Lars has a couple of theories on his wealthy clients' reluctance to take advantage of the near-perfect storm for making large tax-saving gifts. One is the recent economic scare, the one that started in 2008. Even with things seeming to move toward normal again (but who knows?), most of us feel less secure than we did five or ten years ago. Even if our net worth might now have exceeded what it was then. A Lars client with say $4 or $5 million of net worth and thinking about retiring on it, must contemplate possibly losing a million or two off it in a wrenching market. Even good bonds, for crying out loud, took a big hit for a time there.
And yields are way down, particularly for the short-to-intermediate bonds that are more likely to avoid big losses of principal when interest rates rise. Retired people, even wealthy ones, have a great concern about income, an often exaggerated one Lars thinks. When an oldish guy quits working and starts relying on his investments for cash flow, he wants investment income (including the yield on his retirement plan holdings) to replace the income he was getting by working. Understandable, Lars muses, but a bit flawed.
Lars looks again at Uncle Nils. He has a net worth of about $20 million. Most is in real estate, but there is quite a bit (roughly $6 million) in cash and short-to-intermediate-term bonds. If Nils looks only at the small yield on the bonds, and the distributions from his real estate LLCs, his income is rather small in relation to his net worth. The LLC distributions have been less than satisfying because in one project they are using income to pay off debt, and even in the successful one they are building a reserve for capital improvements. To put more pressure on Nils's income, his two nice houses and recent marriage have him feeling rather expensive these days.
But consider the balance sheet. Let's look only at the $6 million in cash and bonds and assume that the real estate will only carry itself with its cash flow. This is awfully conservative as the shopping district is a proven source of good income. But let's limit it to the bonds. Here's Lars's calculation: Nils has a life expectancy of six or seven years. Let's be conservative again financially and say it will be twelve years. If Nils only uses his bonds to live, and is willing to sell them to create cash over the twelve years (this is the tough part psychologically), he will have $500,000 of cash flow each year even assuming the bonds never get a dime of income. This $500,000 is more income than Nils can spend. And at the end of his twelve years of consuming bonds, Nils will have plenty of real estate to fund his premarital obligation to Sylvia, and to leave a large inheritance to other relatives.
Lars is pleased with himself for developing this different perspective on the ability of a wealthy old person to spend and give, but he realizes that Nils and others in like position aren't going to buy it, not fully at least. Their ingrained psychology of money, focused on income, is part of the reason his wealthy clients are slow to make gifts in such a seemingly favorable environment.