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Major Life Issues and the Financial Review When Assessing the Family Office Baseline

Posted by Dr. Kirby Rosplock on 28 October 2014

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In this week’s blog post, I discuss preparing for major life issues and the financial review when assessing the family office baseline. This information will be used to explore and determine the practical needs of a family when considering a family office structure.

Assessing and Preparing for Major Life Issues

Families are constantly managing and coping with a multitude of family life events. In addition to understanding who the family members and their trusted advisors are, it is also vital to understand what and if major life events are occurring. Life events encompass a broad array of issues from birth to death, marriage to divorce, retirement to career change or unemployment, as examples.

Some of these issues may require urgent attention, for example, when or if a family member loses his or her job and needs to supplement the household income or obtain health insurance coverage. Another urgent example may be a shortfall due to a business closure from a fire or accident, requiring a family member to call capital. Other life events, such as declining health, may change gradually overtime and should be monitored, but may not trigger an immediate response from the family office. They should, however, trigger planning for anticipated future life events.

In their book, Family Wealth Transition Planning, Bonnie Brown Hartley, PhD, and Gwendolyn Griffith highlight the heightened need for families of wealth to be proactive and forward-thinking to the myriad of critical issues that could be devastating to the family continuity, business and/or wealth. Otherwise, a family may be blindsided by events when the stress, anxiety and negative effects could have been drastically mitigated with some simple planning. A family may determine that making adequate cash reserves are on hand when and if a family member becomes incapacitated and needs more care, or may move in with other family members. This is a simple example of when being prepared to deal with an anticipated life event can help reduce the resulting stress and anxiety.

Life events are also important reminders that foundational elements, such as the estate plan or gifting schedule, may need to change if, for example, a child is born. Again, understanding who the family is in relation to their advisors and their legal entities is a balancing act that requires constant vigilant oversight and a meeting of the minds of key advisors and family members. (An extensive checklist of life events is available in The Complete Family Office Handbook.) In addition to the financial and legal aspects of the clients laid out in their estate plan, partnership agreements, investment policy statement, and/or other legal documents. Advisors must stay abreast of the changes that individual family members are experiencing. Knowing the client is a core element to all aspects of wealth advising, and it has particular significance for families with a family office.

The Financial Review

In addition to the estate planning documentation and review of all legal entities, it is recommended to also gather significant financial data on the family. Documents such as income tax returns, business tax returns, and financial statements from accounts such as brokerage, pension, 401(k) and investment statements are typically the base documentation collected. The family’s accountant for their personal tax filing as well as the accountant for the business tax filing (if there is an operating business) are often engaged with permission from the family to share this underlying information.

The next step is to organize the documentation by household and then to input the income, expense, tax, investment and performance data into financial modeling software. There are a number of programs that can model income and expense reports, conduct cash flow analysis, produce wealth accumulation projections and plan gifting schedules. Because there are different financial modeling software packages, the key is to find software that is customizable, allowing the family office to change capital market assumptions and/or unique aspects of a family’s situation in order to project the likelihood for success under different models.

Next week’s post will focus on capital sufficiency analysis and several case studies when creating a family office baseline. To explore the family office baseline more in depth, read Chapter 6 of The Complete Family Office Handbook.