What’s Lurking on Your Family’s Balance Sheet?

Planning & Strategy Special Topics

If a cursory reading of the financial press is an accurate judge, it would appear those most bullish on the crypto and digital asset space are eating at least a small helping of crow before their quest to upend the global financial system. Bitcoin (BTC) is down over 65% from its all-time highs, and that’s relatively outperforming some more exotic holdings. Nonfungible tokens (NFTs) have fallen even more precipitously, with many NFTs, such as the “Bored Ape Yacht Club,” needing a downgrade to a dinghy.

Compare that to the record-breaking sale of Andy Warhol’s ‘Shot Sage Blue Marilyn’ for a cool $195 million in May, or nearly 10,000 BTC or 1,700 Bored Apes for those keeping score. As an art and crypto ignoramus, these data points provide interesting watercooler talk but also have us thinking about you and your family’s collective balance sheet.

Any good CFO or Controller worth their salt knows what’s on their business’ balance sheet, including cash, inventory, property, and debt. But for enterprising families, it is often necessary to go one step further and ask what’s on the family’s balance sheet? Maybe your family has resisted the siren song of cryptocurrency and monkey NFTs, but are there any other sizable assets or liabilities you aren’t considering? It may be your great uncle’s antique car collection, a ski chalet shared by you and your family, or rare art that adorns your office. Whatever it may be, and trust us, we have seen some big bogeys; there are three things we think you should consider regarding your more esoteric family balance sheet items: valuation, diversification, and allocation.

What Is It Worth?

Artwork can even be an effective asset for executing some estate tax planning strategies

Without stating the obvious – if you suspect some of your more unique assets have a meaningful impact on your total family balance sheet – it’s worth getting a professional opinion as to the value. Similar to our advice to understand your business’ worth, unique assets ultimately exist on your family balance sheet as it concerns estate planning, gifting strategies, and tax considerations. As noted by estate planner Matthew Erskine in a recent post, artwork can even be an effective asset for executing some estate tax planning strategies. A simple example includes failing to adequately plan your estate accordingly and your estate being hit with a large tax bill. If the majority of taxable assets left are illiquid, you will have to work creatively to meet (liquidity required) tax liabilities. The last we checked, the IRS is still not accepting fractional interests in NFTs.

What Is Our Risk?

In addition to understanding the value of the unique assets on their own, you need to understand how this asset compares to the rest of your family business balance sheet. Understanding the correlation between your business and other assets, including your more distinctive ones, is key to long-term family wealth preservation and business continuity. A client we work with runs an operating business in the hospitality space with thousands of employees across the county. The family also has a penchant for airplanes, and in that case, the total value of the air fleet is over 10% of the combined value of assets. While this represents diversification, perhaps you and your family business are more concentrated, such as running a family of car dealerships while also holding an antique car collection. Being cognizant of your diversification, or lack thereof can help you better plan for the ups and downs in particular markets.

What Do We Want?

Beyond knowing what your assets are worth and their impact on diversification, a fundamental question still lingers for members of enterprising families: do we want to own this asset? As we have asked previously, did we fall into/inherit this asset, or are we here on purpose? Like owning and running a business, understanding your shareholders’ preferences and how they view the overall family business is key in determining asset allocation and where your capital should be deployed, stored, or sold.

Many unique or rare assets have considerable carrying costs to maintain them

The ski chalet that your parents gifted you and your siblings who don’t ski, the rare art collection that you don’t know what to do with, or the yacht your family owns that sits idly by. Many unique or rare assets have considerable carrying costs to maintain them, and markets can often fluctuate wildly. Your family may view these assets in a separate class worth holding on its own, or it may not know what to do with grandfather’s rare coin collection. While we won’t opine on the relative performance of these assets, asking your family if you want to own and hold them is a question worth asking.

Understand the Whole Picture

While we all wish to find that rare vase or Jackson Pollock painting in our mother’s attic, it’s not likely that there are such economic windfalls hiding in your family’s cupboard. Nonetheless, establishing an inventory of all your family’s assets and agreeing on an ownership philosophy for unique assets is important. Understanding what these assets are worth, their impact on diversification, and whether you and the family have a desire to hold them are some simple housekeeping steps you can take to better understand the holistic family balance sheet and its impact on your family business health.

Give us a call to discuss these or any other family balance sheet issues today.

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