Estate Planning Articles

Illiquid Assets and Estate Planning

by Alli Thomas

Jan 27, 2022

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

If you don’t account for illiquid assets in your estate plan, your heirs may need to sell off pieces of your beloved collection (or other assets) in order to cover estate taxes – which, by the way, must be paid within nine months of your death. 

Because illiquid assets can be difficult to value, without proper planning, they may be sold for well below what they’re truly worth. For the purpose of this blog, let’s assume your illiquid assets are in the form of collectibles of some sort. Here are some ideas that can help protect them from unnecessary liquidation at a bad price: 

Keep good records 

Careful recordkeeping is a critical step in including your collectibles in your estate plan. Most financial experts recommend that you keep a list with a detailed description and photographs of each piece in your 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. 

Have your collection regularly appraised 

Consider having a professional appraisal every five years to determine the fair market value of your illiquid assets. Note that appraisals done for insurance purposes aren’t reliable; they reflect the cost of replacing your collectibles, which can run many times higher than the actual fair market value. 

Take out a life insurance policy 

The right kind of life insurance coverage can guarantee a payout at your death that will cover most or all of your heirs’ estate tax liabilities. That means your beneficiaries won’t have to sell off your collectibles in order to pay estate taxes. Even better, the proceeds of a life insurance policy are not subject to estate tax nor income tax.  

Put illiquid assets in a trust.  

Your collectibles can be placed into a trust so that they won’t need to be sold when you die. 

 

Establish a limited liability company (LLC).  

You may be able to establish an LLC for your beneficiaries to share ownership of your collection. 

Give some of it away tax-free  

If you’re single, as of 2022, you may gift up to $16,000 per year to as many people as you wish without the gifts being subject to tax. If you’re married, that doubles to $32,000 per year, per person for married couples. The lifetime exemption for all gifts that go above the individual exclusion is $11.7 million for single people and $23.4 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.  

Assign Power of Attorney 

If you become incapacitated, a durable power of attorney allows you to assign an agent to act in your interests. This can ensure that your collectibles will be managed according to your wishes. A durable POA isn’t forever – you can revise it or revoke it at any time. 

Get help protecting your assets 

Whether you collect antique cash registers, baseball cards or classic cars, remember to include them in your estate plan. Need some guidance about how to best establish a plan for your illiquid assets? Our financial advisors can help you. Click here to schedule a no-cost, no-obligation phone conversation with one of them 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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