Estate Planning Articles

Illiquid Assets and Estate Planning

by Alli Thomas

Jan 13, 2024

An illiquid asset is an asset that can’t be converted immediately to cash in a regulated market at an easily determined price.

If you don’t account for illiquid assets in your estate plan, your heirs may need to sell some of them in order to cover estate tax liabilities. Because any estate tax owed must be paid within nine months of a person’s death, any illiquid assets that must be liquidated are likely to be sold at a significant discount, leaving your heirs with less than they could have otherwise had.

Examples of Illiquid Assets

Illiquid assets include:

  • Collectibles
  • Real estate
  • Ownership in a private business
  • Mineral rights
  • Livestock
  • Timber
  • Certain types of investment vehicles, such as hedge funds or options

Tips for Getting Illiquid Assets Valuated Accurately

Keep good records

Careful recordkeeping is a critical step in ensuring your illiquid assets are valuated accurately.

While many types of illiquid assets, such as real estate, come with official and legal documentation, others – particularly collectibles like sports memorabilia or art – require additional effort.

If your illiquid assets include a valuable collection of some kind, most financial experts recommend that you keep a list with a detailed description and photographs of each piece in the collection. It’s also helpful to hold onto sales records and receipts for your collectibles – basically, any documentation that can help determine their value and ownership history.

Perform regular appraisals

Like stocks and other liquid assets, the value of illiquid assets changes over time and

Get a professional appraisal performed every few years to determine the fair market value of your illiquid assets.

Note that appraisals done for insurance purposes aren’t reliable. These reflect the cost of replacing an asset, which can run many times higher than the actual fair market value.

Ways to Protect Illiquid Assets from Estate Taxes

There are several options available for protecting your illiquid assets from estate taxes. The size of your estate and the value of your assets will play a role in determining which one is right for you, which a financial advisor can help you with as part of the estate planning process. These include:

Take out a life insurance policy

The right kind of life insurance coverage can guarantee a payout at your death that will cover some (or all) estate tax liabilities. That means your beneficiaries won’t have to sell off your illiquid assets in order to pay estate taxes. As an additional benefit, the proceeds of a life insurance policy are not subject to estate tax or income tax.

Consider transferring ownership of your illiquid assets

Depending on what kind of illiquid assets you have and how much they’re worth, you may be benefit from transferring ownership in advance by putting them into a trust or establishing an LLC to manage them.

Give some assets away tax-free

If you’re single, as of 2023, you may gift up to $17,000 per year to as many people as you wish without the gifts being subject to tax. If you’re married, that exemption doubles to $34,000 per year, per person. The lifetime exemption for all gifts that go above the individual exclusion is $12.92 million for single people and $25.84 million for coupes. Exempt gifts are not subject to federal estate taxes, gift taxes or transfer taxes. What’s more, they can be made either during your lifetime, after your death as part of your estate, or both.

Avoid Making an Estate Plan by Yourself

While it may feel like writing a will is all the estate planning you need to do, not making a thorough estate plan can be a costly mistake, particularly if you have a significant amount of assets – regardless of whether they’re liquid or illiquid.

You shouldn’t leave it up to the courts to determine who gets what – and with advance planning, you may be able to reduce the amount that goes to the IRS instead of your heirs. Start planning today by requesting a no-cost, no-obligation advisor consultation regarding your unique financial situation and retirement goals.

Request a no-cost, no-obligation advisor consultation today!

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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