Business Owners: How to Anticipate and Minimize the Liquidity Needs of Your Estate

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:

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
basic gift and estate tax
exclusion amount ($15,000,000 in 2026),
your estate may be subject to federal estate tax.

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.

What liquid resources are available today?

OK, so you’ve calculated the current value of your estate
and made projections for the future. You know how you want your assets
distributed. You also need to determine what resources will be available to pay
for your final expenses and potential estate taxes. This is where you take a
long, hard look at what you have for liquid resources — cash and assets that can
be converted to cash quickly.

What resources will be available at your death?

You may have plenty of liquidity today to cover your
current estimated final expenses and potential estate taxes, but are you sure
you will have these resources indefinitely? Would you have to limit your
lifestyle to maintain these resources, and would you want to do so?

Ways to pay for final expenses

There is more than one way to pay for your final expenses.
One option is to hold cash. Another is to sell your property or assets.

Life insurance may be a better way to pay

There is another solution to a liquidity problem. You
could consider life
insurance with a death benefit sufficient to cover
your final expenses. Paying life insurance premiums represents a current
expense, but the amount of your premium is generally quite small compared to
the death benefit provided. Think of your premiums as a down payment on
potential estate taxes and final expenses (sort of a layaway plan).

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.