What is estate liquidity?
Estate liquidity is the cash and readily-sellable assets available to pay an estate's obligations — debts, funeral costs, administration expenses, and any federal or state estate taxes — without forcing a fire-sale of real estate or a family business.
Why do estates run short of cash?
Estate tax is generally due within nine months of death, yet much of a large estate is often tied up in real estate, closely-held businesses or retirement accounts. If liquid assets are insufficient, the executor may have to sell property quickly or seek an installment election such as IRC 6166 for business interests.
How can I improve my estate's liquidity?
Strategies include life insurance held in an irrevocable life insurance trust (ILIT) to keep proceeds out of the taxable estate, maintaining marketable investments, using IRC 6166 to pay business-related estate tax in installments, and gifting to reduce the taxable estate over time.
Does life insurance help with estate liquidity?
Yes. Life insurance provides tax-favored cash exactly when the estate needs it. Holding the policy in an ILIT keeps the death benefit out of the taxable estate while still supplying liquidity to pay estate taxes and debts.