So far we have only talked about the philosophy behind getting started-the frame of mind, the strength of character, and the objectives. Let us assume that you do possess the determination and you have established objectives. Where do you go from here?
You begin by taking stock. This is the first and absolutely essential step. Before you explore all the estate-creation opportunities open to you, you must know what you have to start with.
What is the value of your estate in terms of providing security for your family right now? This is not determined by a mere listing of assets (although this must be done). The market value of assets alone is not a measure of their security value. After all, some assets might not be liquid to produce income (such as a home). To determine the security potential of your available capital, you must determine how much annual income it will produce. When you know what this is, then you have a true idea of the ability of your estate to provide security for you and your family in the three situations: retirement, disability, and death.
A word here about the significance of capital. We say that capital should never be encroached on, for the moment it is, it loses a portion of its income-producing capacity. A rule of thumb says it should last the lifetime of the individual as well as that of his survival spouse. For a person of 45 years with a spouse 5 years younger, that would mean about 41 years. Sometimes, of course, the principal of an estate will not be large enough to produce a sufficient annual income to meet a family's needs, and so principal will have to be used. How long, then, will die principal last? What if the estate owner and his spouse live long past their life expectancies? These days, ninety years or more is not an unusual life span. The need for support and financial independence must be directed on the basis of the possibility of such a long life. What happens, for instance, if capital is exhausted at some point and the widow lives on for an additional ten, maybe twenty years?
An estate owner should try to plan so that this situation never arises. The production of income and the inviolability of capital as long as possible are, in other words, prime objectives of estate planning.
All estate planning begins with an estimate of income potential. You should make this estimate whether your estate is large or small, whether you are going to leave your family a fortune, or purely a sum to ensure their security. It is something you can do for yourself, without calling on any expert advice.
Begin by making a list of all your properties. Include everything you own or have a right in: securities; Real estate holdings; Business interests; Corporate benefits, such as pension plans, stock options, and group insurance; Personal insurance and annuities; Personal property; Even such things as veterans' benefits and social security.
Now determine the prospective income from each of these in three instances: death, retirement, disability. Use as a basis for representing income a standard estimate of 5 percent annual return after taxes on invested capital.
There will also be administration costs and estate taxes, plus income tax on retirement plan assets to be subtracted from the value of the after-death estate to determine how much property will be left to the surviving family.