What Happens When an Estate Lacks Sufficient Liquid Assets to Pay Claims?

At some point during your life, you will likely be intimately involved in the probate of an estate, making it beneficial to learn as much about the process as possible. Knowledge about the probate process is also beneficial when you are creating your own estate plan.  Careful planning, for example, can help your estate avoid litigation and/or other common problems that occur during the probate of an estate, such as insufficient liquidity. Insufficient liquidity refers to a situation wherein the estate lacks the liquid assets necessary to pay creditor claims. The Westport estate planning attorneys at Nirenstein, Horowitz & Associates, P.C. explain what happens when an estate’s liquid assets fall short of what is needed to pay all approved creditor claims.

Probate Basics

When an individual dies, he or she leaves behind assets. Those assets make up the decedent’s estate. Probate is the term given to the legal process that oversees the eventual transfer of those estate assets to the intended beneficiaries and/or heirs of the estate. Probate also serves other functions, including:

• Authenticating the decedent’s Last Will and Testament if one was left behind
• Identifying, locating, securing, and valuing estate assets
• Locating legal heirs of the estate if the decedent died intestate, or without a valid Will
• Allowing creditors the opportunity to file claims against the estate
• Litigating any challenges to the Will or estate
• Ensuring the taxes owed by the estate are paid

What Is “Estate Liquidity?”

Liquidity is a term used when referring to the value of an asset. In fact, you may have heard people refer to “liquid assets” before in conversation. A liquid asset is one that can easily be converted into cash. Obviously, cash held in a checking or savings account qualifies as a liquid asset. Other assets have varying degrees of liquidity, based on how easily and/or quickly they can be turned into cash. Your home, for example, is not a liquid asset because it may take months to turn the home’s value into cash.  The value of your estate’s liquid assets is often very important when it comes time to probate your estate.

Paying Creditor Claims during Probate

Before assets can be distributed to the intended beneficiaries and/or heirs of the estate, creditors of the estate must be allowed the opportunity to file claims against the estate and any taxes due from the estate must be calculated and paid. Creditor claims submitted to the court are reviewed by the Executor and approved or denied. Approved claims must then be paid out of the available estate assets. Likewise, any federal (and/or state) gift and estate taxes due must be paid out of the estate assets. If the estate has sufficient cash, either from a financial account or another source, paying those claims is a fairly simple process; however, if the estate lacks sufficient liquid assets to cover all the approved claims and taxes due, the Executor’s job becomes considerably more difficult.

At that point, the Executor must convert non-liquid assets into liquid assets to pay the claims. Typically, that entails selling estate assets to raise the necessary funds. Inevitably, the need to sell estate assets creates controversy because it means selling tangible assets that may have sentimental meaning to the estate’s beneficiaries. Adult children, for example, may not be happy about the need to sell the family home or an art/coin/doll collection that they remember fondly from their childhood. For the Executor, deciding which assets to sell can be extremely tough unless the decedent left guidance in the Will or in another estate planning document.

If you are creating, or updating, your estate plan, the way to avoid leaving your estate – and your loved ones – in such a situation is to ensure that your estate contains sufficient liquid assets to cover all the estate ‘s debts, including any gift and estate taxes that might be due.

Contact Westport Estate Planning Attorneys

For more information, download our FREE estate planning worksheet. If you have additional questions or concerns about creating sufficient estate liquidity in your estate plan, contact the experienced Westport estate planning attorneys at Nirenstein, Horowitz & Associates, P.C. by calling (860) 548-1000 to schedule an appointment.