The NPV Debate Rages On!
And you though you knew all the hot topics. Well, we’ve been going ‘round and ‘round about how to use Net Present Value (NPV) in our Family Wealth Goal Achievers to properly reflect a “meaningful” number to clients. Turns out, NPV and “meaningful” present some real challenges for us.
What we’re trying to adequately reflect on is the real value of, say, using a Testamentary Charitable Lead Annuity Trust (TCLAT), to zero out estate taxes for a client family. The trade offs in using the TCLAT are several and this is what precipitated our internal debate (this mostly consisted of Scott and I disagreeing about what the “right” discount rate should be, and why). The things we’re thinking about is that a TCLAT will cause a serious delay in the receipt of wealth by the eventual inheritors. While I argued, for a while at least, that if we were trying to demonstrate real purchasing power then a “discount rate” similar to inflation would be appropriate, I backed off of that number after a counseling session with my son, David, a recent top of class Purdue MBA. I couldn’t resist a little fatherly pride, here). He reminded me that there is, among other factors, some legislative risk with a TCLAT that would suggest that it’s not as if you actually get all the cash right away. I later realized that there are investment constraints that, if not heeded, could cause additional taxes or penalties that don’t exist in the all cash world. Again, these factors argue for a “discount rate” somewhat higher than a nominal safe rate.
Scott posits that paying the tax and foregoing the TCLAT will always net the heirs more money and, after offering brief resistance, I concurred. That would mean that the “discount rate” we apply to a TCLAT would be higher than the investment rate. While our current mindset has us thinking that this is correct, we’d love to hear other voices on this matter. If we’re incorrect, tell us. And tell us why you think so. And vice versa. Thanks.
Add comment May 7th, 2007