In our previous article, we shared a common estate planning dilemma – how to plan for illiquid assets like real estate and collectibles so that they pass to heirs instead of being sold to settle the estate. Today, we will examine how two estate planning tools, trusts and life insurance, can be used to protect illiquid assets. We will also discuss the importance of inventories and asset valuation.
Trusts are a versatile estate planning tool, so it’s not surprising that you can use them to address illiquid assets in an estate plan. When you place assets into a trust during your lifetime, they remain in the trust when you pass away. When you create a trust you also specify who will serve as trustee and how the trustee will manage and distribute the assets in the trust.
Life insurance policies are a useful tool that can prevent the sale of illiquid assets by making cash available to an estate’s beneficiaries. The beneficiaries can use the cash to pay estate expenses and taxes instead of having to sell the assets to obtain the money they need. Life insurance policies are not all the same, so it is critical that you take care to select a product that will help you accomplish your estate planning goals. Also, read all life insurance documents carefully and be sure you understand the beneficiary designation before you complete it. Making a correct beneficiary designation will lead to success in protecting illiquid assets from the pressure to sell while making an incorrect beneficiary designation will leave those assets exposed to the risk of needing to be sold quickly and possibly at a loss.
Whether you choose to address your illiquid assets in your estate plan using a trust, life insurance, or some other combination of estate planning tools, you’ll need to make a detailed inventory of all of your assets. An inventory of assets is a list of every asset that you own, along with the value of each item. When you make your inventory, be thorough, and don’t be afraid to ask for help. Include all of the things you can think of, both large and small, from real estate and vehicles to jewelry, collectibles, furniture, art, and even digital and intellectual property.
If you are not able to determine the value of some of your assets on your own, enlist the aid of a professional appraiser. You may learn some surprising things about your assets during the inventory and appraisal process. For example, some of your assets may be worth more than you expected. That’s critical information that can guide your decision making if you are trying to use your estate plan to distribute your assets equally among heirs or classes of beneficiaries. You might also learn that some items aren’t worth as much as you believed that they were. That can also affect how you parcel out your property in your estate plan, and it could even prompt you to pare down your collection of assets if the items that are losing value do not mean a lot to you. Illiquid assets represent both a challenge and an opportunity in estate planning. When illiquid assets are appropriately planned for in an estate, a decedent’s heirs can possess and enjoy them instead of being burdened by them. Call Wichita attorney J. Joseph Weber at (316) 265-7802, or contact us on the internet to schedule a consultation.