Estate liquidity is the amount of cash and cash equivalents available in your estate to pay creditors and other bills that may arise after you pass away. Many estates are heavy on illiquid assets like real estate, and too light on liquid assets. This means that when the cash runs out, illiquid assets have to be sold in order to pay the bills and settle the estate. Forced sales always put the estate at a disadvantage. For this reason, it’s important to plan for sufficient liquidity.
One way to do this is to establish a Revocable Living Trust. This avoids probate expenses and preserves more money for the estate. When you establish a Revocable Living Trust, you have an attorney draw up a document called a Declaration of Trust. Initially, you can serve as your own Trustee, transferring your property to yourself in your capacity as Trustee. The Declaration of Trust also names a Successor Trustee to take over when you pass away. This person is in charge of distributing your property to the people you want it to go to, according to directions specified in your Declaration of Trust. As long as your trust is properly funded, your property will pass outside of probate, avoiding time and expense.
A small life insurance policy or retirement plan may also be used to cover the various expenses associated with settling an estate or, you could open what is often referred to as a Totten Trust – a pay-on-death savings account designated to pay for funeral expenses and other end-of-life costs.
You can also increase the liquidity of your estate by working closely with your estate planning attorney to keep tabs on developments in the federal estate tax law. As you may know, the federal estate and gift taxes have been repealed for the year 2010, but it is unclear what Congress has in store for 2011 and beyond. Depending on the size of your estate, tax planning strategies including the use of Grantor Retained Annuity Trusts (GRATs), Irrevocable Life Insurance Trusts, and gifting may help you reduce taxes and preserve the liquidity of your estate.