Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Financial Planning > Charitable Giving

Close The Case With Cash Flow Analysis

Your article was successfully shared with the contacts you provided.

Given today’s economic climate, clients are more careful than ever about planning for the future. Even the most well-designed estate or charitable planning strategy runs the risk of being rejected by skeptical individuals who have seen the markets, and their financial lives, turned upside down. A common reason for such rejections: Clients, even those with significant wealth, are concerned that they (or their spouse) will run out money.

Many of the best estate or charitable plans involve giving away or giving up control of assets. Even those vehicles that allow clients to retain some control or benefit, such as a charitable remainder trust, cause many clients to ask, “Am I okay if I implement the plan?” Too few financial services professionals are able to assure their clients on this point because they fail to include a cash flow analysis as part of their process. The analysis is a remarkably effective tool in calming the client.

Presenting a cash flow analysis

Some of the planning techniques shown to clients are so complex that many advisors spend most of their time explaining the concepts. Unfortunately, the concepts are frequently presented on a stand-alone basis without helping clients understand the effect on their financial situation. From a marketing standpoint, a cash flow analysis should be included in any presentation when the advisor makes a recommendation to transfer assets.

The analysis itself can be basic or complex. In either case, cash flow planning enables clients to determine if they will accomplish their goals and live the lives they desire by comparing income sources with income uses and by determining the effect of income flows on assets.

Typical estate, charitable, and life insurance planning presentations start by analyzing clients’ current situation. These presentations then focus on how much future generations or charitable beneficiaries will benefit (or how much tax will be saved). While they understand why the strategy is desirable for the family or charity, many clients are uncomfortable paying premiums or giving up control because they are unsure where this leaves them and their spouse.

The marketing value of a cash flow analysis is the ability to look at a host of “what if?” situations. Projecting the effect a proposed strategy will have on the client’s cash flow over their life expectancy will help them to make informed decisions regarding their objectives. Knowing they will not run out of money, even when implementing the proposed strategy, is the key to assuring the needed peace of mind to move forward.

Many financial professionals believe there are 5 basic challenges in retirement income security planning. Most clients, even highly affluent clients, are concerned about these risks. In our analysis we educate our clients about them and assure our cash flow analysis takes them into account. They are:

(1) Timing and withdrawal rate risk– What do you do when you’re taking income from investments while the market is dropping? Is your withdrawal rate sustainable during your lifetime?

(2) Asset allocation risk–What do you do if you find that your investment portfolio is too risky or that it can’t generate an acceptable rate of return to support your income needs over the long run?

(3) Inflation risk–What do you do to offset the continuous increase in the cost of living?

(4) Longevity risk–With people living longer, are you sure your strategy will allow you to maintain your standard of living for an extended period without running out of money?

(5) Health care risk–Are you sure your assets are sufficient to support unexpected major medical expenses or a long term care situation, particularly if the proposed strategy is implemented?

A case study

By ensuring your clients look at these challenges and by showing them projections for the future based on different scenarios, you will have proactively answered their unspoken objections to your proposed plan or strategy. Consider this example:

Your clients, a husband and wife, both 65 years old, have a net worth of $16 million. Of this, homes and personal property are valued at $2 million with the remaining $14 million of assets being primarily income producing. Their potential estate taxes are $5 million. Your clients have a modest lifestyle requiring $250,000 annually. The estate is also growing rapidly.

Your proposed solution is a $5 million survivor life insurance contract owned by an irrevocable trust. The contract is structured with an annual premium of $100,000. You have also suggested they gift $2 million of assets to the trust. This will use your clients’ lifetime exclusions and remove future growth on those assets from the estate. This will leave them with $12 million of income-producing property.

On the surface, this solution should not present a problem, as $12 million should easily support the clients’ $250,000 in lifestyle expenses, including inflation. Therefore, you are disappointed when the clients don’t move forward. What you didn’t know was the couple is worried about potential medical and long-term care expenses; and whether they would still be okay if the market takes another downturn.

This is where the “what if” cash flow analysis can calm the clients. Most cash flow software today will let you model events such as:

–$200,000 of LTC expense for 4 years; and/or

–Three consecutive years of a down market; and/or

–Unusually high inflation.

You can then let the clients see the numbers (or a colorful chart) showing that despite all of those possibilities, there is a very high likelihood that they will never run out of money, even when implementing the strategy. With that objection out of the way, implementation is more likely.

Rob Studin is executive director of advisory financial services at Lincoln Financial Advisors, Philadelphia, Pa. He can be reached at [email protected]


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.