Imagine a medieval knight or noble passing away unexpectedly. His wealth is overwhelmingly tied up in land, castles, and feudal rights—valuable but highly illiquid. When death came, the family often found themselves facing immediate financial burdens without the cash flow to cover them.
For example, under feudal law, an heir had to pay an inheritance tax (called a “relief”) to the king or local lord before officially taking possession of the estate. Without available cash, this often meant rapidly selling land or borrowing from moneylenders at steep interest rates, which could destabilize the family’s fortune. Some heirs even lost their ancestral lands because they couldn’t raise enough money in time.
Fast-forward to today and the same core problem remains: being asset-rich and cash-poor can force families to sell valuable assets at a discount when liquidity is suddenly needed. The difference? Modern estate planning offers sophisticated financial tools to help prevent this from happening.
The Modern Estate Liquidity Challenge for Affluent Families
Today’s high-worth families often have wealth tied up in a variety of forms: real estate holdings, a closely held business or equity in a private company, stocks and bonds, retirement accounts, art collections, private equity or hedge fund investments, and more. Some of these assets are liquid – cash or securities that can be sold fairly quickly. Others are illiquid, meaning they cannot be easily converted to cash without delay or discount. Estate liquidity refers to the portion of your estate that is readily accessible as cash (or can be quickly turned into cash) to meet obligations like taxes, debts, administrative costs, and the financial needs of your beneficiaries.
High-net-worth estates commonly skew toward illiquid assets. For example, you might own a $50 million real estate portfolio or a large share in a family business empire – and comparatively little in cash or liquid investments. On paper, you’re extremely wealthy, but when your estate faces a multi-million dollar tax bill, where will the cash come from? Executors generally have nine months from the date of death to pay U.S. estate taxes (and in many jurisdictions, there are similar timelines) – a window that can cause panic if most of the estate is tied up in assets that take months or years to sell.
Federal Estate Tax Rates (2025)
Why does this matter? Because without careful planning, being asset-rich and cash-poor can force painful decisions. If your estate lacks liquidity to cover taxes and expenses, the next generation may not receive the full value of the assets you intended them to keep.
In practical terms, your heirs might be compelled to liquidate assets quickly just to pay the tax man, creditors, or other beneficiaries. This could mean:
Fire-Sale of Assets
Valuable assets might have to be sold under time duress. A quick, forced sale rarely brings the best price. A private business, a unique property, or even a family heirloom sold in a hurry could fetch much less than its true value. In fact, using cash reserves to cover obligations is far more likely to net the estate full value than a rushed sale of illiquid assets, which is “unlikely to deliver full value” for the heirs.
Heavy Debt or Lost Opportunities
If they choose not to sell assets, heirs might resort to borrowing money to cover estate costs. That can preserve the assets in the short term, but now the estate or the heirs are saddled with debt and interest payments, which can erode the estate’s value over time. There are financing strategies available (we’ll discuss them in the solutions section), but they come with costs and complexities. An estate that must borrow to meet basic obligations is clearly not operating at an optimal level of liquidity.
Family Disputes and Inequity
Inadequate liquidity can also create internal strife. Imagine a scenario with multiple heirs: one inherits the family business (an illiquid asset), and the others are supposed to get equivalent value. If the estate has little cash, those others might feel shortchanged or face long delays while the business is sold or money is raised. This imbalance can lead to disputes or even litigation among siblings or family members.
Ensuring Estate Liquidity: Modern Strategies and Solutions
Estate liquidity is, oftentimes, a solvable problem. It requires foresight, a clear understanding of your asset mix, and employing the right tools well before they are needed. Here are several strategies that HNW and UHNW families use to ensure their estates have sufficient liquidity. Each strategy comes with considerations and should be tailored to your situation (and done in consultation with financial and legal advisors), but together, they can provide a multi-faceted safety net for your estate.
Establish a Dedicated Liquidity Reserve
Just as you keep an emergency fund for personal finances, your estate plan can include an allocation of liquid assets specifically for estate expenses. This might mean maintaining a certain balance of cash, money market funds, or easily sold investments (like stocks or Treasury bonds) that executors can tap immediately. You don’t want to overly hinder your portfolio’s growth with too much cash drag, but a reasonable reserve is prudent. Striking the right balance is key: Too little liquidity leaves you vulnerable to short-term pressures, while too much idle cash can hinder growth. Work with your wealth manager to determine an appropriate reserve.
Life Insurance (Often via an ILIT)
Life insurance is one of the most commonly used tools to create estate liquidity, and if structured properly, it does so tax-free. The typical strategy for affluent families is to establish an Irrevocable Life Insurance Trust (ILIT) to own one or more life insurance policies on the parents or senior generation. Because the trust, not the individual, owns the policy, the death benefit is not counted as part of the taxable estate. When the insured passes, the policy pays out a lump sum cash benefit to the trust, which can then be used to pay estate taxes and debts.
Tax Code Deferral Options
Some tax regimes offer deferrals for estates that are illiquid. In the U.S., if a large portion of your estate is a family business or farm, your heirs may qualify to pay the estate tax in installments 1 over up to 10–15 years (with interest) instead of the normal 9-month deadline. It doesn’t eliminate the tax, but it avoids the immediate fire sale.
Qualifying for these deferrals requires meeting specific criteria (e.g., the business must be a certain percentage of the estate), and heirs will need to keep that business running (or at least not sell it) during the deferral period.
Estate Loans (Graegin Loans)
In a notable tax case (Estate of Graegin v. Commissioner), an estate was allowed to deduct the interest on a loan used to pay estate taxes2, which in effect reduced the estate’s taxable value and, thus, its tax bill.
Since then, estates have been able to obtain a ‘Graegin Loan’ to pay taxes and other expenses. It may be possible to structure the loan so that all the interest that will ever be due on the loan is accrued and deductible upfront as an estate expense.
In Conclusion
Wealthy families today have more tools than ever at their disposal to ensure that a lifetime (or generations) of hard-earned wealth won’t be broken up and sold off at pennies on the dollar to satisfy a tax bill or pressing expense. The key is to act while you have the luxury of time and options. By understanding your estate’s liquidity needs and implementing thoughtful strategies (with the guidance of experienced advisors), you can help ensure your heirs receive the legacy you envision for them rather than a compromised version of it.
Ready to fortify your estate’s liquidity? Contact our office today to schedule a one-on-one consultation with our estate planning specialists. Together, we’ll craft a customized liquidity strategy that helps preserve your wealth and your family’s legacy for generations to come.
