, probate also serves other functions, including:
- Authenticating the decedent’s Last Will and Testament if one was left behind
- Identifying, locating, securing, and valuing estate assets
- Locating legal heirs of the estate if the decedent died intestate, or without a valid Will
- Allowing creditors the opportunity to file claims against the estate
- Litigating any challenges to the Will or estate
- Ensuring the taxes owed by the estate are paid
Understanding Estate Liquidity
You have probably heard the term “liquid assets” before in everyday conversation. “Liquidity” is a term used when referring to the value of an asset. A liquid asset is one that can easily be converted into cash. Obviously, cash held in a checking or savings account qualifies as a liquid asset. Other assets have varying degrees of liquidity, based on how easily and/or quickly they can be turned into cash. Your home, for example, is not a liquid asset because it may take months to turn the home’s value into cash. Gold, on the other hand, has a high liquidity value because it can easily be turned into cash. The value of your estate’s liquid assets is often very important when it comes time to probate your estate because it is always better to pay claims with cash.
Paying Estate Debts
Before assets can be distributed to the intended beneficiaries and/or heirs of your estate, creditors of the estate must be allowed the opportunity to file claims against the estate. In addition, any taxes due from the estate must be calculated and paid. Creditor claims submitted to the court are reviewed by the Executor of your estate and approved or denied. Approved claims must then be paid out of the available estate assets. Likewise, any federal (and/or state) gift and estate taxes due must be paid out of the estate assets. If the estate has sufficient cash, either from a financial account or another source, paying those claims is a fairly simple process; however, if the estate lacks sufficient liquid assets to cover all the approved claims and taxes due, the Executor’s job becomes considerably more difficult.
If your estate lacks enough cash to cover all approved debts and tax obligations, your Executor must convert non-liquid assets into liquid assets to pay the taxes and debts. That usually means selling estate assets to raise the necessary funds. Inevitably, the need to sell estate assets creates controversy because it means selling tangible assets that were promised to loved ones and/or that may have sentimental meaning to those loved ones. Your children, for instance may not be happy about the need to sell the family home. Those same children may be upset that an art collection promised to them must be sold to raise the funds needed to pay debts. Furthermore, your Executor may have a very tough time deciding which assets to sell unless you left guidance in your Will or in another estate planning document that specifies which assets to sell first.
The best way to avoid leaving your loved ones and your Executor in such a difficult position is to ensure that your estate has sufficient liquid assets available at the time of your death.
Contact Londonderry Estate Planning Attorneys
For more information, please join us for one of our upcoming FREE seminars. If you have additional questions about creating an estate plan with sufficient liquidity, contact the Londonderry estate planning attorneys at DeBruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.