Business owners and people of wealth are often advised to review existing financial and estate plans every few years or as circumstances change, but what should those periodic reviews entail? Looking at your estate planning documents is certainly a good idea, but without a more holistic approach, you may not be getting as much as you can out of the process. Reviews that incorporate assessments of your overall financial condition—meaning an integrated analysis of net worth, cash flows and estate planning—tend to be most beneficial, especially during down markets. Reviews should also include candid discussions of personal, family, financial and philanthropic goals and objectives.
In early 2009, changes were made to federal estate tax exemption amounts that could provide planning opportunities for business owners. As a result, now may be a particularly good time to review existing financial and estate plans and explore opportunities. This practical two-step process can help you and your advisers to evaluate your financial condition, planning opportunities and potential modifications to your financial and estate plans.
Step 1: Update net worth statement and review insurance policies
Determine your assets. The first order of business is to take a current snapshot of all assets and liabilities. Many families' businesses have a greater value than all their other assets combined, so assigning only an approximate value to your business may cloud the true current financial picture. Current values of both business and personal assets should be as realistic as possible.
It's essential to include assets on your net worth statement that may have been previously overlooked. Automobiles, jewelry, parcels of land and artwork are often missed and could lead to an underestimation not only of your net worth but also of your “estate tax” net worth. In some instances, this could lead to an underestimate of projected estate taxes due.
In addition to current fair market values, cost basis information should be reflected, in case there is any asset liquidation that will trigger a capital gain. Your investment advisers should ensure proper investment asset allocation and asset location. As market values have declined, the percentage of cash, fixed income, equities and other types of marketable securities may have shifted out of balance. As a result, the portfolio's assets may not be allocated based on your current risk profile and cash flow needs. Finally, all brokerage, retirement and investment accounts should be examined to determine if consolidating any of these accounts under one roof would make sense from an investment management and overall reporting perspective.
Who owns what assets should also be reviewed. Because estate tax laws are subject to change, it's important that all estate planning documents and asset titling be reviewed. The assessment should ensure not only that recent changes are taken into account and do not produce inadvertent or adverse results for the family, but also that documents are flexible enough to address uncertainty in the future tax landscape.
Take account of your liabilities. As interest rates creep around historic lows, this review step will allow you to determine not only your debt-to-equity ratio, but also your overall personal and business interest liabilities (mortgage, lines of credit, etc.). Advisers should consider comparing the rates and terms of the existing debt to current rates and terms. Refinancing existing non-competitive interest rate debt to more favorable rates and terms may significantly improve your cash flows and potentially reduce your debt-to-equity ratio.
Review your life insurance policies. There are three areas to look at:
• First, is the coverage death benefit amount still appropriate based on your current life insurance needs and goals—especially if you purchased life insurance to pay federal estate taxes, provide estate liquidity or fund a buy-sell agreement?
• Second, are the ownership and beneficiary designations still in line with your objectives? Perhaps circumstances have changed.
• Third, in light of the current economic environment, is the policy performing the way you expected it to perform when it was initially purchased?
Step 2: Project cash flow analysis and review current estate planning structure
Think about your future cash flow needs. During this stage, it's important to determine a projection of your anticipated cash flows (inflows less outflows and taxes) and the impact this will have on your overall projected net worth over time. Maintenance of family cash flow and financial independence should be paramount.
This part of the review should help you think deeply about current and projected cash inflows from salary, bonus and investments to help you manage discretionary and non-discretionary outflows. As an example, maybe your discretionary outflows include gifting $10,000 in company stock to each of your children. You may find upon review of your cash flow analysis that the amounts being gifted could be adjusted upward. And, if stock valuation is depressed, you may even be able to transfer more shares to your children. Over time, the amount transferred to the next generation could be substantial.
The projected cash flow analysis may also unveil a parent's ability to support intrafamily loans. The current low interest rate environment has provided an opportunity for senior generations to lend funds to children who may otherwise not be able to secure financing in today's credit-squeezed environment. When structured properly, this does not affect any gift tax exclusions.
Give your estate plan a careful look. Another critical aspect of the review's second phase is the financial analysis of the flow of your assets at death based on your current estate documents and beneficiary designations. Only through a careful, holistic review will you and your advisers be able to determine whether potential pitfalls exist, and if so, what to do about them.
Robert Chwalk, a Certified Financial Planner, Chartered Life Underwriter and Chartered Financial Consultant, is executive director of the Financial Planning Advisory and Analytics Group at UBS. He heads both the Private Planning (ultra-high-net-worth) and the Preferred Planning (high-net-worth) offerings for UBS in New York (www.ubs.com).