what do you spend each year on travel eating out home renovations and household help how about regular recurring expenses answers to such questions don’t come easily to many wealthy families and when pressed spending estimates are usually substantially lower than the reality advisors say “highnetworth individuals generally have a fairly good idea of their sources of income whether it be salary or ira distributions but they typically don’t have a good handle on the expense side” says allen laufer director of financial planning at silvercrest asset management group whose perclient wealth under management averages 34 million unplanned spending may not seem like a significant highnetworth kind of problem—after all if you have substantial wealth across public and private investments real assets and business interests not to mention a healthy income how bad could it be to be topheavy on discretionary spending pretty bad when measured over decades and very bad when measured across a generation laufer says hinting at the familiar adage “shirtsleeves to shirtsleeves in three generations” which refers to a common pattern in which wealth gained by one generation is gone by the third “we’ve found tracking expenses is eyeopening for clients and when you run the numbers out for years it often tells a surprising story” laufer says throw in some familiar plot twists—a major stock and bond market downturn and a spike in inflation for instance—and the prospect for happy endings dims when you don’t have enough cash to cover expenses you may have to pull that from your portfolio potentially creating an unplanned capitalgains tax obligation worse you’ll have less in your portfolio and therefore less income from your portfolio laufer says “there’s a snowball effect if you have a net cash outflow year after year that affects your net worth and there may not be as much left at the end of the day as you would have hoped” he says for families to succeed at building and maintaining wealth across generations it’s critical that they make a clear distinction between overall wealth and the more important factor when it comes to spending cash flow cashflow management is wealthy families’ form of budgeting with more flexibility budgeting typically involves rigid sources of income that dictate how much you can spend with cashflow management the sources of liquidity can be numerous from earnings and investment income to business interest and rent adding to the complexity assets may be spread across a number of bank investment and advisory accounts planning for the right amount of cash to avoid both shortfalls and having too much sitting in lowyielding accounts is a strategic continuing exercise that should be a collaboration between both a wealth and tax specialist and factoring in all accounts even if they are spread between a number of asset managers and investment accounts taxes are an essential part of cashflow analyses complex investment and estate plans often trigger lowvisibility taxable events that have to be factored into cashflow needs “setting up a grantor trust may be good estate planning but many don’t realize the senior generation is on the hook for its taxes” laufer explains “they could be looking at a tax bill for millions and not have the cash flow if they haven’t planned” involving a tax specialist in cashflow management also helps ensure cash will be generated in the most taxefficient manner says roger young thought leadership director at t rowe price in baltimore “you have to understand the tax consequences of withdrawing from different accounts and that can change over a retirement at different inflection points such as when you start taking required minimum distributions from an ira or if tax rates change tax strategies can help create cash flow out of illiquid assets for example a large art collection may be valued at 10 million or more but it wouldn’t typically generate income you can create an annuity out of such assets by setting up a trust such as a charitable remainder trust and funding it with the illiquid asset the trust kicks off annual income for either a specified period or for life and what’s left in the trust at the term’s end goes to beneficiaries variables in cashflow plans are habits of different family members one person’s unchecked spending can impact the family legacy a good plan can set precise spending limits for family members and serve as a reminder that family wealth can benefit generations this story originally appeared in the june 2023 issue of penta magazine