In the most basic terms, an asset is anything you own that has economic value. Some assets actively generate cash flow, such as rental properties, bonds, or dividend-yielding stocks. Other assets could provide cash flow or economic benefit in the future: e.g. homes and real estate, collectibles, jewelry.
There are many different ways to classify assets depending on the goal of classification. As such, some assets may fall under more than one category.
- Depreciating vs. Appreciating: Certain assets depreciate or lose value over time (e.g. cars, machinery). Others appreciate or gain value (e.g. artwork, stocks).
- Cash and Cash Equivalents: Cash is an asset, and it comes in more forms than paper money in your pockets. Examples of these assets are hard currency, funds in checking and savings accounts, certificates of deposit (CDs), or investment securities that mature in under three months.
- Tangible vs. Intangible Assets: Physical objects that you can touch are tangible assets. Examples of tangible assets include your home, car, boat, art, or jewelry. Intangible assets, such as stocks, bonds, and pensions, are the opposite: non-physical. Asset value is not inherently connected to tangibility.
- Liquid vs. Illiquid Assets: Liquid assets are cash, bank accounts, or assets that can be converted to cash quickly without losing substantial value such as gold or a company’s accounts receivable. Illiquid assets (also known as “fixed assets”) take longer to convert into cash and could lose value in the process. Examples of illiquid assets include cars, houses, real estate, and ownership interests in private companies.
- Fixed-Income Assets: Fixed-income assets produce a stable, often predetermined return on investment usually in the form of interest. Fixed-income assets include bonds (government, Treasury, corporate), CDs, exchange-traded funds (ETFs), and preferred stock/securities.
- Protected vs. Exposed Assets: Certain asset types, known as “protected assets,” are inherently shielded from creditors. Assets not in this class are called “exposed assets,” and special planning is needed to shield them from lawsuits.
When thinking about your assets for estate planning purposes, you should also consider the “type” of value. Many assets have an easily identifiable market value—meaning, they are valuable in an arm’s-length transaction. Other assets, though, primarily have emotional value to a person or a family, which may not map onto an equivalent market value.
Assessing your asset portfolio is important when preparing an estate plan so you can classify all of your assets and take proper precautions to protect your assets from lawsuits, creditors, and predators.