When planning your estate, make sure you commit enough assets to cover expenses in your estate plan. Unfortunately, when you die, your expenses live on. Furthermore, your executor and beneficiaries are not responsible for payment of these expenses. In most common estates, the expenses your executor will most likely handle are some of the following:

• Unsecured debt. This includes credit cards, medical bills, and utility bills. Other types of expenses for homeowners are home repairs, property tax, and home insurance.

• Secured debt. These debts include car loans and mortgages. Typically, these expenses pass to the beneficiary that inherits the asset if they accept the bequest.

• Administrative expenses. These expenses include funeral costs, estate administration costs, attorney fees, and other professional services needed to administer the estate.

Depending on the complexity of your estate, not all expenses listed above will arise. However, for the expenses that may occur, it’s necessary to set aside assets to cover expenses in your estate plan.

Why it’s Important to Cover Expenses in Your Estate Plan:

Covering expenses for the estate is essential when using probate avoidance methods in your estate plan. Using probate avoidance methods moves assets from the estate directly to the beneficiaries leaving the executor fewer assets to pay expenses. In fact, without proper planning, you could create a situation where the expenses exceed assets. This would put your executor in a tough situation. Therefore, approach your estate plan the same way your executor will approach the administration plan before claiming the assets: Estimate the value of your assets and expenses to determine if you have enough assets to cover likely expenses.

In the article The Administration Plan: A necessity for the Executor, the executor estimates the value of the assets and the expenses of the estate to decide how to proceed with the estate. In your estate plan, you will decide how to cover expenses and how you want the remaining assets distributed.

How to Cover Expenses in Your Estate Plan

After estimating your estate’s net worth (assets – expenses), you will have a good idea of the assets you want to commit to covering expenses and the remaining assets you want to distribute. Typically, most common estates have minimal expenses and use only liquid assets to cover expenses. Otherwise, if your estate is more complicated, put instructions in the will on which assets you want the executor to use to cover expenses. The experts at Nolo suggest using asset classes in the following order:

• Liquid assets. This asset class includes bank and deposit accounts, stocks and bonds, and money market accounts. Basically, any asset that you can quickly convert into cash.
• Tangible assets. This asset class consists of any asset that you can sell for cash such as cars, motorcycles, jewelry, stamp and coin collections, and electronic items. Typically, to sell fast and raise cash the executor will have to sell below full value, which will lower the net worth of the estate.
• Insurance. You can buy a life insurance policy to cover estimated expenses of the estate and name the executor as beneficiary. This option requires instructions in the will to make clear that the life insurance policy is for expenses.

Once you determine the use of your assets, you can safely begin to name beneficiaries for those assets. Further, for the purpose of avoiding probate, name only the executor as beneficiary of the assets used to cover expenses. Then, list those assets in the will with instructions that the executor should use the listed assets to pay expenses. As for the rest of the assets, designate beneficiaries as you would like.

Conclusion

Estate planning is a necessary process that hopefully provides a smooth administration for your executor. Many unexpected events can happen that could derail a well-crafted estate plan. However, failing to properly plan for the payment of estate expenses shouldn’t be one of them. If you properly calculate the net worth of your estate and commit enough assets to cover expenses in your estate plan, then you are giving your executor a great start to a smooth estate administration.

References:

Leaving Instructions in Your Will for Paying Debts, Nolo, Betsy Simmons Hannibal, Attorney

Plan Your Estate– This book by Nolo will guide you through building a smooth estate plan.

Did you find this article helpful? Was the article confusing? Enter your questions or comments in the comment section below.