Business owners and professional practices know that they cannot run their business effectively without understanding their financial position. In the same way, when it comes to doing a comprehensive estate plan, you also need a framework to assess your overall financial health.

A “life balance”[1] Provides a comprehensive view of the owner’s assets, liabilities, and net worth. Although similar to the more traditional balance sheet used to monitor your business, the Life Balance Sheet includes both actual and implicit assets and liabilities.

The left side of the sheet lists the owner’s assets and includes traditional financial assets (cash, stocks, bonds, alternative assets, etc.) and other tangible assets (real estate, precious metals, art collections, etc.). It also includes implied but expected assets.

Embedded assets are illiquid assets that are often not marketable but do have value. In a previous article, this was called “Human Capital.” Although often overlooked, human capital represents the present value of the owner’s expected earnings.

The liabilities, on the right side of the sheet, should look the same way. Mortgages, business loans, and other home-secured debt are explicit liabilities. In addition, business and practice owners must include their succession goals as an embedded liability, and career professionals and non-business owners will include their estimated retirement costs.

For example, if you want to maintain a certain standard of living after leaving your business or retiring from your career, you are creating an implicit liability that must be financed by the assets on the left side of the Balance Sheet of Life. Aspirations to buy a vacation home, start another business, or fulfill a charitable commitment also carry implicit responsibilities.

Think of a balance sheet with assets listed on the left side and liabilities on the right side. Combined assets include a home, retirement plans, and the family business. Together these are worth $2,000,000. To this we are going to add $800,000, the amount of money the owner expects to earn as income from the business. This increases the value of Total Assets to $2,800,000/

Under Liabilities, we’ll list three common assets including a mortgage, college expenses, and estimated retirement costs. These add up to $1,800,000. This leaves $1,000,000 as discretionary wealth; an amount that the person can use however they want, but that will have a significant impact on their net worth, retirement, and even her legacy.

Using the Life Balance Sheet helps homeowners, professionals, and others assign a value (present value) to their implicit assets (your projected earnings) as well as their implicit liabilities (retirement and other costs). This information should prompt owners to review all of their tangible and real assets, including the value of their business, to ensure they are on track to achieve their long-term goals.

[1] Wilcox, Jarrod, Jeffrey E. Horvitz, and Dan diBartolomeo, 2006. Investment management for taxable private investorsCharlottesville, VA: CFA Institute Research Foundation.