Gil Gordon CFP® examines the expectations of clients when tragedy and crisis strikes from an estate planning perspective.

My first article in this series of estate planning articles (March issue Financial Planning magazine), introduced a body of statistics that make a strong argument for the value and relevance of estate planning as a service offering for modern Australia and every financial planning firm.

This article will focus on the reality of how a client feels and what a client experiences when tragedy strikes. The financial planner can be proactive and build an ongoing client value proposition based around preparing and maintaining, what I call, ‘The Information That Matters’ and a ‘Crisis Management Plan’.

Perhaps the most compelling statistic is that the net worth of the average Australian couple over 55 exceeds $1 million, held mainly in the value of their family home. Pragmatically, this asset remains largely un-advised by accountants, lawyers and financial planners, however, clients are normally acutely aware of the scale of their children’s likely inheritance.

An ongoing value proposition

One of the great strengths of the financial planning profession is the ongoing revenue streams associated with our businesses. Despite being under attack, these revenues exist because of an ongoing and highly valued relationship between adviser and client.

The ongoing opportunity becomes clear when we realise that estate planning has three elements:

1. The legal instruments – wills, PoAs, superannuation nominations etc;
2. The information that matters that is required for someone to assume control of the estate; and
3. A crisis management plan for the family to follow once crisis has struck.

Elements 2 and 3 present an opportunity for the planning profession. The vast majority of practitioners in Australia err in seeing estate planning as merely the preparation of the necessary legal instruments, which are generally perceived by clients (and financial planners) as a once off expense and not an ongoing requirement.

Case study: When the legal authority simply isn’t enough

Eric and Janine live in Hervey Bay (not their real names or location) and ran a small sole trader kitchen business with two employees. In addition, they have two investment properties, including one in an SMSF administered by Eric through a country accountant.

Eric and Janine have two children, both living at distance, and Janine has never really been involved in the management of their business affairs, relying on Eric and their accountant.

Eric died suddenly in a vehicle accident whilst at work and even though she was executor of Eric’s will, Janine turned to her sister, Susie, and husband, John, for help.

John, a busy and successful accountant in Brisbane, took a week off work to visit Janine and he discovered the reality of the job in front of him.

Tax returns and SMSF returns were yet to be lodged. Eric was ill-disciplined with his management of business versus personal expenses, with mortgage payments, rental income, business and personal expenses all met through the same personal bank accounts.

Eric’s understanding of his own affairs was not well documented.

Even though John knew what to do, he quickly realised just how big a task he had signed up for, estimating that the job would take at least six months (largely outside of work hours) just to make sense of Eric and Janine’s affairs, deal with life insurance and superannuation, and get their tax returns lodged.

“Thank God we have you, John,” said Susie. “Janine and I wouldn’t have the first idea about what to do. What would happen to me if I lost you?”

John realised then that even though his own legal documents were in order, Susie and his children were just as vulnerable as Janine. “You’re right, Susie,” said John. “Having a will is not the same as knowing what you need to know and that is not the same as knowing what you need to do.”

The information that matters

Like so many Australians before him, John (refer to case study p21) discovered that finding the necessary information was a genuine burden. There are 10 basic categories that are required when crisis strikes. See Chart 1.

Chart 1

In our practice, we prepare a client report titled ‘The Information That Matters’ (ITM), which is reviewed annually with clients. The information relating to products is relatively simple; capturing it and storing it creates the value for clients. The following examples (Chart 2) are extracts from the ITM report.

Chart 2

Assets

Bank Accounts

Superannuation Funds

Debts

Credit Cards

Mortgages

A new definition of estate planning

Life is immeasurably more complex for the average Australian now than a generation or two ago. Not only are we wealthier but we typically have shares, properties and managed funds, four different types of life insurance, two to three family vehicles and four to eight different general insurance policies. We have blended families, six bank accounts with three different institutions and have 10 different online identities.

Viewed this way, we need to upgrade the traditional definition of estate planning from:

‘The right money, to the right people at the right time’, to ‘The right money, the right information and the right guidance, to the right people at the right time.’

Taking action: A useful listing of the most commonly required information is available for downloading. It’s titled the EPFL One Page Executor’s Guide. For a copy, contact us via www.estateplanningforlife.com.au and we will email you one.

The case study of Eric and Janine illustrates how a competent and trained professional can still be blindsided by the reality of an estate planning event/family crisis. John knew what he must do and, via Susie, legal authority wasn’t a problem, but he was hamstrung by missing information.

In reality, the ‘Information That Matters’ is constantly evolving for the majority of our clients as they change vehicle, homes, insurance policies, investments and so forth. It is this change which creates the ongoing value proposition that we are seeking in a world where ASIC is now very interested in what financial planners are delivering for their ongoing fees.

In addition, the value of this register is greater for clients as they age and the traditional advice opportunities diminish.

Our practice also prepares a document called the ‘Crisis Management Plan’, which is used to guide the families of our clients through the questions they need to ask. I will discuss this document along with the ‘pricing’ and ‘deliverables’ in an ongoing estate planning offering in a future article.

Engagement ideas: Protecting the kids

Over the years, I have had many conversations with my clients about their wills and what they want for their children and grandchildren. Our file notes are full of quotes like:

• They spent too much and have nothing to show for it;
• He has too much influence over our daughter, he couldn’t leave her money alone;
• Why do they need to keep spending money on toys for him, and they’re still renting. Don’t they think about their future?
• It’s not a good marriage, they’re always fighting. I want to help them but that woman will have the money spent before it’s in their bank account.
• Business isn’t good. They work hard but they’re always fighting about money.
• Our son drinks and smokes drugs. He can’t hold down a job for too long. We want to make sure our grandson is provided for.
• My daughter is easily led and I worry that some guy will take advantage of her to get to her money.

Sounds familiar, doesn’t it?

The basics of discretionary testamentary trusts are relatively well understood by planners, so I won’t make this a lesson in the roles and operation of trusts.

I believe strongly in the value of testamentary trusts, with bloodline capital restrictions for inheritances of more than a few hundred thousand dollars. These trusts aren’t perfect and whilst there are occasional precedents where the Family Court has considered the trust capital to be assets of the marriage, those same courts have shown themselves to be very respectful of the intent of the will maker in attempting to preserve the assets for the benefit of their descendants from legal and behavioural risks.

As I say to clients all the time: “We are trying to establish legal hurdles to make it difficult for external parties to attack your family’s inheritance… these structures aren’t perfect, they’re good but not perfect. Just ask Gina Rinehart if you want to know more!”

Two problems and a solution: Divorce

When discussing divorce, I like to use the following images:

A possible solution

This diagram explains the concept of a protective trust quite simply. A skilled planner I know describes it as: “The wall is not perfect, there is a gap at the top, but it’s a better barrier than nothing at all.”

Two problems and a solution: Protecting the grandchildren

Another common fear is the death of a child and the grandchildren being disinherited. I use the following images to outline the problem and a possible solution.

A possible solution

If your client’s children have a will, it’s normally a typical ‘mum and dad’ will, which means the son-in-law or daughter-in-law will inherit any assets of the deceased beneficiary. You may recall from my previous article (The case for estate planning services) that if that person re-partners, then the chance of that relationship breaking down is more than 66 per cent.Using a trust can create an elegant and robust solution. In this example, the siblings of the deceased child could be asked to accept the role of appointor to ‘watch over’ their niece and nephew’s inheritance. They remain free to appoint any appropriate person as trustee (including the widower).

If they are not happy with the decisions of the trustee, then they can appoint someone else or step in themselves.

I often tell clients that whilst they cannot rule from the grave, they can decide who will.

Taking action: Contact us via www.estateplanningforlife.com.au and we will email you a copy of these slide images.

It is critically important for financial planners and accountants to explain to their clients that any discussion around these ideas is simply that, a discussion.

The law requires, as does your PI insurance, that a solicitor provide legal advice as to the appropriateness of testamentary trusts for clients. This creates an opportunity for the planner to engage with solicitors and then act as facilitator or lead adviser in this process.

However, a word of warning.

My experience has been that specialist estate planning lawyers are very comfortable and skilled with these structures, whereas lawyers with limited experience can have a lesser understanding of their merits.

Summary

I would encourage the reader to download some of the resources from our web page and simply include the conversation in your next review meeting with clients. Ask this simple question:

‘Is there anything about your daughter’s situation and her inheritance that worries or concerns you?’

I assure you that your clients will be engaged and respond very positively to you raising the question.

In future estate planning articles, I will examine:

• Building and pricing a scalable estate planning offering within your practice.
• Engagement techniques and estate planning engagement tools.
• Using estate planning to connect to the next generation.
• Elements of a Crisis Management Plan.
• More common concerns and possible solutions.

Gil Gordon CFP^® is proprietor and senior adviser at RI Lower Hunter. Gil is the architect of Estate Planning For Life, a scalable web based system that facilitates the delivery of estate planning solutions in accounting and financial planning practices. Gil can be contacted on (02) 4013 6070 or at [email protected]