How To Plug the Estate Tax and Estate Liquidity Leaks in Your Will & Estate Plan

Everyone needs a will… even if all your assets are owned by a living trust or held in joint title.

A will is a legal document in which a person, known as the testator, sets forth his or her wishes about how to distribute an estate’s assets, pay debts, care for any minor children,  and handle other issues after the individual dies. Most often, the testator also appoints one or more executors to administer the estate and names guardians for minor children in a will. A will also might create one or more trusts and name the trustees.

It is unlikely that even if you have a living trust or other arrangement, all your assets will be covered by it. Any other assets will be covered by your will or disposed of according to state law.

A will also can cover other issues such as guardians for children and small symbolic gifts to special individuals. And the will can have several provisions in it to protect your heirs and your wealth.

Here are some key will and estate planning provisions that everyone should have or at least consider.

Estate liquidity is remarkably overlooked in estate planning.

It is not enough to reduce taxes and probate. You must be sure the estate will have enough cash or liquid assets to pay the expenses it will face.

These cash transfers include paying your debts, estate expenses, and for the management of property while the estate is processed. You might have a surviving spouse or other dependents who need help with their living expenses until the estate is settled.

All of your planning could be for naught if the estate has to sell assets to raise cash for basic expenses.

In your planning, be sure to estimate estate liquidity. If there might be a cash shortage, consider buying life insurance or designating which assets should be sold first to raise cash for expenses.

When the estate has a lot of illiquid assets, consider selling some of them now to ensure the estate will have enough cash to meet its needs and obligations.

A related issue is specific dollar bequests. Often a will states that someone is bequeathed a specific dollar amount.

At the time the will is written, this bequest is a certain percentage of the estate and the intent was to give that person that percentage of the estate.

But the size of an estate can change. Suppose an estate had a lot of common stocks or mutual funds. The owner wrote a will in the spring leaving specific dollar bequests to certain individuals and charities.

The owner dies, however, and about the same time the stock market suffers a steep decline. Suddenly, the specific dollar bequests are a much larger portion of the estate because of the sharp decline of the value of the estate assets.

Despite this, the specific dollar bequests would be paid first. The other heirs would receive whatever was left, which would be less than was intended.

The same result could occur in an estate that holds real estate, collectables, a business, or any other substantial assets that fluctuate in value.

Your heirs often are better off if you limit specific dollar bequests. Except for fairly nominal bequests, most bequests should be made either by naming specific assets, by stating a specific percentage of the estate’s value, or by a formula that states a specific dollar amount or a certain percentage of the estate, which is smaller.

Another key clause is the tax apportionment clause.

This clause states whether the death and income taxes related to a particular asset will be paid by the individual inheriting that asset or by the residuary estate (the estate left over after specific bequests). It can be an important clause.

If you do not state how the taxes will be computed, they will be paid out of the residuary estate. That means less for whoever gets the residuary estate, and that usually is your spouse or children. Make sure you go over the consequences of the tax payment clause thoroughly with your estate planner.

The same philosophy applies to the payment of debts clause. Will each heir in effect pay a share of the estate debts, or will they be paid out of the residuary estate?

Perhaps whoever inherits each asset will be responsible for debts related to it. Or will you buy enough life insurance to cover the debt payments?

Do not overlook this issue, or your residuary beneficiary could end up with far less than you intended. A simultaneous death clause is standard in most wills, but be sure yours has one.

This clause states that if you and your spouse die within a certain time of each other, then each spouse will be treated as having predeceased the other. This is important for avoiding multiple estate taxes and costs.

Without this clause, if you and your spouse are in a common accident many state laws say to assume that each survived the other. That means all your assets go through your estate, then go through your spouse’s estate before they go to your children or other heirs.

That could mean double taxes and double fees. You probably want to set the time period in the simultaneous death clause at 90 days. Some state laws put the period at 24 hours or 72 hours.

This means if you and your spouse are in a common accident but one of you dies a week after the other, your assets will be hit with double estate costs. Most estate planners find that 90 days is a better time period for the simultaneous death clause.

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