Friday, January 16, 2009

Returning to Core Values Through Estate Planning

I had originally titled this post as: "Chasing Returns", but decided on this title instead because it is more in keeping with the theme of this topic.

We have witnessed an almost unprecedented financial meltdown over the past year. Only those who lived through the great depression have seen something similar. The causes of this phenomenon and the reasons we as a society value an 18 year old's basketball skills over a teacher's is beyond this article.

Suffice it to say that current events suggest that we should be concentrating on some core issues. I submit one of those should be a return to core values. In fact, I suggest that had we all been focused on core values over the past few years, a significant cushion to recent financial times would have existed.

The current financial mess obviously has many root causes. Even the best and brightest of our financial minds were swept away in chasing returns, creating millions out of nothing of value and signing up with the Madoff group. So the mess was not the result of a lack of brains. In fact, you could say the mess was more the result of too much smarts and not enough sense.

For core values, I suggest taking care of our families as our first priority, not the last. Protecting one's family should always start by protecting against the downside risks. If you think of any financial plan or play, the thrust is the time line for making that plan work. Let's take a very simple example of a college savings fund.

The college savings fund works only if the parent lives long enough, or works long enough to contribute the desired amounts over time. This is what I mean by the time line for the plan. However, the plan cannot work if the parent or parents do not survive or work for the length of the time line. This is so obvious that I am surprised how few people recognize that the time line assumptions are only assumptions and only bear resemblance to reality by coincidence.

This is why financial planning is usually upside down and backwards. Any good plan must include fail safes to allow the plan to work, if the time line assumptions do not happen. In our example of the college savings plan, what is missing? The plan will only work, if the parents also include elements to take care of the time line not happening.

This time line not happening is what I refer to as the down side risk. If you don't live long enough, or don't work long enough due to illness or disability, what happens. The "what" is what estate planning is all about. Another way to say this is to say that every financial plan has to begin with the estate plan, not end with estate planning. Since the down side risk is always to the time line not happening, then we always start with that down side in designing the estate plan.

While this is frustrating to financial planners who are emotionally tied to their forecast time lines working, it is fundamental to properly protecting your family. And we have seen that even the best financial plan will collapse under certain market conditions.

So where should you begin? Begin at the beginning and build a sound financial foundation for yourself and your family. A sound foundation always begins with your estate planning. Estate planning always begins with the questions about how you want things to be if your time lines are cut short due to an unplanned death, illness or disability.

I will explore this more as we discuss the elements necessary to build your foundation. Please let me know your thoughts and if you have any questions. You can reach me at: with your thoughts or you can leave comments here.

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