LIQUIDITY GAP

Often the financial measurement of “Net Worth” (assets minus liabilities) can be misleading. While it provides a financial snapshot in time that has become an accepted barometer to measure credit worthiness, “Net Worth” may not consider important variables such as future obligations or “promises to pay” including estate and inheritance taxes, financial guarantees (debts) and/or consideration for financial markets fluctuations. Therefore “Net Worth” potentially overestimates an individuals “Future Worth” at the time of death. In addition, the increased need for cash after death creates pressures that could further reduce the expected “Real Worth” of an individual.

As a means of illustrating the magnitude of this issue, it is important to understand the relationship between “Wealth” (assets that include securities, cash, real estate and business interests) and “Liabilities” (debt and promises to pay). Typically, ”Net Worth” is comprised of assets minus liabilities, however, taxes are usually not considered.

For example: At death it may be that “Wealth” and “Liabilities” are nearly equal because assets minus liabilities now include inheritance and other taxes. If all of the liabilities are required to be paid, the total wealth of the estate may be required to service debt and other obligations. If the majority of the family’s wealth is illiquid (as with most wealthy families), assets need to be liquidated to satisfy the estate’s obligations. In all likelihood, the assets may not be sold for their true market value as the requirement for liquidity may come at an inappropriate time.

Wealthy individuals outside the United States clearly understand this is a realistic scenario and potentially disruptive to their family’s financial security. As a result, they seek solutions to create liquidity when it is needed, thus turning to their financial advisors for advice.