Estate planning: hitting the right note

While every financial planner might touch on estate planning with their clients, it has often only been to the extent of asking: Do you have a will? Do you have a power of attorney? Do you have a power of guardianship? If the answer is no, go and see your lawyer.

However, with the industry’s focus now on appropriate advice, estate planning is becoming a strategic investigation service for financial planners that allows them to delve deeper into the client’s background and qualify the appropriateness of the follow-on service that is then delivered, according to Michael Perkins, Diamond Conway special counsel and technical adviser to Estplan.

Estplan provides training and education to advisers offering estate planning.

“This is about cementing leadership of your clients, not just providing referral feeds to other professionals.”

Although estate planning is a multidisciplinary service often involving lawyers and accountants, the financial planner has to play the lead role.

Planners are the only nationally recognised profession that has a strategic estate planning service as part of their professional competency standards, Perkins pointed out.

“There’s no uniform training of lawyers in succession law in Australia,” he said.

“Consistently there’s a level of estate planning training which is applied across all financial planning specialists nationally — you can’t say the same about lawyers and accountants.”

Traditionally, estate planning appears a fair way down on a planner’s priority list, according to Lakeside Consultants SA estate adviser Ken Ashby.

“I think in the industry at large there is a greater emphasis on investment strategy … and then there’s the sister aspect of the industry that involves risk advice,” Ashby said.

However, Perkins said there has been a resurgence in interest in estate planning by the planner due to pressure on commissions and public policy interest in financial planners becoming strategy-driven advisers of their clients, not just the providers of financial products and services for commission.

“That opens up the question of what work do we have to do in order to deliver sufficient value to charge fee-for-service,” Perkins said.

So rather than passing the client off to a lawyer for a will, a power of attorney and power of guardianship, financial planners are recognising the opportunity to be involved in an area of multigenerational wealth management and client affairs management, Perkins noted.

The Financial Planning Association (FPA) sees estate planning as a vital area of growth.

“We have been looking at the expansion of our credentials for professional development in this space,” said FPA deputy chief executive Deen Sanders.

“We’ve been running workshops and dipping our toe in the water to better understand the needs of our members in this space and the educational opportunity that exists.”

Sanders thinks estate planning is a natural progression of the financial planning relationship, allowing planners to work with clients beyond the accumulation phase into the retirement phase as well as with their families.

“We’re all aware of the ageing population and the massive demographic shift that’s occurring in the community and a natural question … for a financial planner is how we work with our clients to not only improve their financial wellbeing and their retirement outcomes, [but] extend that to the issue of their children? How do we make sure the family as a whole is being looked after properly?

“That sort of conversation automatically takes into account the thinking about estate planning,” Sanders said.

“This is something that has been growing for some time and we’re on the edge of a very big expansion right now.”

While it is still essential that financial planners refer clients on to other professionals, particularly lawyers and accountants, included in that referral can be a very deep analysis of the client that assists and “acts as a springboard” for other professionals.

“It’s true that there might be a range of other professionals attached to any good advice relationship, be it lawyers or accountants, but when it comes to estate planning the only person who genuinely knows the full financial picture of the family is the financial planner,” Sanders said.

Service integration

A key challenge for the client is deciding how much help they want the planner to provide in the integration of the services of the other professionals, Perkins said.

In today’s challenging economic times, clients are in greater need of the services of financial planners, who are arguably the only professionals in a client advice relationship who understand what the family actually wants to do and what the client wishes to achieve.

At a time when we’ve got estate values going south, it is more important than ever that a client’s estate is properly protected through the transfer of wealth on someone’s passing.

The global financial crisis has seen the value of nest eggs fall, share portfolios diminish and the levels of debts increase.

Measures such as an equalisation clause in a client’s will, although a high priority at all times, should be given an even greater priority in the current economic environment.

Such a clause directs the executors to ‘even up’ inequalities to make certain there is absolute equality of inheritance for children.

However, even taking into account the winding back of wealth levels caused by the global financial crisis, there is still substantially more wealth in the community now than 10 or 15 years ago and a long-term trend of increasing wealth in families, according to Perkins.

“Between house prices, superannuation and sales of small businesses to fund retirement, there is a lot of money out there.”

According to Julie Toop, head of client services at ANZ trustees: “You don’t even blink when you look at someone’s asset and liability statement now [and it is worth $10 million, $15 million or $20 million].”

Having been in the industry for over 30 years, Toop remembers when $1 million was a lot of money.

And now clients want to ensure what they have created lasts.

Perkins said people have to put more effort into managing what they’ve got, and simply breaking up an estate on someone’s death and distributing it among the surviving family is not necessarily the optimal solution.

“That being said, for 70 per cent of people a simple will, power of attorney, power of guardianship and a superannuation nomination is probably all they need. But for the top 30 per cent of the population … they’re the ones who need more sophisticated thinking if they want the best outcomes for their families,” Perkins said.

A means of doing this for many of the wealthy is by way of a trust structure, Toop said.

Complicated financial structures have put an end to summing up your wealth in a simple six-page will; now the wealthy are turning to the likes of a testamentary discretionary trust, Toop said.

Although some will-makers will also direct a portion of their wealth directly to their grandchildren, Toop said they will generally use a trust structure.

Charitable foundations

Increased wealth has also seen a rise in the popularity of establishing charitable foundations.

According to Toop, a charitable foundation is the only trust that can basically go on forever.

“People name their trusts, so it’ll be the John Smith Foundation for example, and it can be very wide in its application. They know that trust continues long [after] bricks and walls have fallen down, and there is a huge feel-good factor as well.

“I think it’s probably the one area … where we should be following America. We’re pretty stingy in this country,” Toop said.

Legal changes

Meanwhile, it is imperative that estate planners keep on top of changes in estate planning laws.

Recent changes under the Succession Amendment (Intestacy) Bill 2009 will affect how the estates of people without eligible wills will be distributed upon death. This highlights the importance of keeping a will valid and up-to-date.

Under the new legislation, spouses or partners of people who have not made wills will receive 100 per cent of their estate upon death and children will not benefit.

Prosperity Advisers legal practitioner Owen Griffiths said he sees an increased chance of estranged children missing out altogether as a result of the change.

“The amendment has been designed to simplify the distribution process, but it also introduces grey areas for those who are found to have an invalid will or estranged children who have been out of touch with the surviving parent.

“Take, for example, two parents living in a wealthy suburb with their three children having moved out of home. They have a house worth $1.2 million in Mum’s name, $700,000 in a share portfolio given to Mum from her father and combined superannuation worth $1.1 million.

“Mum is close to the children but Dad has had a falling out with the two eldest, which resulted in both leaving home.

“This conflict has led to neither parent completing wills despite Mum wanting to distribute her assets evenly between the children. She dies unexpectedly and the entire estate is left to Dad, who chooses to disinherit the children.”

Not having a will can generate a number of unnecessary and avoidable issues and it is equally important that those with wills ensure they are valid and up-to-date, particularly with these amendments coming into effect.

The important thing for people to remember is that if a will is prepared correctly in the first instance, they don’t have to worry about intestacy laws such as these, Griffiths said.

The legislation has been passed but the commencement date has not been confirmed.

Changes to the intestacy laws are part of a national push to make all laws in relation to wills and estates uniform in Australia, Griffiths explained.

Getting proactive

Planners need to adopt a proactive approach to estate planning because getting clients to focus on it can be difficult, Griffiths argued.

Clients often don’t want to focus on negative factors such as mortality and the losses they may have experienced in the market, and they’d rather not think about complicated blended and moulded families.

However, at the end of the day, “it’s a huge sleep easy factor for the client”, Aviva technical manager Martin Breckon said.

Toop said if a client doesn’t take some time out to “tackle this quite difficult decision-making process ... [they’re] going to leave an awful lot of distraught, unhappy family members behind. It’s obviously going to be hugely expensive; what [they] want to achieve won’t be achieved and there’ll be some very high profile court cases.”

Only around 30 to 40 per cent of the Australian population have a will, and 50 per cent of those wills are out-of-date or inappropriate.

There needs to be more community understanding about why these things are important, Perkins said.