Can financial planners overcome the hurdles to provide estate planning?

Estate planning has always been the missing piece in the financial advice puzzle. According to popular belief, financial planners have always struggled over where to place estate planning in their advice offering to clients, with many supposedly leaving it to the lawyer or specialist.

But their hesitation may be more than myth. Training and education, developing close relationships with lawyers and estate executors, legal changes, good client communication, and a lack of decent back-office systems all stand in the way.

And even with the industry adopting a broader whole of life approach to planning, many believe there are missed opportunities for advisers in the sector.

Barriers to market

Angela Gaffney, a wealth succession planner at self managed super fund specialist Opez, blames commissions and products for standing in the way of financial planners.

“In my opinion, over the last 15 years, financial planners have always been commission based and commission driven.

"Because of the way they have been remunerated, they’ve only been worried about selling someone a product and getting their money into an investment, rather than, from an estate planning perspective, looking at the risk areas and what vehicle would an investor place the money in to protect it?”

Many financial planners and even accountants look on estate planning as touchy-feely stuff when the need to discuss emotional issues such as death and mortality become a necessity, Gaffney says.

“As a general rule, financial planners are focused on people making money when they are in the 45 to 55 age bracket and they think this death stuff happens to people in their 80’s and 90’s.”

The lack of interest in estate planning extends even to the dealer groups themselves for much the same reason, according to the executive director of Financial Options, Jack Houwing.

“Dealer groups effectively, have been getting a share of the platform fee, or getting a share of the funds under management (FUM), and my experience is that when you sit down and talk to them about estate planning as an opportunity, they may not say it, but you know their business model is really about the FUM story,” Houwing says.

“There is something of a quandary to this approach, as when you have clients already in their 60’s collecting their super benefit and you work out from the mortality tables that each year you will lose a certain amount of clients from death, and that their family will be coming in and taking their deceased parent’s estate, then the business is lost,” he says.

However, financial planners are beginning to realise that estate planning is an untouched area with potential clients who have an incredible amount of wealth, Gaffney says.

“The financial planning industry isn’t commission driven any more so they’re having to be more accountable for their time and what services they’re offering. And so to differentiate themselves from other providers in the marketplace, they’re seeing estate planning as a value-add service,” she says.

Estate planning is a way for planners to retain a client’s assets even after they pass away, Gaffney says.

“If they’re smart, they’ll raise the topic of estate planning with their clients as it’s one way for them to start to build a relationship with the next generation that’s going to inherit all their client’s money. It’s succession planning for their own business.”

Houwing agrees. “You can retain this business by having that next generation as clients and retaining them as clients. The conduit of that is the estate planning,” he says.

Estate planning is the natural way for advisers to keep control of their business, Houwing adds. “Some advisers refer, or write business for clients through a platform, but it is really the finance institutions that have the hold on the client. I feel at times that estate planning is something you can use to maintain better control of your business.”

Mark Gleeson, technical services manager at ING, believes that estate planning in superannuation is a golden opportunity for financial planners.

For clients that die with only $150,000 or $200,000 in their super fund, if they have a $1 million life insurance policy attached to their fund, there can end up being more than $1 million in total super death benefits that need to be planned for, Gleeson says.

“It’s a large sum of money in terms of a person’s estate plan,” he says. Gleeson agrees that financial planners do not recognise super death benefits as a source of income.

“Many planners look at estate planning as a compliance requirement, rather than as an opportunity. They only think of the compliance department chasing them up if there’s no estate planning section in their Statement Of Advice (SOA).

“So there’s been a trend just to cover it from a compliance point of view, and having been a paraplanner in the past, I have seen many SOA’s that say in the estate planning section ‘Make sure you have an up to date will and enduring power of attorney’,” he says.

Training and education

For planners who have recognised that estate planning has unrealised potential, a lack of knowledge about the sector can be off-putting.

With a historical focus on compliance in estate planning, advisers don’t feel they are equipped with the knowledge to develop that advice and build it into an SOA and charge a plan for it, according to Gleeson.

Chief executive of the Association of Financial Advisers, Richard Klipin, says that any specialist stream such as estate planning is something that is developed over a lifetime of work.

“Whatever your specialist stream, it’s something that happens over a lifetime and a generation, so that’s why there’s a strong need to ensure that for practices which are working in that area that they have the expertise up front,” Klipin says.

This means that for those financial planners wanting to move into estate planning, there is a need for specialist study and qualifications, he says.

“It is a specialist topic, it’s a sophisticated area because it covers both tax law and implementation through various products, and advisers who have been around the market for a while are those who have a very clear offer,” he says.

It is clear that the lack of professionals specialising in estate planning is going to hurt planning practices as their clients move into retirement. Michael Perkins, special counsel at Diamond Cownay Lawyers and a technical services manager of estate planning training business, Estplan, says there are less than 5000 professionals across the accounting, tax, finance and law industries who are able to provide comprehensive estate planning.

Perkins and Estplan consultant, Guy Thornycroft, recently released a Financial Planning Association accredited program to provide training for advisers in estate planning and recognition as an estate-planning strategist.

“It is a massive deficit that hasn’t really been thought about,” Thornycroft says.

However, while the need for specialist training has been recognised, some believe there is a lack of in-depth courses on offer.

“What we do these days when people come in, is we refer them to some training organisations, but my experience is that those training organisations only do a reasonable job of introducing you to the subject,” Houwing says.

Financial planners need to do the reading themselves and learn on their own, not just with the training available, Houwing says.

“What I do is grasp a whole series of textbooks, and I’m talking heavy textbooks, provided by CCH [Australia] and the Tax Institute, and Thomson [Reuters Australia] and really study them to get my head around it, and get myself personally skilled up,” he says.

Planners are not at the point to deal with in-depth training, he adds.

“I think the training courses at this point in time are at a level that advisers can cope with. To come at an adviser with a heavy training program, with a lot of depth at this point in time is, I think, more than what most advisers can cope with.

"But once they’ve done an introductory course, then the next thing is to come out with more depth in the subject. But there isn’t enough of a push towards estate planning across the board,” he says.

Estate planning and superannuation

One area, which financial planners may need extensive training to understand, is the role of super in estate planning. Gaffney studied a postgraduate course on estate planning solely on the topic of self managed super funds (SMSF).

“As a general practitioner, I couldn’t keep up with all the changes, so in the end I went and did a one-year course. It’s amazing. You don’t know what you don’t know until you don’t know it. It took me a year’s course on that topic to really understand what they call the hidden death tax,” she says.

While a lot of planners will talk to clients about how super is a tax effective vehicle for saving, and all the tax advantages involved, they forget to warn them about hidden death tax, Gaffney says.

“When a person dies, if their money is sitting inside the superannuation structure, unless the super account holder has a tax dependent, depending on the age of the deceased and the components of the super, a non-tax dependent beneficiary could pay between 16.5 per cent and 31.5 per cent tax,” she says.

“People need to be aware that that tax is sitting there,” she adds.

SMSF holders also need to be very aware of binding nominations for their SMSFs when they die, Gaffney says. Binding nominations need to be made up front, according to Gleeson.

“If an adviser chooses the child death benefit pension option, in case of sudden death, one thing we need to do is have the nominations of the super fund updated today, because if the estate is nominated, or there is no nomination, in all likelihood, if there’s a death, the fund trustee will probably pay the estate or another beneficiary,” he says.

“I think a lot of advisers have this idea that in the event of death we can then sort out the estate plan, but that may or may not occur. If you want the certainty and outcome, you have to start looking at binding nomination forms today,” Gleeson says.

“Super has been a big area of change in the last few years and we’ve really had to keep on top of it, so making sure that you’ve got the appropriate estate planning around that is important,” says Legal Essentials principal Jessica Amberley.

One of the big changes in the last few years that have had a big effect on wills is eliminating the reasonable benefit limits, Amberley says.

“You really need to be careful when preparing a will or general estate plan about the tax treatment of super benefits, or the changes in the ability to do binding, non-binding and lapsing nominations,” she says.

Memorising the different structures used within super for estate planning is a must. In a recent article in Money Management, Gleeson emphasised the different structures that can be put in place to safeguard super for the next generation, including testamentary trusts and child pensions.

“They are not the most used structures, because they focus on the children, one giving you tax benefits [the child pension], the other giving you control [the testamentary trust],” he says.

Child pensions provide tax-exempt earnings, while if the surviving parent and child are less than 60 years of age; the tax-free component is received tax free, while the taxable component is subject to a 15 per cent tax offset. If the surviving parent has reached the age of 60, the payments are completely tax free, Gleeson wrote.

The trustee can vary the income distributions from a testamentary trust each year depending on the beneficiary’s circumstances, while also being protected from bankruptcy, relationship breakdowns, and financially irresponsible children, while also providing some tax savings.

“But you could look at just a pension for a surviving beneficiary, for surviving spouse, or a lump sum, and I think that’s an area where advisers are most comfortable, and that’s why I wanted to open them up to different structures for estate planning,” Gleeson says.

Lump sums are good structures to choose if a mortgage needs to be extinguished, or the upfront costs of a funeral, he adds.

However, advisers still need to work out what fees they charge for estate planning advice and how they structure it into the SOA, Gleeson says.

“It depends on what type of advice is given. So in addition to the will, are we talking about instituting different structures? Will there be a binding nomination of your super, the structure of the assets and is it jointly owned or held through trusts?

"But there is no reason for advisers not to charge from $1000, maybe up to $5000 depending on the complexity,” Gleeson says.

Communication and relationships

Advisers in the estate planning space cannot hope to manage on their own, according to Amberley. There are huge changes in the relationships between advisers, lawyers and administrators in the estate planning space, she says.

“Instead of having the lawyer and the financial adviser working independently, you really need quite a close relationship between them, there’s no point in your financial adviser setting up a wonderful structure if you don’t have the estate planning structure in place to make sure it all passes on to the next generation,” she says.

Amberley warns that there is a strong level of liability and responsibility in estate planning.

“My recommendation is always that financial advisers getting involved need specialist legal advice as well. They need to work closely with lawyers but not necessarily try to do that element of the job themselves,” Amberley says.

But financial advisers can be centre stage in the sector. “You need someone who has had exposure to administering assets,” Gaffney says. “We still have to feed some work to the lawyers, but there is a lot of work we can keep in-house” she says.

A close relationship becomes even more important when one considers estate law, which is not uniform in Australia. In times when investment portfolios stretch across borders, it can wreak havoc with succession planning.

“For the last ten years in my career as an estate planner, I have been listening to the lawyers talk about how they are going to have national certification of the estate planning laws. There are some fundamental similarities between each state, but they’re all slightly different, which is crazy,” Gaffney says.

“So you can have someone who dies in Western Australia (WA) and leaves property [there], but they might also have property in NSW [New South Wales], so you can have different groups of people contesting the estate in each state.

"And in NSW, they have legislation governing what does or doesn’t fall in the estate, and in WA, they’ve got a different law again,” Gaffney says.

The lack of national legislation can affect any kind of interstate assets, as well as if retirees move around the country, according to Amberley. “Any clients need to review their estate planning any time they move interstate, but for clients who have assets within the one state, it’s not such a big impact.”

Advisers need to be careful who they talk to however. Financial planners seeking advice from lawyers who aren’t trained in estate planning is a widespread problem, Gaffney says.

“Within the legal profession, there are everyday GP lawyers, and then there are estate planning lawyers, and they understand the tax concessions, but a lot of people will go see their local GP lawyer, spend a few hundred dollars getting a very simple will drawn up, and a lawyer will do it almost for a loss, because once he gets that will in his or her will bank, they know that when someone dies they can make a lot of money on administering the estate,” she says.

It’s very rare once someone dies for beneficiaries of an estate to pull together as a team, and if a decent estate lawyer isn’t engaged early on, a fight over the estate can last for years and cost hundreds of thousands, Gaffney says.

“Beneficiaries are pretty much all over the place and if they were to pull together as a team, there would be a lot more estates in this country administered more efficiently.

But the clients have to be prepared to pay a few thousand dollars for a decent will rather than a few hundred dollars for something that’s not worth the paper it’s written on,” she says.

Early action

Financial planners must move quickly with clients to establish an estate plan.

“It’s creeping up on advisers as their clients are getting more of a need for it, because clients are getting elderly and it’s being thrust upon everybody, but the big risk of that is that the client needs to have mental capacity to know what they are doing,” Houwing says.

“If a client signs off on legal documents, whether they’re the will documents or the binding nominations, they have to have capacity, and it’s incumbent on the adviser and the lawyer to recognise that people might seem like they have all their marbles, but if there is even a twinge that they’re losing capacity, then any estate planning that you’ve done could be challenged,” he says.

Gaffney agrees with the sentiment. “Estate planning involves not just death, it’s also about what if the client gets old and loses their mental faculties, and therefore you can’t handle your own money any more. Who do trust to control your money, to make sure you get the right care?”

Houwing also warns that advisers must implement the right processes if they hope to begin moving into the estate planning space.

“In any part of advice, you need to have good systems and processes. And my experience has been that when you sit down and talk to advisers about estate planning, their own systems and processes within their business is so badly set up to the extent that they and their staff don’t have the time and resources to add another service to their business like estate planning, and that’s what they really have to address.”