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Mary Owens: A functioning estate

Many people think their estate will be easy to administrate because their assets are so modest. This can be true in many cases, but it is not unusual for modest estates to incur some challenging issues because cash liquidity needs post death were not considered in the planning process.

All of us want our estate to function smoothly, without stress and internal family strife. Inadequate cash flows during the estate administration process is a common issue which can result in sibling bickering. Last month we discussed the unintended problems of a small estate that relied upon a pension and social security inflows as the mainstay of cash flows to pay bills prior to death. However, once those sources of income were terminated after death, issues arose on how the ongoing bills were to be paid.

Let’s explore some cash flow solutions for a typical simple estate: one that has a home with a mortgage, a modest checking and savings account and the majority of its liquid assets in an IRA. If this combination of assets and liabilities sounds like your situation, you may have a cash flow problem that is solvable with some simple preplanning techniques.



The administrator of your estate needs to have access to cash to be able to pay your funeral expenses, your last medical bills, estate administration expenses and ongoing monthly payments like a home mortgage or car payment. It can take time to sell a house or automobile, especially if the nation is in a recessionary period when you die. If you do not have enough cash in your checking or savings account, your estate administrator must liquidate whatever assets they can to create cash. One of the most common sources is an IRA or similar type of retirement account.

All of us want our estate to function smoothly, without stress and internal family strife.

While this sounds like a simple solution, it can frequently be a source of significant family tension. Most IRAs have named beneficiaries so that assets are transferred directly to them upon your death, either in cash or as a rollover to a beneficiary IRA. As soon as a death certificate is available to the beneficiaries, it is common practice for a financial advisor to start processing the payments to the beneficiaries shortly after your passing.



That process involves your financial advisor meeting with each named beneficiary individually and telling them the approximate amount they are receiving from your IRA. While this is an appropriate procedure to follow, it potentially sets up a family fight if the administrator of the estate has to stop the IRA distributions because it is the only source of cash to pay estate bills. The expectation of receiving the IRA proceeds immediately is now taken away from the beneficiaries, and they may not understand or respond well to what they perceive as having their rightful inheritance taken away. This is an even more significant problem if the beneficiaries have already spent the money with the expectation of receiving the proceeds in the immediate future. Not all families have this reaction, but it is best to avoid the situation altogether. Subsurface family tension is most likely to show its presence shortly after your death and during the estate administration process. Thoughtful estate planning does what it can to avoid potential family conflict.

So how do you avoid these issues with the IRA? There are two easy approaches that can be implemented that do not involve life insurance. While a life insurance policy payable to the estate for liquidity needs is another potential solution, this is a planning technique that usually works only if the policy is implemented when the IRA owner is younger and still insurable because their health is not impacted by aging related issues. But most people in a cash flow crunch later in life no longer have this option available to them or decided the insurance option was not affordable earlier in life. So how do we address the situation now?

Even though your estate may be simple, having a trust, in addition to a will, may be of significant benefit to ease the estate administration burdens. It can lower the administration costs and reduce the time involved in the estate administration and allow your estate administrator to take control of your IRA account immediately upon your death. An IRA account cannot be titled in the name of your trust. By law it must stay in your name during your lifetime. But you can change the beneficiary of the IRA account to the trust. In doing so, it allows the administrator of your estate to have first access to needed cash, preventing family members from getting direct access to potentially the only significant source of liquidity in your estate. Some of the IRA account proceeds can now be used by the administrator to pay needed bills. Any remaining proceeds not needed to pay final expenses can then be distributed to your intended final beneficiaries. This approach avoids the issue of your beneficiaries being told to expect a specific sum from your IRA, but instead will be enjoying the net proceeds from your estate assets, that were administrated properly by avoiding a cash flow crisis. Imagine the stress among family members if your house did not sell and the mortgage could not be paid because there were not funds available to pay bills on time. The bank could foreclose and the net amount each of your beneficiaries would have received from the equity in your house would be lost. If you chose one of your children to be the administrator of your estate, they could be in a no-win situation with their siblings. Tensions rise, harsh words are said, and the relationships among family members are harmed.

Estate planning done well plans for cash liquidity needs. Adequate cash reserves assists in keeping the peace in the family.

Next month we will be exploring another option for creating estate liquidity from your IRA account. Have a wonderful Thanksgiving with your loved ones!!

Mary Owens, Founder, Owens Estate & Wealth Strategies Group, Financial Advisor, RJFS, 426 Sutton Way, Suite 110, Grass Valley, 530-272-7500. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Owens Estate and Wealth Strategies Group is not a registered broker/dealer and is independent of Raymond James Financial Services. Any opinions are those of Mary Owens and not necessarily those of Raymond James.


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