As people begin to amass wealth, the clarity and simplicity of their financial lives can quickly diminish.

For instance, consider the potpourri of financial accounts, alternative investments, real estate holdings, closely held business interests and insurance products that are staples for high net worth individuals. The ownership structure and situs of these assets, primarily driven by tax, legal and estate planning considerations, further complicate what was once a modest financial picture. Over time, the financial arrangement grows puzzling, causing high net worth households to lack a framework for thinking about all the workings of their capital in a clear, concise manner. Financial decision making becomes a pain point as families lose conviction and recognize they have blind spots but are unable to identify where.

Extensive time can occur in this state of flux as the individuals’ primary focus is creating wealth rather than managing and overseeing it. Throughout the wealth accumulation phase, the individual sensibly invests more time and energy in human capital than financial capital. This confluence of events leads to the appointment of several types of experts to carefully monitor the family’s capital and implement financial, estate and tax planning solutions. They need an integrated team-based approach to wealth management as no one advisor possesses the client’s full picture and wherewithal to provide the spectrum of advice and service required.

Central to this team are trustworthy and capable accountants who can leverage their analytical, detail-oriented and inquisitive nature to depict and diagram the family's entire financial structure accurately. Piecing together a map of the client’s wealth will help illuminate blind spots and serve the family, future generations and other members of the advisory team as a platform for prudent decision making. While it may not be feasible to simplify the client’s financial holdings, illustrating it simply and concisely will yield a framework that helps clients manage their financial lives more effectively.

To craft a thorough and useful framework, the accountant should conduct an investigative examination into the financial affairs of the family. Given the multifaceted economic nature of a high net worth client, the procedure will need to be analogous to a “forensic accounting” that an accountant would perform for an operating business. In this case, however, the forensic accounting entails investigating, interpreting, analyzing, and summarizing complex financial matters for a family instead of a business enterprise.

Discovery: As with forensic accounting, start the discovery phase by leveraging information that’s readily accessible. Accountants tasked with the preparation of the family’s various tax returns have a great starting point with the abundance of information in their annual work-paper files and permanent files. Further, tax returns serve as an excellent roadmap in uncovering each layer of a family’s financial picture.

For example, following the natural progression of the Form 1040, begin with wages and identify any salary deferrals under qualified and nonqualified plans reported on the Form W-2. Additionally, scan the W-2 for any indication of equity-linked compensation such as qualified and nonqualified stock options, restricted stock and performance stock. If necessary, request copies of the most recent account statements as well as the beneficiary designation forms.

Next, compile the 1099 forms and statements for taxable bank and brokerage accounts that generate interest and dividends listed on Schedule B as well as capital gains detailed on Schedule D. Also, note any income that’s being reported from a grantor type trust and bring forth the trust document archived in the permanent file. Forging ahead to Schedule E, track down the K-1s for any allocation to alternative investments, including private equity, venture capital, real estate and hedge funds. Make a note of any other flow-through entities the family may have an interest in, such as partnerships, S corporations or trusts, and request copies of the formation documents. Continue the fact-finding process by going line-by-line through the remainder of Form 1040 and its accompanying schedules and statements. Be sure to keep a thorough list of any gaps in your records that the client may need to fill in.

Once the data-gathering process is complete, it’s useful to assemble the information in a binder with a tab for every account, asset, obligation and entity revealed during the investigative analysis. Synthesize the results of the discovery phase by organizing and streamlining the information in a way that makes it palatable for the family, while retaining the granularity and rigor of the analysis. Assembling a balance sheet, statement of cash flows and diagram of the estate plan will help to form the baseline infrastructure for monitoring the family’s wealth over time and making sensible decisions going forward. Although this process may sound elementary, don’t make the faulty assumption that the family already has the proper foundation on which to build an effective wealth management plan.

Financial statements: Once the binder is complete, formulate a balance sheet and cash flow analysis to lay the foundation for the family’s financial recordkeeping and organization. A balance sheet in tandem with a cash flow analysis will help to develop an unambiguous picture of exactly where the family stands today, serving as a baseline when modeling and making an important investment or estate planning decision.

Deploy the information from your prior detective work by building a comprehensive balance sheet that encompasses all your client’s assets and liabilities, both inside and outside of their taxable estate, with an emphasis on how these items are titled. The goal of this exercise is to help the family get a clear and organized picture of what they own and owe and how they're holding it.

Next, develop a cash flow analysis by mapping out all the expected cash inflows and outflows over the next 20- to 30-year period. Remember to reflect all the types and timing of cash flows, including deferred compensation payouts as elected, restricted stock upon vesting, stock options near expiration date, required minimum distributions at age 70 ½, and Social Security payments at full retirement age or later. Ascertain the family’s spending level and compute the net cash flow each year over the period, classifying it as either a surplus or deficit. For a surplus, show where the funds will accumulate. For a deficit, show the assets that are available for consumption. Be sure to factor in a conservative rate of return on the assets that the family will need to consume in the future. This illustration will help the family find an appropriate balance between current income and long-term asset growth to support their ongoing obligations as well as future living expenses.

Flowcharts: From your knowledge of the assets, liabilities and titling on the balance sheet, prepare a flowchart of the family’s estate following the provisions of their current wills and trust documents. A flowchart is a powerful device for the family to see exactly where their assets are positioned today and where they will flow after the death of each spouse.

Often, providing for an orderly transfer of wealth between spouses and then from one generation to the next with the least amount of friction is a key goal for a high net worth family. Through prospective hindsight, imagine the event has already occurred and think through the resulting scenario of the passing of each spouse. Uncovering any potential concerns or issues in advance will help preserve wealth and save the family from unnecessary hardship. In the event the family feels uncomfortable to tackle this sensitive subject, make sure it’s clear they’ll be ill-equipped to deal with these eventualities if they refuse to plan and heed warnings.

The goal of the flowchart is to provide a diagram of the client’s estate, including details of the disposition of their personal property and specific bequests. The chart will also highlight the impact that asset titling and beneficiary designations have on the passing of their assets at death. Another important aspect of this analysis is to quantify the movement of wealth following each spouse’s death, including how much wealth is directed into trusts, passed outright to beneficiaries, given to charity, and used to satisfy federal and state tax obligations. This process will illuminate any outcomes that go against the family’s wishes, motivating them to continue moving forward with the financial and estate planning process.

As high net worth clients grow more complex, the accountant is well positioned to assume a critical role that goes beyond the preparation of the family’s tax filings. Accountants who can unravel the high net worth financial puzzle efficiently and document the wealth structure accurately will become the linchpin of the family’s advisory team. Although implementing this financial framework may be time-consuming, it will prove invaluable to the client as a platform to enable the family to manage their financial lives successfully. The client will be grateful to have a strong foundation in place to bolster confidence and provide clarity around their wealth and what strategic financial planning is done and why.

Robert Westley

Robert Westley

Robert A. Westley, CPA/PFS, CFP, is a CPA financial planner based in New York City. He specializes in the financial management and wealth planning needs of high net worth individuals and their families. Robert is an active member of the American Institute of CPAs, the New York State Society of CPAs, the Financial Planning Association, and currently, volunteers on the AICPA’s Personal Financial Specialist Credential Committee.