United States: Use A Total Balance Sheet For Your Estate Plan, Including Invisible Assets And Liabilities

Last Updated: January 30 2015

A financial plan should be a thoughtful alignment of your income, expenses, saving, and asset allocation that makes it more likely you'll achieve what matters most to you. Your estate plan is financial plan's autopilot, ensuring that your capabilities carry out your goals, even if you're not around to supervise things yourself.

Using the Quadrant-based life cycle planning model, your balance sheet is one of your key Facts, because it presents your capabilities and your obligations on a single page.

A conventional balance sheet (one that shows your "visible" assets, liabilities, and net worth) shows the capabilities and obligations you have presently.

In theory.

In reality, your conventional balance sheet is likely leaving out some (or even most of) the really important stuff.

Good stuff such as your stream of future earnings or your plans to put your child through medical school. Bad stuff, like your spouse's compulsive shopping. Or stuff that might be good, or bad, depending on your perspective, like your hobby of collecting boats, cars, or watches.

To show all of your capabilities and obligations, you need to include these "invisible" assets and liabilities, to produce a Total Balance Sheet.

A thoughtful consideration of your Total Balance Sheet should be one of key engines for your integrated financial and estate plan.

The Total Balance Sheet (larger sized version here) looks complicated, but should make sense quickly when you review it more closely.

On the left side of the Total Balance Sheet, Assets are divided into two categories: visible and invisible. Visible assets include real assets (like houses) and financial assets (like stocks and bonds). Invisible assets are those relating to human capital.

The raw material of human capital is your age, because all things equal, a low age provides lots of lifespan, which provides time. Time, the "master resource," offers the opportunity to develop and your deploy human capital to create cash flow and other resources to achieve your goals. Using these cash flows and resources, you can fulfill liabilities on your Total Balance Sheet.

Your human capital is also strongly influenced, of course, by your physical health. You can't control your health, but you can encourage it through diet, sleep, and exercise.

Emotional health is a key driver for human capital, because when it is strong, energy is higher; when it's lacking, it is difficult to reliably deploy human capital over time. Family relationships contribute to emotional health, as do one's stress management, friends, and spiritual life.

Relationships in one's community through church, civic activity, and clubs help create social capital, which is an accelerant for human capital, allowing it to be developed faster and deployed in more situations. (Translated out of econ-speak, that can mean "it helps you get another job faster.")

Knowledge (often developed through schooling and professional training) and experience (often obtained through internships, or on the job) round out the drivers of human capital formation.

If your human capital is high and you deploy it effectively with the right mix of industry and serendipity, your future earnings will be high, creating an asset on your Total Balance Sheet that's very real, even though it may be invisible.

Similarly, on the right side of the Total Balance Sheet, Liabilities are divided into two categories: visible and invisible. Visible liabilities include student loans, credit card debt, mortgage and home equity debt, car loans, and business debt. Invisible liabilities include those relating to community, family, health, and lifestyle aspirations.

Invisible liabilities to the community come in two varieties: voluntary and involuntary.

Voluntary community liabilities might include service on civic boards or a church vestry, or charitable pledges.

Involuntary community liabilities are those relating to future, contingent tax exposure associated with unfunded entitlements and/or deficits run by state, local, and federal government.

(To illustrate this point, is it more congenial to be a high-earning or large-balance-sheet person in a city in California with severely underfunded pension plans, or in Texas, Nevada, or Florida – all high-growth states with no state income taxes?)

Invisible liabilities to family could relate to a spouse, aging parents, or children.

A spouse could have spending problems or a bad marriage could present heightened divorce risks – with all the carnage that usually causes for financial health.

Aging parents could require expensive long term care.

Although children are rewarding in many ways, raising them to adulthood is a seriously large liability, even without the addition of independent primary and secondary school, private college, and graduate school. Adult children can also present ongoing liabilities, such as pressure to subsidize glamorous but non-lucrative careers or help pay for grandchildren's education.

Health risks and conditions (whether known or unknown) can also present invisible liabilities.

Lifestyle aspirations are one of the largest drivers of invisible liabilities.

A person driven to sustain a higher cost lifestyle will necessarily divert cash flow to fund that lifestyle away from investment in financial capital. They may also work longer hours with higher stress, potentially depleting human capital through reduced health and less time to invest in the relationships that build emotional health and the community activities driving social capital.

The Total Balance Sheet is constantly changing throughout the life cycle, and each person's is unique.

For instance, a recent engineering school graduate may have high student debt (a visible liability), but also has high future earnings.

A mid-career professional may have retirement accounts providing visible financial assets, valuable job experience, and a wide array of social capital, but lower future earnings and looming, substantial invisible liabilities relating to children's college costs.

Clients and advisors will make better life cycle estate and financial planning decisions when they take time to reflect on the client's Total Balance Sheet, how it will change in years ahead, and how various decisions might affect it (for better, or for worse).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.