One of the few positives to come out of the COVID-19 pandemic is that the feeling of uncertainty has led people to address setting up or updating their estate plan which otherwise would have fallen into the “I’ll get to it later” basket.
While financial advisers should be discussing estate plans with their clients, they should not forget about their own estate plan either especially if they own their practice.
This, Succession Plus chief executive, Craig West, said was something advisers often overlooked for themselves plus the fact that estate planning was a topic people generally avoided
“People tend to think ‘I’ve got plenty of time, I’ll sort that out later on I’m only 50 and I’m not going to die till I get to 75’. But then, of course, you could get hit by a bus, or have a serious illness, or get COVID-19 and suddenly it’s an urgent problem,” West said.
“As soon as that happens, you can’t do anything about it. By definition, you can no longer do an estate plan.”
Estate planning for advice firms
West said estate planning for small businesses was very different to those for people who worked on a salary for a company, owned a property, and had an investment portfolio.
Small businesses, like adviser-owned practices, often included more stakeholders such as shareholders, employees, suppliers, and banks.
“Estate plans for advice businesses need to consider all the stakeholders as it’s not enough to say ‘pass all of that business across to, like in a normal real estate plan, my spouse’,” West said.
Spouses, he said, might not be qualified financial planners and they might not want to own the business as they might be doing something completely different.
“The big problem that comes up with estate planning for business owners is the funding question. You suddenly have a business that’s got clients that need to be serviced, it’s got bank loans that need to be repaid, etc. and the principal is now by definition no longer around,” West said.
“Therefore, bank guarantees are a problem, and the licencing might be a problem. Then it comes to how do they continue to deliver the advice to clients? If I was the licensee and I’m now no longer with us, that’s a problem.
“I think the key thing really is to start to think through all of these potential issues well before you start to worry about what’s going to happen. As part of the estate planning process, you need to look at the business and the risks that go with business.”
West said the first area to tackle was a shareholder agreement if there were multiple shareholders of the business. The agreement needed to cover what would happen if someone could not work, how shares were paid out, and in turn how that would be funded. Insurance policies were also an important step in the estate plan.
“I’ve worked with a couple of financial advice firms which were very good at getting this [insurance policies] right for their clients, but not so great at getting that right for themselves. This tends to be an area people don’t want to talk about or think about and everybody believes they have plenty of time to sort out their estate plan,” he said.
With advisers leaving the industry due to education requirements, there were issues arising with advisers who decided to stay on in the industry to run or manage advice practices but were not licenced to give advice.
“What happens if that person falls off the perch? What’s the solution then? What does that mean for the other people that are employed in the business? Your estate plan at that level needs to consider those other issues,” West said.
“What happens with the estate plan for your key adviser? If I’m not licenced, for whatever reason, it means I have to have a licenced adviser working for me. Well, what happens if they get hit by a bus? Suddenly you’ve got a business with all these clients that need help and you’ve got no-one licenced do it. You need to think about that and all of those different levels.”
However, West said the most common error that was made when drawing up estate plans was when it was worked on in isolation by advisers, accountants, and lawyers rather than the three parties working together.
“The best outcome is when you get all three of those people in the room working out ‘What outcomes do we want? What do we legally need to document to make it happen? What does the funding look like from an insurance/financial advice point of view? How do we make sure we’ve got the valuation right from an accounting point of view?’,” he said
“When those three are coordinated, you can get some much, much easier, cleaner and simpler results. Unfortunately, they’re often done in isolation and that’s the worst mistake you can make.”
HLB Mann Judd’s estate services director, Robert Monahan, said the role of the adviser was to advise the client on various options they had as far as their clients’ financial situation was concerned.
Advisers also helped lawyers in explaining the client’s financial situation, what their assets were, and how they were structured, rather than the client explaining it in their own words.
“If I recommend changes to the structuring, then I copy the adviser into that and I always encourage clients to authorise me to give copies of the estate planning documents to their adviser so that the adviser knows what’s going on,” Monahan said.
He noted that advisers should be asking their clients to have copies of who a client’s enduring power of attorney is so that it was understood who would make decisions.
“Quite often, adviser checklists would ask the question to the client if they had an enduring power of attorney. If the client says yes that box is ticked. But what the adviser should be doing is asking the client, ‘well, can I have a copy of it?’
“I also encourage advisers to read the document and ask themselves ‘is this going to work for my client?’.
“So many times I’ll see a situation where a couple, for instance, have appointed each other but have no backups in place. So, I’d say to advisers, look, if you see that a couple are appointing each other but there’s no substitutes you should draw that to their attention.
“The adviser is not going to do the legal work but the adviser can identify it and say ‘I think you should talk to the lawyer about that because if you’re both in an accident this is not going to work’.”
Monahan said he encouraged advisers to have some knowledge of estate planning to enable them to get the relevant information needed for an estate plan.
Recent data by Colonial First State found that estate planning was the third most-common query from advisers as more advisers looked to assist clients in this area.
“The lawyer doesn’t have to do it all and the financial adviser can’t do it all but they should work together and to achieve the best result,” Monahan said.
THE OVERSEAS TRIP UP
Equity Trustees taxation services senior manager, Chris Holloway, said one of the biggest issues with estate planning was not preparing clients on outcomes, such as tax implications, and having overseas executors.
With more people looking to move overseas either for a period of time or permanently, Haynes said part of an estate plan was who should be an executor.
“Having an overseas executor makes it a little bit more difficult and has a large effect on the tax side of things,” he said.
“While the residency of the person writing the will has absolutely has no effect, it is important to have a good think about who your executor is, particularly where they live, where they are, and where they might live.
“Estate planning is looking into the future so if you’re overseas or you have children that are overseas or could have their residency changed, there may be issues. That’s definitely something to consider.”
Similarly, there were different tax rules for estates with overseas beneficiaries compared to those with beneficiaries in Australia.
Monahan said he was often asked by advisers on this issue, and it was happening more often as people had children that were working overseas more frequently. However, advisers would also have to know how to ask those kinds of questions.
“A good financial adviser should not only get information on their client’s assets, liability and their structures, but also an idea of their family because that’s very relevant to estate planning,” he said.
“The other advantage, and this is sort of a side benefit to good advisers, is advisers who are proactive with their clients, as far as estate planning goes, tend to have a stronger relationship with their clients and it is also less likely that the clients might want to move to another adviser. Good advisers also involve the next generation.”