As a CPA practice owner, you know numbers—but have you run the numbers on your own estate liquidity? A lack of liquid assets could leave your heirs and executor scrambling to cover estate taxes, business expenses, and probate costs.
Without careful planning, the IRS and creditors may get paid before your loved ones do. That’s where understanding estate liquidity demands becomes crucial.
Estate Liquidity Demands
Let’s look at what your estate needs to write checks for—and how quickly. The biggest and most time-sensitive hit is usually federal estate tax, currently at 40% of assets over the $13.99 million exemption ($27.98 million for married couples). However, this bill comes with a strict 9-month deadline. Add state estate taxes to the mix (ranging from 12% to 20% in states like Washington and Hawaii), and you’re looking at a substantial cash requirement right when your estate has the least flexibility to generate it.
But federal and state taxes are just the beginning of the liquidity story. Every estate faces a cascade of immediate expenses: funeral costs, attorney fees, executor fees, and accounting fees for the estate’s tax returns. Overall, your estate could see probate costs running between 3-7% of the estate’s value, all needing to be paid in cash within the first year. And unlike taxes, many of these service providers expect payment upfront—they’re not interested in waiting for the estate to sell assets at full value or collect receivables.1
Business Continuation Requirements
When a practice owner passes away unexpectedly, what was once a well-oiled machine could face a perfect storm of cash demands. While your fixed expenses may continue as normal, your revenue stream could face significant headwinds. For example, engagement letters may require client re-authorization upon ownership changes, potentially creating a revenue bottleneck just when you need cash flow the most.
Additionally, standard commercial loans might contain “due-on-death” clauses that activate during ownership changes, potentially triggering loan reviews or new collateral requirements. Meanwhile, maintaining staff continuity and bringing in transition leadership may require substantial capital. Even well-structured buy-sell agreements often focus solely on ownership transfer while missing critical short-term liquidity challenges—a blind spot that could force difficult decisions about a practice’s future at precisely the wrong moment.
What Happens If There Isn’t Enough Liquidity in Your Estate?
Without enough liquidity, your estate will still need to cover taxes, legal fees, and business expenses—often within tight deadlines. Executors might struggle to meet payroll, loan obligations, or probate costs, leading to delays and financial strain on your heirs. These obligations don’t pause just because assets take time to sell or access.
Without sufficient liquidity, your estate may be forced into a fire sale—where assets like real estate, business interests, or investments are quickly sold at steep discounts just to generate cash. A fire sale often means selling at a fraction of market value, eroding the wealth you intended to pass down.
The worst-case scenario? Losing control over how your assets are distributed simply because there wasn’t enough cash on hand.
Fortunately, there are solutions to potential liquidity problems.
Estate Liquidity Solutions
Potential Liquidity Sources Breakdown
Cash Reserves
This may seem like an obvious one, but unfortunately, it’s often overlooked. Having cash reserves specifically earmarked for immediate estate expenses is one of the simplest and most effective ways to avoid liquidity shortfalls. Setting aside a designated fund will help ensure that your heirs and executor have quick access to capital for funeral costs, legal fees, and urgent business obligations. However, you probably won’t want to keep millions set aside where they will lose value to inflation. That’s where insurance comes in.
Life Insurance Strategies
One of the most common strategies is to utilize life insurance to create a lump sum of money upon your passing. You have two general options: term vs life.
While term insurance offers straightforward protection, permanent coverage can create a more comprehensive solution by building cash value alongside death benefits—potentially offering liquidity during life while guaranteeing estate liquidity later.
The pinnacle of insurance planning often involves Irrevocable Life Insurance Trusts (ILITs), which, when properly structured, can provide liquidity exactly where needed while keeping proceeds outside your taxable estate.
For example, consider an estate facing a $3 million estate tax bill. If the executor lacks sufficient liquid assets, they may be forced to sell business interests or real estate at a discount. However, an ILIT holding a $3 million life insurance policy helps ensure timely liquidity, allowing the estate to meet tax obligations without distress sales, which could lead to a loss.
Trust Planning Approaches
While most trusts may not provide immediate liquidity like an ILIT, they can significantly reduce estate tax burdens by moving assets outside of the taxable estate and thus avoiding costly probate. By strategically utilizing grantor trusts, irrevocable life insurance trusts (ILITs), and other estate planning tools, high-value assets can be shielded from estate taxes, preserving more wealth for heirs and reducing the need for a rushed liquidation of assets.
Business Liquidity Solutions
Buy-Sell Agreements (Funded with Cash or Insurance)
If your CPA practice has partners, a properly funded buy-sell agreement can ensure a smooth transition without forcing the estate to sell the business at a discount. These agreements set clear terms for ownership transfer and valuation, preventing disputes and ensuring business continuity. When funded with life insurance or cash reserves, they provide the necessary liquidity to execute the agreement without financial strain on heirs or surviving partners.
Business-Owned Life Insurance (“Key Person” Insurance)
Your practice itself can own a life insurance policy on you, providing instant liquidity to cover expenses like payroll, lease obligations, and transition costs. This ensures that employees and clients aren’t left scrambling in the wake of an unexpected death. Without it, the firm might struggle to retain key talent or fund daily operations, increasing the risk of business failure at precisely the wrong moment.
In Conclusion
What would happen if your estate suddenly needed cash—right now? Taxes, legal fees, and business obligations don’t wait for long, and without proper planning, your heirs could be left scrambling to cover immediate expenses. A lack of liquidity can turn an otherwise well-structured estate into a financial mess, forcing hasty asset sales at deep discounts or disrupting business continuity.
By implementing a combination of cash reserves, insurance strategies, and structured business succession plans, you can help ensure your heirs have the financial flexibility they need to navigate estate transitions smoothly.
If you’re unsure about your own financial strategy, feel free to reach out–we work precisely with CPA practice owners to help identify and address potential challenges before they impact your legacy plans. Click below to schedule a review!
