The ACA/ASICreport of February 2003 on the quality of financial planning advice in estate planning said: “This was one of the worst aspects of the plans assessed, with 58 per cent scoring a ‘fail’ or ‘poor’. Most plans had no reference to estate planning at all.”
It is part of an adviser’s duty of care to ensure that estate planning is done properly, which includes making sure clients are properly advised on and assisted in making sound estate planning decisions.
Allow us to give you a likely example. A young financial planner (we’ll call him ‘Guy’) was quite pleased with himself. He had just scored some new clients — a recently retired couple with substantial assets, property, shares and a large amount of money in their super fund.
Excitedly, Guy told this to the elder of the financial planning firm he was working in, showing him the file. In the file was a photocopy of the clients’ wills, virtually identical, where they gifted the assets of the estate to each other.
Guy didn’t think the couple would want to change anything, but told Barry, the elder planner, that he would send them to their solicitor anyway. Barry suggested Guy talk to the family first on the premise that, because the family were the ultimate beneficiaries, what they wanted was important.
In a High Court case, Hill v Van Erp (1997), it was confirmed that the solicitor drafting the will owed a duty of care to an intended beneficiary, as well as to the client who has written the will.
The High Court held that, since a solicitor’s duty of care to a client (the testator) coincided with a duty also owed to the intended beneficiary, a duty of care existed to the beneficiary and that the beneficiary could take action against the solicitor. The same applies for financial advisers.
Guy has a word with his clients and finds out a few things. Firstly, the elder son, James, is going through his second divorce and has to provide maintenance for the children of the two marriages.
The eldest daughter, Mary, is an obstetrician not wishing to hold any assets in her name for fear of legal claims made against her. The clients tell Guy that Mary is not too fussed about her husband getting his hands on her inheritance either.
The third child, Angela, has a job and is an undischarged bankrupt, as a result of providing personal guarantees for her husband’s business, and any distribution of assets will be attacked by the receiver.
Guy goes back to Barry who explains a few things. If James receives his share of the estate and he invests it, then the income will be taxable. In other words, the maintenance will be paid in ‘after tax’ dollars.
Any income he can use will fund the maintenance of his two families. James’ interests will be better served if, rather than on the death of the clients, he receives his proportion of the assets of the estate via a testamentary discretionary trust. If such a trust is established, income to James can be tax-effectively distributed from the invested capital, taking advantage of S102AG of the Tax Act (ITAA36).
Mary, as an obstetrician, will have as her greatest concern any assets held in her name, particularly due to the increasing onset of professional indemnity. Barry suggests that Mary’s share of the estate may also be best held in a testamentary discretionary trust, keeping it out of reach of any likely professional liability claims.
What about Angela? Again, if the estate pays her share of the estate directly, the receiver in bankruptcy may have his eye on it. Barry thought that Angela’s share of the estate could also be best held in a testamentary discretionary trust to protect it from any likely claims.
In most cases, wills containing testamentary discretionary trusts should be individually drafted because there can be so many variables.
Guy could see how this could advantage his clients but he was concerned about how he would be paid for his advice. Barry suggested asking the family how much it would cost them if they didn’t do it and how much they were prepared to pay him to fix it up.
Guy did exactly that. He met with all the family, outlined the issues and potential consequences and broadly outlined the potential solutions. The family response was that Guy did bring up areas that worried all members of the family and responded that they were prepared to pay a reasonable fee because the cost of not doing anything was substantial.
Guy went back to Barry quite chuffed with the enhanced relationship with his clients and the rapport he built up with the adult children of the clients.
Speaking at a recentResnikconference, Mike Fitzpatrick (co-author of this article) asked an audience of about 350 advisers: “Who here as a beneficiary would not want the protection against bankruptcy that a testamentary trust affords?”
Not one hand went up.
Again he asked the audience: “Who would not want the ability to tax effectively split income with your wife and family as a provision in the will?”
Again, not one hand went up.
Why is it then that the ACA/ASIC report found estate planning wanting?
Is it because advisers don’t want to do it? Advisers are required to consider the consequences of death, disability and incapacity on clients’ financial situation.
Is it because clients are not prepared to pay for it? Let us assure you they are. Do clients not want to talk to you about their estate planning? Let us assure you they do.
Is it because there is not a need for it? It is common knowledge that people’s wills and their affairs are generally not in order on death, disability and incapacity. Estate planning is a business opportunity for advisers waiting to be filled.
What should advisers do?
* Skill themselves up as to what proper estate planning is;
* Structure a sound estate planning methodology and have good estate planning business systems;
* Train staff;
* Have a sound relationship with legal firms that are skilled in estate planning and see themselves as part of your business;
* Deliver to all clients comprehensive and properly drafted written estate planning recommendations and ensure they are all implemented properly.
When advisers and lawyers work at estate planning together — bothering pays.
The key is to have the skills, the advice methodology and the right relationship with lawyers who will support you.
The only concern is that many lawyers who profess to have some understanding often fall short of the mark and it is difficult for the adviser to make an educated judgement as to the competency of a lawyer in the legal work involved in estate planning.
Jack Houwing is director of dealer group, Financial Options. Mike Fitzpatrick is a lawyer and adviser withAssociated Planners .
