Laying estate planning fears to rest

Hope William-Smith looks at how changing family structures and the ageing population have required advisers to upgrade their estate planning expertise and how they are embracing the challenge.

Over the last few years, planners have successfully stepped into the realm of estate planning and have learnt the art of balance with lawyers. While experts have said the estate planning sector has been in the best shape to date, there are still issues that deter many Australians from seeking this kind of advice.

Over the 20 years to 2016, the proportion of the Australian population aged 65 years and over increased from 12 per cent to 15.3 per cent - an approximate increase of 3.7 million people.

Australian Bureau of Statistics (ABS) data also showed the population over 85 had increased 141.2 per cent during the same period, meaning planners had their work cut out in terms of managing the intergenerational transfer of wealth. 

As Baby Boomers have entered the pension phase and the youngest cohort are set to live for up to 40 more years, advisers now have to structure their offerings around a generational blip.

Recent statistics from finder.com.au showed that 70 per cent of Baby Boomers feared unexpected financial costs, and did not have enough savings to manage a financial curve ball. Of these fears, the highest concern (29 per cent) was passing debt on to family. 

The conversational shift between advisers and their clients over the past two years has centred on the uncertainties around superannuation such as the introduction of the transfer balance cap of $1.6 million (per person), and the increased focus on building an effective tax governance framework. 

This, added with the changes to pension provisions and transition-to-retirement (TTR) benefits are resulting in clients losing sight of after-death provisions.

Advisers and lawyers now need to convince clients of the necessity of an estate plan, and the need to strengthen the sector through education and collaboration on pertinent issues.

RESTRUCTURING ADVICE

A joint 2015 study by the University of Queensland, Queensland University of Technology, and Victoria University found that only 59 per cent of Australians had a will, with an additional 22 per cent expecting to make one. 

Add to that the complex structure of the modern family and the commonplace incidence of estate claims and advisers have a lot to consider in developing an effective estate plan, according to Perpetual Private manager, strategic advice, Catherine Chivers.

“There has been a shift in the concept of a family structure over the last 15 to 20 years, from the so-called ‘nuclear’ family of mum, dad, and 2.5 kids,” she said. 

“There are so many areas of advice that interact with and have estate planning consequences such as superannuation, taxation, risk insurance planning, asset protection, intergenerational wealth planning, social security, and aged care.

“Given this interaction with so many other advice areas, embedding estate planning services within a broader advice model, and having appropriate referral arrangements in place to legal specialists is essential to meeting the professional responsibility of being a financial planner, including also the best interests duty,” Chivers said.

With advisers now comfortable in estate planning, Australian Unity national manager, estate planning, Anna Hacker said there had been a notable push for higher standards across the sector, which in turn had boosted the legal industry’s move toward increased specialisation.

“The difference I have seen over the last few years is that people are getting a lot more encouragement from their advisers to get their estate planning done. Estate planners are definitely realising that this [encouragement] is a really key part of their advice,” she said.

“We are finding it a bit easier as lawyers, we’ve got another support there, someone else saying, you need this to be done… when we have the advisers really encouraging the clients to get proper advice, that makes our job easier.”

The most substantial threat to the stability of the sector were the changes to superannuation, which HLB Mann Judd director with HLB Estate Services, Robert Monahan, said advisers should be most aware of. 

He said advisers should be assured that professionally, lawyers now had their back.

“There is an increased awareness by lawyers that estate planning is a complex area and that a lawyer in a general practice will achieve a better result for their client by collaborating with the client’s accountants and financial advisers,” he said.

“A proactive adviser who keeps abreast of developments, and places the client’s estate planning on the agenda for the client’s regular review, will better serve their clients.”

PLANNING 101

When it comes to good estate planning, clear processes for gathering relevant data, asking pertinent questions and building a client-best outcome would always be at the core of advice, according to Townsends Business and Corporate Lawyers principal, Peter Townsend. 

A sustainable legal structure to include the best outcomes for families would be key for a well-designed, client-focused plan, he said.

Townsend said there were a number of red flags within estate plans for advisers to consider. 

First would be the development of a plan with only a will, rather than a will with the additional inclusion of a superannuation binding death benefit nomination, memorandum of wishes, and the appointment of a power of attorney and an enduring guardian.

Townsend said many estate plans fell short on informing the client of all outcomes and that best practice was a plan that informed the client what they needed to consider, and one that considered the client’s specific needs and dealt with those.

Townsend said a well-designed plan would also be flexible to allow “primary beneficiaries to guide executors on the best way to receive their inheritance”, as well as practical in dealing with superannuation and taxation.

Hacker said another common red flag was clients devising their own plans without appropriate consultation, especially when dealing with super and tax.

“It’s mostly not understanding how their estates are structured, or they think they can deal with their super like a bank account,” she said.

“They think they know how to deal with it, and super is probably the biggest problem area of all. All the wealth is there and the biggest area that you see is clients saying ‘I give all my super to X’ in a will without doing a binding death benefit nomination.”

Townsend said the most effective plan would permit access to tax free distribution of tax free benefits, rather than failing to coordinate the will with the nomination. 

Another consideration for planners was the protection of a deceased’s spouse from the children of any previous marriages, and vice versa, which Monahan said could be achieved through a testamentary discretionary trust (TDT).

“Clients want their hard-earned wealth to benefit their beneficiaries and descendants, not creditors and estranged spouses,” he said.

“There is also potential damage to the reputation of an adviser who is not recommending the use of a TDT, where the benefits are widely known within the industry.”

According to Townsend the four key benefits for an effective plan for the modern family were that it: 

• Ensured Government help to subsidise education and upbringing of children or grandchildren;
• Assisted  children in high risk professions quarantine inheritance from creditors;
• Helped any high risk children such as mentally or physically disabled, substance or behavioural addicts control their inheritance; and
• Protected inheritance from an estranged spouse or de facto partner.

While Chivers agreed to the benefits, she also warned against panning to the one-size-fits-all mould.

“A carefully structured testamentary discretionary trust can have asset protection advantages as they can help make sure family assets stay within that family group, as they prevent a lump sum inheritance being paid to a beneficiary,” she said.

“[They] may use the funds inappropriately, be open to exploitation from others, or be an ‘at risk’ due to the presence of creditors and other litigants.”

Chivers said the implementation of a TDT within the plan would also have additional tax advantages which would ensure an effective tax framework.

“A TDT can offer tax advantages due to the ability to split income across a wider family group, and take advantage of multiple tax-free thresholds. As minor beneficiaries are taxed at adult tax rates on any income derived, they don’t pay tax at penalty child rates,” she said.

“Failing to use a TDT could mean that the estate isn’t managed as tax-effectively as it may have been otherwise.”

According to Townsend, an estate plan that “deals realistically with entitlements of family members to avoid or minimise future claims” was also vital.

EDUCATIONAL SUPPORT

For the past two years, estate planning has been seen as a professional area of study.

Specialist estate planning subjects were now a requirement for the University of Notre Dame’s Bachelor of Financial Planning, along with Western Sydney University’s Bachelor of Financial Advising, and the University of New South Wales’ graduate certificate, diploma, and Masters of Financial Planning. Tax and estate planning was also a required subject for the University of Southern Queensland’s financial planning major.

Australian National University law lecturer and course developer, Glenda Bloomfield, said specialist education for lawyers in the estate area had grown with demand and benefited the industry significantly in recent years.

“The practitioners and professionals who can go into those areas need to appreciate and understand what all the other areas are doing to be able to play a really active role within the team,” she said.

“Enrolments are strong compared to other Masters courses within the program and there does seem to be a genuine interest.”

As the sector moved towards greater professionalisation, Hacker said both sides of the equation had to be clued in on what constituted successful estate planning from every angle, which would benefit their best interests duty. 

“There is definitely a blending of advice on both sides; advisers are getting more confident and that is a change I’ve seen in the last five years,” she said.

“They are more confident in understanding how things really work and while they might not be going 100 per cent into giving legal advice, they are more confident to pick up any potential issues with clients.”

With a greater push toward cohesion, Bloomfield said advisers should recognise that increasingly intricate requirements across the sector would best be met with collaboration, and that lawyers too were making the shift toward specialisation and professionalisation.

“It’s no longer good enough to just know your succession law, you’ve got to know about taxation and superannuation and life insurance and so much else that’s there,” she said of lawyers within the sector.

“The diversity of clients and what they want and how you can assist them is staggering. It’s very real law, it affects everyone.”

BUILDING PROFESSIONAL BRIDGES

The relationship between advisers and lawyers around estate planning is historically complicated, as advisers have been accused of passing on clients without taking a vested interest. Chivers said cooperation on short-term issues such as the 1 July super reforms, as well as long-term challenges were crucial for demonstrating the perpetual applicability and pertinence of estate planning.

“It’s never been more important for advisers and lawyers to work together and collaborate effectively for their mutual client’s benefit,” she said.

“Ensuring that an appropriate estate planning solution fits each types of family structure, with the aim to have the ‘right assets going to the right people, at the right time’ whilst maintaining family harmony means that conversations and sharing of information need to be taking place regularly between a client’s adviser and their lawyer.” 

As the level of financial sophistication grew in line with changing family structures, Monahan said there would be a reduction in how much of a client’s wealth was governed by terms of a will, which further necessitated a solid estate plan. 

While the estate planning sector has always provided a vital service to clients, the sector is evolving, with planners and lawyers now more willing to collaborate and bridge the gap for clients.

While planners would always remain somewhat limited in their ability to offer legal advice, Hacker said blurring the lines would have positive outcomes.

“[Collaboration] has increased over the last five years, especially because of the best interests duty coming out which has been in that time period. We have many more advisers sitting in the meetings and what I’m seeing is that they have identified issues with their clients before they even come to us,” she said.

A key recommendation for planners from the other side was to look at regulation with positivity.

“Planners are starting to really worry about ‘what if this all goes wrong’ after FOFA [Future of Financial Advice] and with all of the changes [planners] are having at the moment,” Hacker said.

“Embrace regulation, it will save you, it will stop you. Think ‘how would I justify what I have just done if I was standing in front of a judge?’ If you don’t feel good about it, you really shouldn’t do it, say [it], or especially write it.”