Once you are past the early adult phase of buying first car, first home, furniture and other assets you use, you will learn to reduce the debt that occurred in round one.
Debt reduction is a cash flow issue and it behaves about the same way as investment. You need only notice one aspect. The absence of a cost is very similar to income. Making your debt payments go away is functionally similar to providing yourself with more income. Paying down a mortgage is like acquiring a fixed, riskless, rate of return that is, after taxes, higher than anything you can get elsewhere with similar risk. End of round two.
Round three is the first that demands attention to a very long future. It is four parts:
- Build financial assets.
- Use financial assets
- Organize a way to transfer all assets
You build by saving, investing and growing a business. The limits include yield, risk, taxation and time. The priority is growth – to accumulate enough to allow retirement to work properly.
Retirement may have a stage that includes a business transition. Eventually though you will live off what you have saved and created. In this stage the priority is cash to spend. The limits remain yield and taxation, but risk tends to become less as more guaranteed asset classes become the norm. Time reverses. Instead of too little time to accumulate there is the risk of needing money for too long. New potentials emerge. Inflation and health.
People must decide how they wish to transfer what they own to others. Money is easy because it is fungible. Heirlooms are more difficult because their prime value may be emotional. Monuments like a business should have already happened. Difficult if they have not. The priority here is fairness, optimal values and speed. Many assets can transfer sooner rather than from the estate. That requires recognition of a stewardship idea and pays heed to the fact that most people who inherit from their parents are about 60 when they do. Earlier is better. Ease of management, cash flow and predictability are the prime values. Risk and tax are potential problems.
Final distribution is about speed and simple. Poorly drawn wills with too little clarity and too little liquidity cause problems. Try and do an exercise where you discover your estate and its outcome on a pro forma basis. That process will identify many of the obstacles your executors will face. Try to discover what your written will means in terms of estate outcomes. You may be surprised.
Estate planning is little more than organized common sense. Actions you take now will have a big effect on how well it works out.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 866-285-7772