We are all victims of the limitations contained within our personal viewpoint. It is possible to be objective but usually only with help. Consider the end of life part of an estate plan.
In creating the disposition plan, you must provide for solutions to the numerous conflicts, blind spots and vague unknowns that exist. A basis for discussion on these problems involves looking at the disposable estate from several viewing points. For this discussion, I will assume it is the second death of a couple. Other factors may matter more on the first death. Manageability for example.
The simplest viewing point analysis involves the parent, the executors and the heirs.
Parents tend to see assets in terms of their gross value, ignoring taxes, costs of disposition, a negotiating margin and even debt. They recall what they gave up to earn them and they can estimate what they provide in current use or income. These assets have an emotional component that hides important information. A common oversight is the skill and contacts needed to operate a business.
Heirs tend to see the estate in terms of what their fair share may be and how it will influence the lives of themselves and their families. Fair share is often problematic when the estate includes valuable, illiquid assets like a farm or business. These monuments are especially difficult because, while valuable, the family prefers that the family business be retained. If only some of the children will own it, how do you value it? Do you value it as if the children/managers are not there, or do you force them to essentially buy themselves?
Heirlooms are equally contentious. The family piano, the art, the jewelry, the cottage, even furniture. Try to resolve the important ones early.
Heirs tend to ask how much, how soon and which, if the distribution is to be in kind.
The estate trustee or executor tends not to ask the how much question in the same way. Executors tend to be dependent on liquidity and so ask, how much cash?
Many estates have not considered the vast amount of cash required to transfer efficiently. That need will depend on the composition of the estate.
For older people there may be investment portfolios and retirement income products that liquidate easily and thus address the liquidity problem. Their only defects are that the value may be unknowable at any future date and their income is taxable while they are being held for future disposition to the government and others. There are usually few liabilities and few undone projects.
For younger people the estate may not enjoy enough liquidity. A 50-year-old may have an estate in which the home and recreational property together with the business account for 90% or more of the total. There are liabilities and half done projects. What will be for sale? Recall the old finance adage. “When you need money, you don’t sell what you want, you sell what you can.”
Estate liquidity is fundamental to a successful transition. Writing checks is never a problem if you can make the deposits to clear them.
Consider how the deposits will become available.
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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.