Introduction
As a business owner, you’ve likely dedicated years, if not decades, to building a company and accumulating assets. However, one often-overlooked responsibility is planning for the liquidity needs of your estate. Without adequate planning, your family or estate may face difficult financial decisions, such as the forced sale of assets or business interests, to cover final expenses or estate taxes. Anticipating these needs now, by understanding your estate’s value, estimating potential obligations, and exploring funding strategies, can help protect your legacy, ease the burden on your loved ones, and ensure the smooth transition of your assets.
What does it mean to anticipate and minimize liquidity needs?
Determine the value of your assets
The first step to anticipating the liquidity needs of your estate is to determine the value of your estate. This exercise may indicate that you are worth a lot more than you thought you were. You should include the value of everything you own: personal belongings, property, your business, life insurance policies (including death benefits and cash value), cash and bank accounts, stocks, etc.
Anticipate final expenses
At your death, you can expect your family or estate to be faced with many expenses. There may be funeral and burial arrangements to pay for, which can run into thousands of dollars. You may have debt obligations to settle. Even if you have no outstanding loans or mortgages, there may be one final debt to settle—with the federal government in the form of estate taxes. Your state of residence (there may be more than one) will want in on the action, too. Estimating final expenses and comparing the result with your expected liquid resources should expose any gap that needs to be filled.
Engage in estate planning, which may include steps to minimize your estate’s value
Estate planning is the process of assessing what you own, deciding how you would like it distributed at your death, and determining what the tax liability will be, if any. Once you have the groundwork set, you can actively manage your estate and take the proper steps to minimize the potential estate taxes that may be due. Don’t think of estate planning as death planning; look at it as lifetime planning—an ongoing, evolutionary process that can change with your changing life circumstances.
Make preparations to cover cash liquidity needs at death
Once you have an idea of the value of your estate and the expenses that may be due at your death, you can plan how it should all be paid for. If estate taxes are owed, they will be due to the federal government within nine months after your death, in cash, and could total 40% of your estate’s assets if your estate ends up in the highest tax bracket. Adding in other taxes and settlement costs can raise this to 70%. Your state may want death taxes even sooner than the federal government. Without advance planning, your family may not have the cash to make these payments. This could result in a forced liquidation of your assets to cover the tax liability.
Business succession planning part of estate planning (not a substitute)
Business succession planning can be used to provide for an orderly transition of management and ownership of your business interests. If you have drafted a buy-sell agreement for your business that covers management and ownership transition after events such as disability, retirement, or death, you have taken a major step in the right direction. However, it is also very important that you take a look at your entire estate (all the stuff you own in addition to your business). Business succession planning is part of estate planning, just as your business is part of your estate.
What makes up your gross estate?
Basically, your gross estate comprises everything you own. Certain possessions may immediately come to mind (e.g., your business or your stock portfolio), but the list is actually more comprehensive.
Items in your gross estate may include:
Cash, stocks, bonds, notes, mortgages, annuities, personal residence, other real estate, furniture, collectibles, automobiles, jewelry, retirement plan benefits, artwork, business interests, life insurance (including death benefits and cash value)
A simplified discussion of the net estate
Your adjusted gross estate is your gross estate less any debts. This value is further reduced by the value of assets passing to charity at your death and those assets passing to your surviving spouse under the unlimited marital deduction. The value after the marital and possibly other deductions is your net estate. If this value is greater than the applicable exclusion amount ($13,610,000 in 2024), your estate may be subject to federal estate tax.
The second step—projecting growth of your estate
Once you have determined a value for your estate today (and estimated your potential estate tax liability), you need to know what the value will be in the future—5, 10, 20, or 50 years from now. Chances are, the value of your estate will grow over time and with it your potential estate tax liability. This is especially true if you own a growing business that represents a large portion of your estate.
You may want to organize your estate to minimize potential estate taxes
Once you have the full view of what you own and how it could grow, you can develop your plan for what you want to happen to your estate when you die. Estate planning is an important function. Some strategies include lifetime gifting, the use of various types of trusts, estate freezes, and taking advantage of the applicable exclusion amount and marital deduction.
Decide who gets what and when
When you develop your estate plan, you need to decide whom you want to receive your assets. You have the option of making lifetime gifts to beneficiaries or bequests at your death. There are definite tax consequences to this timing decision, and it is in your best interest to consider all your options. There are also tools available to assure the smooth distribution of your estate.
Planning for final expenses
What liquid resources are available today?
Once you’ve calculated your estate’s value and projected its growth, consider what liquid assets are currently available to cover final expenses. These include cash, stocks, bonds, or assets that can be quickly sold.
What resources will be available at your death?
Even if your estate is currently liquid, you should determine whether those resources will remain accessible when needed. Will the value hold? Will your heirs be forced to sell assets in unfavorable conditions?
Ways to pay for final expenses
Your estate could hold cash, sell investments or property, or sell a business interest. But those methods can be risky or inefficient at the time of your death.
Life insurance may be a better way to pay
A better way to ensure your estate has sufficient liquidity is to purchase life insurance. A properly structured policy with the right owner (e.g., an irrevocable trust) can provide tax-efficient funds to cover estate taxes and expenses without requiring the sale of other assets.
Conclusion
Planning for your estate’s liquidity needs isn’t just about taxes—it’s about preserving what you’ve built and providing your family with financial security and flexibility when they need it most. By taking steps now to assess your estate, minimize tax exposure, and ensure cash will be available when needed, you can avoid unnecessary hardship for your heirs. With thoughtful estate and business succession planning, you’ll leave more than just assets behind—you’ll leave a lasting plan for stability and peace of mind.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
