Many people are focused on their traditional assets that generate monthly statements, like bank and investment accounts, stocks and mutual funds. However, those assets, which are called “liquid” because they can be readily converted to cash, are often less than half of their entire portfolio. Wilmington Biz advises readers not to ignore their illiquid accounts in the article “Don’t Overlook Those Harder-To-Sell Assets When Making An Estate Plan.”

First, let’s see what assets fall into the illiquid category. Commonly, they include:

• Real estate, collectibles, artwork, cars, livestock, mineral rights and timber, as well as
• Financial instruments that don’t have a ready market: hedge funds, options, stock in non-public corporations and some types of debt securities.

The biggest consequences of leaving these assets out of an estate plan isn’t felt, until after the owner dies. First, estate taxes must be paid which are levied on the value of all inheritable assets transferable to heirs. Those taxes are due in a matter of months. However, if a good chunk of those assets are illiquid, they may need to be sold in a hurry to raise the cash needed to pay the taxes or debts of the estate.

That presents a real problem for heirs.

Many illiquid assets can’t be sold, or have to be sold below their market value, if they have to be sold within a tight nine-month window or a reasonable estate administration time frame. If the decedent owned real estate in a region were prices are in a slump, the sale price will be lower than if there were enough assets to pay the taxes and wait for prices to return to normal or even become robust.

A will often divides the estate in a way that has nothing to do with the actual value of the assets. Let’s say three children are left a third of an estate, two-thirds of which are real estate and one-third of which is cash or liquid assets. The real estate may need to be sold, if the heirs don’t want to own an undivided interest in the real estate property together.

Here’s a more common situation: If the amount of cash needed to settle the estate is far less than the actual value of an illiquid asset, but the only way to get cash is to sell the asset, something that might have been hoped to be passed on to the next generation may be lost. That includes family farms, a family business or an heirloom.

Careful planning with an experienced estate planning attorney well in advance can avoid this and similar situations, where illiquid assets are concerned. It may mean setting up and funding a trust or using life insurance. An estate planning lawyer will be able to guide the family through the process to protect assets, but it must be done well in advance of the person’s death.

One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation.  Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security.  Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.

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Reference: Wilmington Biz (November 27, 2019) “Don’t Overlook Those Harder-To-Sell Assets When Making An Estate Plan”