How We Lost Grandfather's Farm: Turning Illiquid Assets Into Liquid Assets Isn't Easy

This is easy to do with sugar cubes. To make the solid, a liquid, you simply pour boiling water on them. Unfortunately for illiquid assets, the transition is not that easy. Take for example, when one of your wealthy clients dies at a time where most of their assets are illiquid such as land, houses, or even collections of rare art. To the contrary, this could also easily be a temporary situation because of a business decision or some other reason.

Unfortunately, when someone of wealth passes away, there is often a need for liquidity in their estate. If there isn’t enough cash, this problem can be easily remedied if your client has securities such as stocks, muni bonds, or Treasury bills. All of these can be sold to generate cash which survivors and the estate usually need and need quickly.

Sometimes gathering the cash needed to pay expenses like taxes requires selling illiquid assets— sometimes below market value—which often generates an additional tax liability. These types of liquidity problems can create a devil’s brew of estate taxes, capital gains taxes, income taxes, excise taxes, especially if the decedent had neglected to create a viable estate plan. The repercussions of this lack of planning can have an impact on the decedent’s family; this can reverberate across generations.

My grandparents owned a magnificent 1,000 acre farm. Both members of my extended family and I spent some of the happiest —and hardest working— hours of our childhoods on the farm. So I want to tell you the story of what happened to that farm. This isn’t something that happened to those mythical people Mr. or Ms. Jones we conjure up when explaining to prospects what can happen if they don’t purchase a product or service. It happened to me.

A death in the family is always a tragedy. However, in addition to the tragedy of my grandpa’s death was the sadness of losing the family farm. I don’t remember all the financial details, but what I do remember is there was no liquidity in my grandfather’s estate. While there are exemptions in the tax code for passing family farms from one generation to the next, taxes still had to be paid to settle the estate.

The only way to access the funds to pay these taxes was to sell the farm; this brought a lot of liquidity into the estate. Prior to the sale, the family had discussed the following conundrum for long hours: we wanted to keep the farm in the family; the 1,000 acres that comprised the farm had a lot of value; selling the farm would bring a lot of cash to the estate of my grandparents. What was so maddening was that sale of the farm would bring far more cash than needed to pay the taxes, but the only way to access the value was to sell the farm.

Selling the farm would have been the last thing my grandfather would have wanted. He was a smart man and a good businessman as successful farmers have to be. But he had failed to do the one thing which would have prevented this—prepare for the potential tax liability of transferring the farm to the next generation. 

Unfortunately, he had no awareness of the potential estate tax liability until it was too late. My father later told me that he, too, was unaware of the potential tax liability. He had been busy farming. A good life insurance policy would have been an easy way to satisfy the tax liabilities.

Do you have clients who would be forced to sell a treasured family possession in a similar event? Perhaps a painting which has been in the family for generations. Or a collection of antique and exquisite Persian rugs from the 19th century. Maybe even a farm?

If you have clients like this, you will be doing them a great favor by mentioning two of the most important features of life insurance:

1). Proceeds from the policy provide immediate cash to the beneficiaries.
2). The proceeds received by the beneficiaries are not subject to income tax.

Further, in the case of our family farm, provided the life insurance policy had been structured correctly, it also would have protected the farm from additional estate tax liability. 

The death of a wealthy client can generate a lot of unforeseen expenses. Make sure these expenses don’t force the sale of an illiquid asset that has great emotional value to your client’s family.

To learn more about this topic, register for our Capitalizing on the Insurance Opportunity course. 

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Contributing Writer: Subject Matter Expert Charles McCain