We’ve all heard horror stories about heirs who feared they would be forced to sell off the family business or other assets to cover their estate taxes. But this is a concern mostly for the very wealthy these days, since the estate tax doesn’t kick in now until an estate reaches $5.25 million. Most families won’t come near the limits imposed by the estate tax laws — so many people may be unconcerned about the amount of liquid assets they leave behind in their estate.
However, there are other reasons you and your clients should be keeping an eye on estate liquidity. The end of your client’s life could bring about some major expenses, whether or not they’re subject to the federal estate tax. Some things to keep an eye on include:
- State estate taxes. The exemptions for these drop as low as $675,000 for New Jersey and $910,725 for Rhode Island, although the other 13 states with estate taxes all have exemptions of $1 million or more. If your client lives in a state with an estate tax, it’s fairly easy to bump up against the limit. Several states also have inheritance taxes to worry about.
- Probate costs. These are highly dependent on the state, but the court and attorney fees can range from the hundreds to the thousands of dollars.
- Funeral expenses. One estimate from earlier this year pegged the costs for the average funeral, including embalming and casket, at $7,000 to $10,000. Your clients won’t want to leave those costs for their loved ones to scramble to pay.
- Medical expenses. No one knows, obviously, how much this will end up costing, but don’t expect Medicare to cover everything. Long-term custodial care is a good example of something Medicare doesn’t pay for, but it could end up being very expensive.
- Charitable gifts. Many people would prefer to be able to leave cash or other liquid assets to their favorite causes. For a lot of people, the only reasonable way to leave a gift is through some sort of cash equivalent.
Obviously, it’s very difficult to estimate just how much these expenses will total. So how can you have your client prepared to cover such an amorphous expense?
One solution should be obvious: keep a certain amount of the clients’ assets in liquid vehicles, such as savings accounts, stocks and bonds. But that’s not the only option available.
Many financial advisors make creative use of life insurance to cover these needs. Proceeds resulting from life insurance are almost always liquid. Life insurance can also be arranged so that it is not included in the estate, just in case the client might be concerned it would push them past the estate tax exemption. Some people may even be able to list their estate as the beneficiary for their life insurance or, if they’re focused on leaving a legacy, to list their favorite charitable concern.
Clients can also plan around their more illiquid assets. They should consider the order in which their real estate or business interests should be sold off, if that becomes necessary to cover the expenses. Your clients’ heirs should understand, for instance, that the expectations are for them to sell the vacation home but keep the business.
At the same time, though, those heirs deserve to have a voice in this. They will be the ones left holding the assets, after all. It makes sense to have the client, well ahead of the time that it becomes necessary, to talk to key heirs about which assets would be the most meaningful to them.
That can give both the client and the heirs an opportunity to make those difficult decisions together. It may be the client wants to sell off other assets in order to ensure the family business survives — but the next generation feels incapable of running the business and plans to sell it off instead. It’s nice to have that conversation before it becomes absolutely imperative.
One other concern: If the client wants to provide roughly equal bequests — particularly if they are part of a big family with several heirs — that can be difficult with illiquid assets such as real estate. That might be a reason to provide guidelines for a sale in the decedent’s will, or even liquidate some assets.
This is another series of difficult conversations for you to have with your clients, and for the clients to have with their heirs. But better an awkward conversation now than a dramatic shortfall of liquid assets when they’re needed the most.
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