Where there’s a will, there’s a way to do business

Often at industry functions we ask advisers: “How do you do the estate planning in your business?”

Invariably, the answers come back: “I tell clients their will needs to be reviewed and send them to a solicitor to get it done.”

Or: “I am not into risk insurance, I send them to our risk insurance adviser who reviews their insurance needs.”

Or (if we meet an adviser who has some idea): “I do a needs analysis, fix up their insurances and change their will to a discretionary testamentary trust.”

None of these approaches is proper estate planning and advisers are not only missing a great business opportunity but also exposing themselves to all sorts of risk.

Because a major proportion of clients’ wealth is held in ‘entities’, which are not governed by a will (joint ownership, family trusts, superannuation funds), and because all life and financial decisions have an estate planning impact, organising a client’s will or arranging some risk insurance does not go anywhere near proper estate planning.

Generally, a lawyer’s skill is limited to the drafting of wills which do not cover the whole gambit of a person’s wealth. Likewise, risk insurance is only a small (albeit vital) component of estate planning.

The financial adviser can help the client to see the need for estate planning and can also help the client to understand what proper estate planning delivers.

Advisers can leverage off the back of their existing relationships with clients to offer estate planning services, thereby dramatically increasing the potential for fee income.

Both of us regularly earn fees of about $1,500 to $2,000 for an estate planning assignment, over and above the earnings from risk insurance and the preparation of wills and enduring powers of attorney.

Why are we so enthusiastic about it? Apart from the fact that it is a legal compliance requirement, estate planning removes the risk of losing clients and shuts out the competition.

It’s also enjoyable work. Although we are focusing on morbid events, it is that one time when clients willingly allow you to become personally closer to them in the business relationship. It helps to strengthen the client/adviser relationship.

You deliver an additional service offering and dramatically increase the transactional side of your business, that is, risk insurance and investments. Clients will want you to manage all their wealth, not just the portfolios you set up. Furthermore, advisers will be able to strengthen and leverage returns from relationships with other professional advisers, such as accountants and lawyers.

If an adviser fully understands and appreciates what good estate planning involves, then he or she is able to introduce to the business and to clients a methodology which clients willingly pay for.

Estate planning done properly should not be done when the adviser is working with clients on the financial plan. This is simply because the complexity of wealth creation or wealth management strategies will not enable clients to think about much more than the ‘life’ side of their financial affairs.

When we are preparing financial plans, we both ensure that we are conscious of the estate planning consequences. Very soon after implementing the financial strategies, we organise with the clients to prepare a separate estate plan.

To make estate planning work effectively for clients and be profitable for advisers, there are three main criteria:

1.The adviser should have an effective estate planning business and marketing model, which is relatively efficient and easy to use, making the complicated straight forward;

2.The adviser should have the skills and access to expertise and a resource base that can be relied upon; and

3.The methodology and implementation process should be sound and supported by robust estate planning systems.

The adviser can deliver, then, two separate but related services (financial planning and estate planning), while at the same time deriving another source of revenue with the same clients and with no more overheads.

Case study: The problems with a cheap will

This is a case brought to us recently by a local law firm. They had acted for Jim in his divorce and family law property settlement. Jim’s wife had left him with the care of two teenage children aged 16 and 14. Jim’s eldest child, a daughter aged 20, was also still living at home and was in full time employment.

When Jim’s divorce and property settlement was finalised his family lawyer had said to Jim: “You had better get a new will done. I’ll do a simple one for you free of charge.”

Jim said, “That’s good, I want to leave everything to my three children equally”. This the lawyer did, appointing Jim’s eldest daughter executor.

Six months later, Jim was killed tragically in a car accident. His major asset was his home which was worth $250,000. However, Jim had to borrow fairly extensively on his home to pay out his wife’s claim on the property settlement, so there was a debt of $220,000.

Jim also had a car on hire purchase and a few other bills, which meant in terms of his estate, his assets were almost the same as his liabilities.

However, Jim had a superannuation balance of about $450,000 and $500,000 worth of life cover through his superannuation fund, which meant he had almost $1 million in superannuation. In addition, because the accident happened on the way to work, Jim’s dependants were entitled to a lump sum in relation to his worker’s compensation rights.

The first problem encountered by the advisers to the estate was that Jim had made a nomination on his superannuation in which he had appointed his former wife. In preparing the will, the lawyer had overlooked reviewing the superannuation nomination. Fortunately, the nomination was not a binding nomination. However, when the trustee of the super fund contacted Jim’s former wife to ascertain if she had any interest in the super, she attempted (albeit unsuccessfully) to take a second bite of the cherry.

The next problem was that the trustees of the superannuation fund (after a trip to the Superannuation Complaints Tribunal instigated by the former wife) ultimately took the view that they were duty bound to pay the proceeds of Jim’s superannuation to his two dependant children. The estate’s assets were used to pay the creditors and so Jim’s eldest, non-dependant daughter therefore effectively got nothing from Jim’s estate.

Had the job been done properly, a result which more appropriately reflected Jim’s intentions could have been obtained. Life cover outside of superannuation would have meant that a resource would have been available to pay the debts of the estate, which means that the house would not have needed to be sold and a more equal distribution in accordance with Jim’s wishes would have resulted.

Jim’s elder daughter is now obtaining advice as to whether she has an action against Jim’s lawyers for failing to advise Jim properly in relation to his estate planning affairs.

Jack Houwing is director of boutique dealer group, Financial Options. Mike Fitzpatrick is a lawyer and adviser withAssociated Planners.