Regardless of the size of a client's estate, recognizing underutilized wealth is the first and most fundamental tool of preserving family wealth. Whether we are doing tax planning or long-term care planning, underutilized assets should almost always be transferred to the next generation. The following are reliable ways of recognizing underutilized wealth. These are not truths nor “rules," but indicators and guidelines for further discussion.
The client is retired or otherwise without active income, but assets are still growing. (Income exceeds needs):
The client is retired or only has passive income, and is generally reinvesting investment profits:
These two items may seem similar, but there is both a degree and a cash-flow distinction. Sometimes straight asset appreciation, growth in real estate values, or growth in stock prices causes assets to increase in value without generating additional cash flow. If so, caution is warranted, or perhaps the client should only consider transferring assets that are not producing cash flow and simply appreciating, such as personal residence.
In item two, we are focused on the reinvestment of profits. Does the client have one or more accounts in which he or she regularly reinvests the profits from their dividends and bond income? These might be indicators of underutilized wealth.
More Than Two Years of Cash on Hand:
I get nervous when I see a client with less than six months of cash on hand, and I have no objection to those clients who want to keep two years of cash on hand. If the client has more than two years of cash, additional questions should be asked, as this it is probably an indicator of underutilized wealth.
High Cash Value Insurance vs. Death Benefit Life Insurance:
We often encounter clients who have old cash-value life insurance policies. Often the clients are contributing very little or nothing to these policies. Sometimes, the policies have a relatively high cash value as compared to the death benefit. While I do not recommend these policies be cashed-in, they may represent a source of underutilized wealth. Certainly, for most clients, these policies will never add to the insured’s cash flow or lifestyle. In a Medicaid situation, such policies are liabilities instead of assets. Further questions are warranted.
Annuities That Will Never Be Annuitized:
We often meet clients who have annuities they never expect to annuitize. Often, these annuities were purchased during high-income years for the simple purpose of reducing income taxes on investment growth. Now, because any withdrawals from this asset are subject to high marginal income taxes, there can be a great reluctance to withdraw from the account or to do anything with it at all. These annuities are often sources of underutilized wealth that might be redeployed for better purposes.
Legacy Counselors is here to help. If you are interested in learning more about underutilized wealth, please give us a call. We will be happy to assist.
Please visit our blog later this week for Part II and Part III in our series on underutilized wealth.