Last Will & Testament: it’s not the end of the story

A last will and testament is a crucial component of estate planning, as it allows you to specify how your assets should be distributed after your death. However, while a will outlines your wishes, it does not automatically guarantee those wishes can be fulfilled.

One critical aspect often overlooked in estate planning is ensuring there are sufficient funds in your estate to cover the requirements of the document. Without adequate liquid assets, your heirs may face significant challenges in executing your will as intended, potentially leading to delays, financial hardship, or even disputes among beneficiaries.

What is estate liquidity?

In a nutshell, estate liquidity refers to the availability of cash or assets that can be easily converted into cash to cover the expenses, debts, and taxes associated with settling an estate.
Liquid assets include: cash, savings accounts, money market accounts, stocks, bonds – and any assets that can be quickly sold or accessed without significant loss of value.
Non-liquid assets include: real estate, business interests, collectibles, and retirement accounts, all of which may take time to sell or incur penalties or fees if accessed prematurely.
Cash to cover the associated costs: it’s essential to consider not only how your assets will be distributed, but also how easily those assets can be converted into cash to cover the costs associated with administering your estate. Costs you need to consider when considering the ramifications of your passing: cost of the funeral itself; payment of debts; estate taxes; legal and administrative costs.

The awkward results of lack of liquidity

While a last will is an essential tool for expressing your wishes regarding the distribution of your assets, it is not the last word on the matter if it does not address the practicalities of how those wishes will be carried out. Even if your will is clear and unambiguous, it may be difficult to execute if your estate lacks liquidity.

• If your estate consists primarily of non-liquid assets, your executor may need to sell some of these assets to generate the cash needed to pay debts, taxes, and expenses. This can be problematic if the market conditions are unfavourable or if the assets are difficult to sell quickly. Additionally, the sale of non-liquid assets may result in less favorable terms or prices, reducing the overall value of your estate.
• The process of converting non-liquid assets into cash can be time-consuming, leading to delays in the distribution of your estate. If your heirs are dependent on their inheritance to cover immediate expenses, these delays can cause financial hardship.
• Without sufficient liquidity, your executor may be forced to sell non-liquid assets quickly, and potentially at a loss, to cover obligations. This is particularly concerning if the assets hold sentimental value or if selling them would disrupt a family business or other important aspects of the family’s inheritance.
• Lack of liquidity means that If your heirs may be pressed to cover certain costs out of their own pockets while waiting for the estate to be settled. This can place an unexpected financial burden on them, particularly if the estate takes a long time to settle.

Eight steps to ensure liquidity will be accessible in your estate

1.Life insurance: Life insurance is one of the most effective ways to provide immediate liquidity to your estate. The death benefit from a life insurance policy can be used to cover funeral expenses, pay off debts, and meet estate tax obligations, ensuring that your non-liquid assets can be preserved for your heirs.

2.Designated beneficiaries: For certain assets, you can designate beneficiaries directly. These assets bypass the probate process and are paid out directly to the beneficiaries upon your death, providing them with immediate access to funds.

3.Establish a trust: A trust can be an effective tool for managing the liquidity of your estate. By placing assets into a trust, you can provide your trustee with the flexibility to manage those assets in a way that ensures there is sufficient liquidity to cover the estate’s obligations.

4.Rebalance asset allocation: Regular reviewing and rebalancing your asset allocation can help ensure that your estate remains liquid. This might involve selling off some non-liquid assets during your lifetime and reinvesting the proceeds into more liquid investments, such as cash, bonds, or mutual funds.

5.Regularly review your estate plan: It’s also important to remember that estate planning is not a one-time event. Your financial situation, assets, and personal circumstances are likely to change over time, and your estate plan should be reviewed and updated regularly to reflect these changes.

6.A business-wise Buy-Sell agreement: A buy-sell agreement is a legally binding contract that outlines how your business interests will be transferred upon your death. The agreement can include provisions for the sale of your business interest to a co-owner or a third party, providing your estate with the liquidity needed to settle debts and taxes.

7.Make sure you have an emergency fund: Setting aside a portion of your assets in a liquid, easily accessible emergency fund can provide your estate with the immediate cash needed to cover unexpected expenses or short-term obligations.

8.Work with an estate planner: An experienced estate planner can help you assess the liquidity needs of your estate and develop a comprehensive plan to ensure that those needs are met.

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