Case Study: How (Not) To Burn a Well-Planned Estate into the Ground

Here’s a story about a client of mine who did all the right things before he passed away.?

And yet, you’ll see just how easy it is for his estate to crumble to nothing unless the money is properly managed. The story really, is about his wife, who is now in charge of that estate.?

It is easy to get your assets in place and believe that you’ve left ‘enough’ behind for your family.?

What many people fail to think about is: How much is actually ‘enough’??

Enough to cover what, and for how long? Who’s going to manage these assets after you’re gone??

Let’s jump into this case.?

Case Background?

Dev, my client, passed away suddenly and unexpectedly two years ago.?

He is survived by his wife, Nisha, and their two children. Their son had just started university at the time of his passing, and their daughter was in middle school.?

Nisha has always been a homemaker and full-time mom. She had no experience managing finances.?

And so, when she found herself the default estate manager when Dev passed away, she was wading strange, unknown waters.

?To the extent that, when she needed to draw out some cash, she didn’t even know that she was withdrawing money using a credit card instead of a debit card that had ample funds on it.?

So, what did this estate she was in charge of look like??

Dev, a high-flying executive with an oil and gas company here in the UAE, had slowly and steadily built a solid estate to leave behind. He had left behind a Life Insurance policy worth US$3 million, a sizeable investment portfolio, a property portfolio with property in the UAE, the UK, and India, plus an end-of-service benefits package and a group Life Insurance payout from Dev’s tenure with his company.??

All of this collectively means that Nisha’s left in charge of an estate worth approximately US$6 million.?

As is typical, there was a long delay in the settlement of this estate by the UAE courts. The end-of-service benefits and group Life Insurance didn’t reach the family until very recently, nearly two years after Dev’s passing. The property in the UAE had still not been transferred to Nisha’s name.?

The only payout that paid out instantly was Dev’s personally procured Life Insurance policy and investments, also secured through an insurance company, which by default pays out to Named Beneficiaries only (one of the greatest benefits of ringfencing your money using a Life Insurance policy).?

That sum has, for over two years, been funding Nisha’s and the kids’ expenses—home and living expenses, school fees, all of it.?

But that’s not the real challenge here.?

The Challenge?

The real challenge here is that Nisha has absolutely no experience managing money. And if she continues making the mistakes she is making, their well-built family estate will crumble to nothing.?

Nisha is essentially overspending. She’s been drawing out about US$250,000 a year, rather than the US$ 150,000 dollars that we budgeted she requires.

And with the investment markets being the way they are today, their investment portfolio is turning around a significantly lower return than expected. In short: she is over-drawing from an underperforming portfolio – an obvious recipe for disaster.?

At this rate, Nisha will run out of money unless she sets up some form of an income stream to keep adding to that base.?

As a homemaker for the last 20 years, she’s not hot on starting a business or any other income-generating activity. This leaves her with one other alternative: Get smart about her assets and move more money into income-generating streams.?

Just a few months ago, the courts ruled in Nisha’s favor, and the rest of Dev’s estate has been handed over to her. We’ve been counseling her on how best to manage her money. Here’s the solution we’ve mapped out for her:?

The Solution?

Step 1: Stay within budget.?

This might sound simple-stupid, but keeping expenditures in check is one of the foundations of a sound financial future. We’ve designed a budget with Nisha that allows her and her kids to live comfortably, covering all their needs and expenses.?

Consistently outspending this budget will create problems even if the rest of Nisha’s assets are well-positioned for growth. If she does want to spend more, then it is essential for her to set up an additional source of income so that the principal doesn’t keep dwindling.?

Step 2: Downsize the family home?

Nisha currently lives in a large five-bedroom villa in the Arabian Ranches. That was a big home even when the whole family lived there together – Dev, Nisha, their two children, the dog, and the house help.?

Now it’s down to just Nisha, her daughter, and the house help. Their son is at university in London and spends, at best, a week or two a year in Dubai.?

Nisha would be wise to downsize their residence. With the property market at an all-time high, she could sell the villa, currently valued at around eight million dirhams, and then buy a smaller three-bedroom villa that would be comfortable for her daughter and herself.?

If she doesn’t want to sell the large family home, she could also rent it out and move into a smaller villa herself, bringing in healthy rental income and significantly cutting down on the costs of maintenance of an unnecessarily large home.?

Step 3: Get her own Life Insurance in place?

Another challenge within this challenge is the fact that Dev left these assets behind for Nisha and, more importantly, their children to inherit.?

Nisha has taken measures to ensure that in the event she passes on, the assets do indeed pass on to the children.

But the problem is that at the rate Nisha is going: It is likely that the money will all be spent before that, leaving little to nothing behind for the children.?

Dev’s Life Insurance policy that paid out upon his passing is the reason that Nisha had the liquidity today to cover all of their living, education and other expenses in his absence.?

But as a single mum of two, the next inevitable job on hand for her is to ensure she leaves behind that level of liquidity for her children too, in the event something happens to her.?

What we recommended here is for Nisha to utilize some of the recently-released assets from Dev’s estate towards getting in place a Life Insurance policy – ideally purchased on a single premium basis. This ensures that one asset is unshakeably in place for her children, even if the rest of the finances take a hit for any reason.?

If Nisha wanted to get in place, for instance, the same level of cover that Dev had in place, that would be a US$ 3 million Universal Life insurance policy. The policy would cost her in the range of US$ 600,000 as a single upfront premium.?

Now, one way to look at this is it’s US$ 600,000 out of their pot – but what Nisha is really doing here is freeing up US$ 2.4 million (the US$3 million assured inheritance minus the cost of procuring it) for Nisha to do with as she pleases.?

That US$2.4 million could be invested in other places. It could be used for Nisha to pursue interests of her own, and at worst, it could be seen as headroom for Nisha to get things wrong.?

She can, in essence, blow or burn US$2.4 million, and her children would still stand to receive a full US$ 3 million upon her passing.?

This case is not unique. Many families are in a situation where the main breadwinner, the money manager, passes on, and a well-planned estate is left with family members who have little knowledge or experience on how to manage it.?

A big component here is financial discipline – but a bigger component is knowing how best to stretch and utilize the dollars left behind.?

Taking the right measures not only ensures that Nisha has the resources to continue to fund the family’s lifestyle and expenses, but it also ensures that she can realize her husband’s intended end goal: For their children to be provided for in the event the worst should happen.?

This case also has me thinking more about the real job of a Life Insurance advisor.

?If you’re in this for the transaction, then perhaps you’d see your job as done when the death claim has been settled.?

But in my corner, transactional just doesn’t cut it. We’re after lifelong relationships. My job as an advisor goes way beyond Dev death claim. Regardless of whether Nisha buys another policy.?