Skip to main content

Check out our 3Q2021 Market Review & Outlook Video + Blog!

Small house and trees in a snow covered field in Gettysburg Pennsylvania

Illiquid Assets and Estate Plans: What You Need to Know

Illiquid assets are those assets that you may own that are harder to sell, such as real estate, your home, your business, art work, as well as collections of stamps, coins, cars, or guns. There are also various “odd” items that are also considered illiquid assets: livestock, thoroughbred animals (e.g. horses or dogs), timber, and mineral rights. Investments that are considered illiquid would include some hedged funds, options, penny stocks, and debt or equity from a private non-exchange traded company.

Most individuals have some of these items, and may have an idea of their value. Moreover, when setting up an estate plan, they will probably leave these assets to their heirs without any further thoughts about how that inheritance might affect them. But there are instances when an unintended impact could negatively affect your heirs and those you love most.

Let’s suppose you have two grown children whom you want to treat equally in your estate plan. As part of your estate, you own land, timber, and mineral rights that you feel are valued around $5 million. You decide to leave this portion of your estate to your son, while leaving your liquid assets (your investment accounts valued at $4 million at the time the estate plan was written) to your daughter.

At your passing, the appraisal of your assets is completed. The property left to your son now has a value of $11 million. Under today’s tax laws, there will be an estate tax due; and it must be paid in cash within nine months of your date of death. Since all liquid assets were left to your daughter, what can your son do to pay his portion of the estate tax? Some of his choices are better than others, but none are perfect.

Option #1: Your son can use his own illiquid assets that will have to be sold at the current market value to pay the tax. This could lead to a large capital gain, or he could be forced to sell at a loss. He could choose to sell his home, the land he inherited, or his personal collection of firearms. But remember, the estate tax must be paid with nine months of your passing and selling his home, or the inherited land, or even his gun collection could take much longer than nine months because they are illiquid.

Option #2: Because of the time deadline, your son decides to use his investments (stocks and bonds) that has a cost basis of $2 million to cover the estate tax. Turns out, his investments sell for $3.5 million. So he now has the cash to pay the estate taxes but will also now owe taxes on the capital gain he recognized when he liquidated his investments, which could be as much as $300,000.

Clearly both options outlined above have a significant downside. So what can you do to prevent this from happening with your estate? Here are just a few suggestions to discuss with your financial advisor:

  • Place your illiquid assets into a trust before you die;
  • Buy life insurance that will pay out enough to cover the estate taxes; or
  • Your son could take out a loan when the estate taxes are owed using his home or investments as collateral.

Of course, these are only a few choices. There may be others based on your individual situation. Advanced planning and honest family discussions are extremely important to discern the best path. Consult your advisor to determine a strategy that fits your needs. He/she will also be able to help you acquire a more current, accurate value on all your illiquid assets.

For more information on this topic, check out Leveraging Liquid Wealth to Transfer Illiquid Assets written by Francis W. Dubreuil and Hon Ruff.

Related Insights
I Stock 1226418360 businessowner JGS Craft

Did You Know Less Than 2% of Businesses Value Themselves Annually?

If you're a business owner or entrepreneur, your business is your greatest asset. Not only do you invest your time and talent into growing your business, it takes significant capital too. But did you know less than 2% of businesses actually take the time to value themselves annually? Whether it’s simply due to a lack of time or expertise, today's business owners don't do a deep-dive analysis into their businesses every year, which results in a significant number of them being undercapitalized. Learn what you can do to keep your business operating at its full potential.

Read More
Peanut Butter Jar

How Peanut Butter Tells My Personal Fiscalosophy Story

The collection of stories and experiences throughout each of our lives make up who we are today as well as help shape our decisions for the future. Very often, we don’t realize just how much a certain experience or encounter may have impacted us, until someone points to it or draws it out of us. As adults, the way we view the world and make decisions for ourselves and family members may originate from how we were raised, work or educational experiences, or social interactions with friends and neighbors.

Our experiences with finances are no different. Sometimes we are very cavalier about those unique lessons learned we have gained over the years in regards to money. Believe it or not, our past experiences with money, or the lack thereof, have likely shaped our beliefs and how we choose to handle our own money today and in the future...we call this our Fiscalosophy. Learn why understanding your own Fiscalosophy is so important to your financial future.

Read More
NLG Blog image retail investing

Surprising Positive Pandemic Outcome: A Surge in Retail Investors

The COVID-19 pandemic brought economic shutdowns, high unemployment rates, and market volatility; but it also highlighted that individuals should prioritize saving over spending. Research shows a surge in retail investors emerged as a direct result of the pandemic -- one now dubbed the "Generation Investor."

Read More
Play