Why a liquidity plan matters

When someone dies, the estate often needs cash immediately to pay funeral expenses, creditor claims, attorney and executor fees, and any taxes due. Without ready liquidity, heirs may face rushed asset sales (often at a discount), increased costs, or even forced borrowing. The goal of a liquidity plan is to reduce stress, preserve value, and give your executor tools to manage the estate efficiently.

In my practice as a CFP® with 15+ years helping families plan estates, I’ve seen small gaps in liquidity cause outsized problems — homes listed in a down market, delayed distributions while taxes are resolved, or families taking on short-term loans at poor rates. A well-designed plan prevents those outcomes.

(Authoritative sources: IRS—estate and gift tax rules; Consumer Financial Protection Bureau—probate and estate settlement basics.)

Typical estate expenses to plan for

Plan for three timing buckets of liabilities:

  • Immediate (0–3 months): funeral and burial/cremation costs, initial cash to hire an attorney, short-term bills. Average funeral expenses commonly fall in a broad range — often several thousand dollars — depending on services and location (see Consumer Financial Protection Bureau; Investopedia for ranges).
  • Short-term (3–12 months): probate costs, attorney/executor fees, appraisal and closing costs for sales, outstanding medical bills and credit-card debt.
  • Medium-term (6–24 months): federal and state estate or inheritance taxes (if any), final income tax returns, and liquidation of illiquid assets.

Key items to include in your estimate:

  • Funeral and disposition costs. (CFPB; Investopedia)
  • Probate and court fees; attorney and executor compensation. (CFPB)
  • Outstanding medical bills, final payroll/taxes for employees, credit-card and other personal debts.
  • Federal estate taxes or state estate/inheritance taxes where applicable. (IRS)
  • Any liens on real property and costs to maintain or secure property until disposition.

Note: Federal estate-tax exemptions change with inflation and law. For current exemption amounts and tax rules, check the IRS Estate Tax page: https://www.irs.gov/estate-tax

Step-by-step: building your liquidity plan

  1. Inventory likely expenses
  • Create a worksheet listing every potential cost and when it would typically be payable. Be conservative — overestimate rather than underestimate.
  1. Estimate amounts using ranges
  • Use local funeral home estimates, your attorney’s typical fee schedule, and realistic selling costs for property (commissions, repairs, closing costs). For taxes, use current IRS guidance for exemptions and rates; remember state rules vary.
  1. Identify existing liquid resources
  • Cash and bank accounts.
  • Short-term investments (money market funds, short-term Treasury bills).
  • Life insurance death benefits.
  • Retirement plan beneficiary designations (some accounts can be accessed quickly by a named beneficiary).
  1. Close liquidity gaps with layered strategies
  • Life insurance. A death benefit paid directly to a named beneficiary or to an estate (depending on how the policy is owned) provides immediate cash. Consider portability and ownership to avoid probate delays. (See our article on Using Life Insurance in Estate Liquidity Planning: https://finhelp.io/glossary/using-life-insurance-in-estate-liquidity-planning/)
  • Trusts. A revocable living trust can allow successor trustees to access trust assets faster than assets passing through probate, offering liquidity for immediate needs. For certain high-net-worth plans, an irrevocable life insurance trust (ILIT) can keep insurance proceeds out of the estate for tax purposes.
  • Short-term credit lines. A home equity line of credit (HELOC) or business line of credit can be used to bridge cash needs; be cautious of collateral and payment terms.
  • Joint accounts or payable-on-death (POD) designations. These allow named individuals to access funds quickly but carry ownership and estate planning trade-offs.
  • Liquidating low-cost portfolio holdings, if needed, but consider tax consequences and market timing.
  1. Document access and authority
  • Make clear where funds are, how beneficiaries or the executor can access them, and any passwords or agent contact information. Keep a list with your estate documents and inform your executor and spouse.
  1. Review annually or after major life events
  • Update when you buy or sell property, change beneficiaries, or if laws affecting estate taxes change.

Sample liquidity worksheet (simple example)

Expense type Timing Conservative estimate
Funeral & immediate expenses 0–2 months $10,000
Probate fees & attorney costs 2–12 months $7,500
Short-term creditor claims 0–6 months $5,000
Federal/state estate taxes (if applicable) 6–18 months Use current IRS/state guidance
Property maintenance and insurance 0–12 months $2,500
Total target liquidity $25,000 + potential tax exposure

Customize numbers to local costs and your estate size. In practice, many estates are fine with $10k–$50k of prepared liquidity; larger estates or those facing estate taxes need proportionally more.

Funding options: pros and cons

  • Cash and savings

  • Pros: Immediate, no transfer issues.

  • Cons: Holding large cash reduces investment growth.

  • Life insurance

  • Pros: Large lump-sum payout at death, tax treatment often favorable; can be structured to avoid probate if owned and designated properly.

  • Cons: Cost of premiums, need to manage ownership and beneficiary designations; can be contested if beneficiary designations are unclear.

  • Trusts (revocable and irrevocable)

  • Pros: Speed of access for trust assets, tax and creditor planning opportunities for irrevocable vehicles.

  • Cons: Setup and maintenance costs; irrevocable trusts have permanence.

  • Lines of credit (HELOC, business LOC)

  • Pros: Flexible bridge financing.

  • Cons: Interest costs, secured by collateral, may require creditworthiness of surviving spouse.

  • Joint accounts / POD designations

  • Pros: Fast access for the named person.

  • Cons: Gift tax implications, loss of individual control, potential creditor exposure.

Probate timing and how it affects liquidity

Probate rules and timing vary by state — some states offer expedited summary procedures for small estates, while high-value estates can take many months or longer. Executors often need cash before the probate court authorizes distributions. That gap is where pre-arranged liquidity matters. The Consumer Financial Protection Bureau provides a practical overview of the probate process and potential costs.

Common mistakes to avoid

  • Assuming all assets can be sold quickly at full value (real estate and business interests are illiquid).
  • Letting beneficiary designations or policy ownership create unintended taxable consequences.
  • Not documenting how to access accounts, policies, or digital assets.
  • Relying entirely on selling a home — market conditions may force a sale at a loss.

Real-world example

A family I worked with faced a $25,000 tax and legal bill soon after the death of the primary owner of rental property. The property was a good asset but would have taken months to appraise and sell. Because the client had a modest term life policy payable to the estate and a small joint account with the spouse, the executor used the insurance proceeds and joint funds to cover immediate costs and keep the rentals operating until they could be sold at market value.

Who should consider a liquidity plan?

  • Anyone with an estate of any size — even modest estates face immediate costs.
  • Owners of illiquid assets: primary residence, rental real estate, businesses, or collections.
  • People living in states with estate or inheritance taxes or where probate is lengthy or expensive.

Professional tips

  • Coordinate life insurance ownership and beneficiary designations with your estate plan to avoid probate and unintended estate inclusion.
  • Consider a small “liquidity reserve” in cash or short-term securities earmarked for estate settlement.
  • Talk with your estate attorney and tax advisor about whether a trust (revocable or irrevocable) fits your goals.
  • Keep a secure, up-to-date access list (account numbers, policy numbers, attorney contact) and tell your executor where it is located.

Frequently asked questions

Q: How much liquid cash should I leave?
A: There’s no one-size-fits-all number. Many advisors recommend enough to cover 6–12 months of estate operating costs (funeral, probate, creditor claims, basic property upkeep) plus a buffer for taxes. For estates subject to federal or state estate taxes, plan for those liabilities separately using current tax rules.

Q: Will life insurance proceeds be taxed?
A: Death benefits from life insurance are generally received income-tax-free by beneficiaries, but proceeds may be included in the estate if the insured owned the policy at death. Consult the IRS and your tax advisor for specifics. (IRS: https://www.irs.gov)

Q: Can my executor access my bank account immediately?
A: Not usually. If accounts are titled solely in the decedent’s name, banks typically require a death certificate and probate paperwork. Payable-on-death (POD) or joint accounts can allow immediate transfer but have estate-planning trade-offs.

Professional disclaimer

This article is educational and does not constitute legal, tax, or investment advice. Laws and tax rules change; consult your estate attorney, tax advisor, or certified financial planner for tailored guidance. For up-to-date federal rules on estate tax, see the IRS: https://www.irs.gov/estate-tax. For practical information about probate and settling estates, see the Consumer Financial Protection Bureau: https://www.consumerfinance.gov.

Further reading and internal resources

Author: CFP® with 15+ years advising families on estate and financial planning. This guidance reflects common practices and regulatory sources as of publication; always verify rules that affect your situation.

Sources