What do you spend on traveling every year? Eating out? Do you need help with home renovations or household chores? What about regular recurring expenses?
Answers to such questions aren't easy to come by for many wealthy families, and when asked, spending estimates are usually significantly lower than reality, advisers say.
“High-net-worth individuals typically have a pretty good understanding of their income sources, whether it's salary or IRA distributions, but they typically don't have a good handle on their spending,” says Allen, director of finance.・Mr. Laufer says. Silvercrest Asset Management Group manages plans with an average of $34 million in assets under management per client.
Unplanned spending may not seem like a big problem for wealthy people. After all, how bad could it be if you have a lot of wealth from public and private investments, real assets, business profits, etc., not to mention a healthy income? Should you give maximum weight to discretionary spending?
“It's pretty bad when you measure it over decades, but it's really bad when you measure it across generations,” Laufer said, alluding to the well-known adage, “shirtsleeve to shirtsleeve in three generations,” which It refers to a common pattern in which wealth gained within a generation disappears. By the third.
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“We find that expense tracking is an eye-opener for our clients, and when they run through the numbers over the years, they often find something surprising,” says Laufer.
Add in the familiar twists and turns, such as deep stock and bond market declines and soaring inflation, and the prospects for a happy ending become bleak. If you don't have enough cash to cover your expenses, you may need to withdraw cash from your portfolio and may incur an unplanned capital gains tax liability. What's worse, says Laufer, is that you'll have fewer assets in your portfolio and therefore less income from your portfolio.
“There's a snowball effect going on. There's a net cash outflow every year that impacts your net worth, and you may not have as much cash left at the end of the day as you expected,” he says.
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For families to successfully build and maintain wealth across generations, it's important to clearly distinguish between overall wealth and the more important component when it comes to spending: cash flow.
Cash flow management is a more flexible budgeting method for wealthy families. Budgeting usually involves a strict source of income that determines how much you can spend. When it comes to cash flow management, there are many sources of liquidity, from earnings and investment income to business interest and rent. Adding to the complexity, your assets may be spread across numerous bank, investment, and advisory accounts.
To avoid shortfalls and leaving too much money in low-yield accounts, planning for the right amount of cash is a strategic, ongoing exercise that requires cooperation from both parties.
We are wealth and tax experts who take all your accounts into account, even if they are spread across multiple asset managers and investment accounts.
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Taxes are an important part of cash flow analysis. Complex investment and estate planning often creates less visible taxable events that need to be factored into your cash flow needs.
“While creating a grantor trust may be good estate planning, many people don't realize that seniors are on the hook for taxes,” explains Laufer. “If they don't have a plan in place, they're looking at multi-million dollar tax bills and potentially not having cash flow.”
Involving tax professionals in cash flow management also helps ensure that cash is generated in the most tax-efficient manner, says Roger Young, thought leadership director at T. Rowe Price in Baltimore. talk. “You need to understand the tax implications of withdrawals from different accounts, and you need to understand the tax implications of withdrawals from different accounts, and you need to understand the tax implications of withdrawing money from your retirement savings at various inflection points, such as when you start taking required minimum distributions from an IRA or when tax rates change. There may be consequences.
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Tax strategies can help generate cash flow from illiquid assets. For example, the value of a large art collection can be more than $10 million, but it usually does not provide any income. An annuity can be created from such assets by setting up a trust, such as a charitable remainder trust, and funding it with illiquid assets. This trust begins to generate annual income for a specified period or for life, and what is left in the trust at the end of the period is distributed to the beneficiaries.
Variables in cash flow planning are different family habits. If one person's spending goes unchecked, it can affect the family's inheritance. A good plan allows you to accurately set your family's spending limits and helps remind you that your family's wealth can benefit you for generations.
This story was originally published in the June 2023 issue of Penta magazine.
