Business owners and professional practices know that they cannot run their business effectively without understanding its financial position. In the same way, when it comes to making a comprehensive estate plan, you also need a framework to assess your overall financial status.
A “balance of life” provides a comprehensive view of the owner’s assets, liabilities, and net worth. Although similar to the more traditional balance sheet used to monitor your business, the Life Balance Sheet includes both real and implied assets and liabilities.
The left side of the sheet lists the owner’s assets and includes traditional financial assets (cash, stocks, bonds, alternative assets, etc.) and other tangible assets (real estate, precious metals, art collections, etc.). It also includes implied but expected assets.
Embedded assets are illiquid assets that are often not tradable but have value. In a previous article, this was called “Human Capital”. Although often overlooked, human capital represents the present value of the owner’s expected earnings.
The liabilities, on the right side of the sheet, should look the same. Mortgages, business loans, and other property-secured debt are explicit liabilities. In addition, business and practice owners should include their succession goals as a built-in liability and career professionals and non-business owners will include their estimated retirement costs.
For example, if you want to maintain a certain standard of living after you leave your business or retire from your career, you are creating an implicit liability that must be funded by the assets on the left side of the Life Balance Sheet. Aspirations to buy a vacation home, start another business, or fulfill a charitable commitment also represent implicit responsibilities.
Think of a balance sheet with assets listed on the left side and liabilities on the right side. The combined assets include a home, retirement plans, and the family business. Collectively, these are worth $2,000,000. To this we are going to add $800,000, the amount of money the owner expects to earn as income from the business. This increases the value of Total Assets to $2,800,000/
Under Liabilities, we’ll list three common assets including a mortgage, college expenses, and estimated retirement costs. These add up to $1,800,000. This leaves $1,000,000 as discretionary wealth; an amount that the person can use as they wish, but which will have a significant impact on their net worth, their retirement and even her legacy.
Using the life balance sheet helps homeowners, professionals, and others assign a value (present value) to their underlying assets (your projected earnings) as well as their underlying liabilities (retirement and other costs). This information should prompt owners to review all of their real, tangible assets, including the value of their business, to ensure they are on track to meet their long-term goals.
 Wilcox, Jarrod, Jeffrey E. Horvitz, and Dan diBartolomeo, 2006. Investment management for taxable private investorsCharlottesville, VA: CFA Institute Research Foundation.