Many estate planners, as well as estate planning software, only show one side of the picture. The emphasis is on how much estate tax will be saved, and/or how much more the heirs will inherit. After all, that is the side of the picture almost every higher net worth individual is concerned.

What about the other side of the picture? What are the costs associated with the various planning techniques? To consider the “whole” picture, the clients must consider two other financial concerns: one, the clients’ lifestyle expenses; and, two, the long-term effects on their wealth, or net worth.

First, let’s look at an example of what I prefer to call, “one sided estate planning.” A couple has a net worth of $10 million, and after various techniques are applied as well as considering their objectives, it’s determine that a survivorship whole life for $3,000,000 will cover the transfer costs and allow their property to pass to their heirs as desired. The policy has an annual cost of $60,000. It sounds great, past a $10 million dollar estate to your heirs at a cost of $60,000 a year—as the late Ben Feldman would have said, “Dollars for pennies!” Many planners and software lets the clients figure out whether or not they can afford this solution. This is what I refer to as the “one sided solution.” All of the emphasis is on the net to the heirs or paying the transfer costs at death.

The other side of this example is what will be the effects of the clients paying $60,000 a year for this solution? Will their current lifestyle have to be reduced? Will their net worth reach an uncomfortable low as they reach and enjoy their retirement years?

One way to analyze the other side of the picture would be to examine the clients’ cash flow assuming all existing lifestyle expenses must be continued. In other words, the clients’ lifestyle will not change. Now we use other funds, or liquidate available assets to pay the cost of the solution—the $60,000 annual premium in this example. This approach will cause one of two things to happen—income that would have been used to increase net worth will be used for the premiums, or existing assets will be liquidated and used for the premiums reducing net worth. With this approach, you can compare the decrease in net worth with the increase in net to heirs get an estimate of the cost of the solution.

This approach allows the clients to see how the recommended solution affects them—is the gradual reduction in net worth a fair price to pay for the increase in the net to heirs? The answer to a well thought out plan, is almost always an easy yes. The clients know what the solution is ultimately costing. They didn’t create an estate planning need by looking for nor expecting “a free lunch.”

Good cash flow software is essential to analyzing the other side of the picture. Making this comparison is the design objective of the Wealth Distribution Analysis presentation. All of PlanLab’s Detailed Analysis use this type of cash flow details to fairly illustrate proposed solutions.