The new message is 'begin with the end in mind'. Work out your death and then structure your life. In other words - begin with the end in mind. Structure your portfolios and investments with the end, and your heirs, in mind.
To that end, ifa enticed some experts out of their silos to begin the new dialogue with the Australian public. RM: I'm Robert Monahan, special counsel in estate planning with Australian Executor Trustees (AET). What excites me about estate planning is for people to become aware of its importance. Sadly, it's something the legal profession hasn't focused on, certainly since death duties were abolished in Australia by 1984.
Until then, people were focused on estate planning. There's a general misconception that a will is a simple document and it can be. There are now tax consequences that people need to focus on, primarily due to superannuation and capital gains tax, and also giving a beneficiary an investment structure to tax-effectively administer their estate.
AW: I'm Alison Williamson, senior financial adviser with Fiducian Financial Services. Estate planning is a passion of mine. I like achieving solutions for clients and this is one way in which you can add value to what can be a very emotive situation.
SD: Shamal Dass, from Australian Executor Trustees, where I'm head of sales for the trust and fiduciary services. What concerns me is the obsession with portfolio construction and investment. That is the last piece of the plan. If you're working strategically for a client, you have to figure out what they aim to achieve, how much they need to achieve that, where they are now, how they're going to get there and how they effectively pass that on. Investment comes at the end as part of the solution to achieve the goal.
NL: Nigel Leverett from PSK Financial Services, general manager for advice. How can we better educate advisers to understand more about estate planning? Advisers ask "do you have a will?" and depending on the answer, they struggle with it or they're okay. Insurance is half the advice. While estate planning is the last piece of the puzzle, there are many complex issues a planner has to go through. Often it's lost in the labyrinth of the other stuff.
PB: Peter Bobbin from Argyle Lawyers. Financial planners are getting estate planning wrong from their business perspective. I've been on this bandwagon for a few years and presented at conferences, saying financial planners are doing themselves a disservice. They're doing exactly what lawyers did wrong. Lawyers did wills. They underpriced themselves. The law societies across Australia have 'Will Week'.
"Go and get a free will from your local lawyer." How undervaluing of the estate planning capabilities of lawyers is that? That estate planning is a subset of a statement of advice (SOA)is wrong. Financial planning has gone beyond that. Financial advisers - and FOFA (Future of Financial Advice) forces this - moving to fee-for-service need to identify the skill set you have and present it. I'm a tax lawyer.
I'm not just a lawyer. I do superannuation, financial services. You have financial planners who are estate planners. That's a skill set. You have superannuation financial planning specialists. Having an SOA which deals with mum, dad, the dog, the kids, super, life insurance, estate planning, asset protection ... stupid. Polarisation is occurring in financial services in skill sets, as in medicine. You have general practitioners and specialists. So, you have an SOA which deals with investment advising. But, there is a separate one for estate planning. The great untouched
AW: Estate planning is an untouched area. Advisers will deal with various subjects across such broad, different issues and estate planning is left until the end. The extent of it is "do you have a will?" It's yes or no. Then enduring power of attorney and guardianship come in and that's the extent of it. Awareness is key in dealing with clients. You ask very different sorts of questions because you identify the issues that are important. The reality is the client doesn't know what it is they need.
NL: You need to understand the family tree. You have limited time with a client in the first or second appointment. But, take the time up front to understand who's who in the zoo. Are their parents alive, were they married before? Questions that people don't want to ask. Children from previous marriages?
SD: On "do you have a will?", that's not sufficient. You're not doing your client a service by asking them if they have a will and then asking them to see their lawyer. That's not acceptable. If you're giving advice on shares and structures, and you don't know what their will says, you can't give advice - you might be negligent.
When you see advice done really well, they isolate issues. Some of the best advisers do a life-cycle issue: they don't want to solve everything in one plan. They say: 'Your main issue is insurance. We've solved that now, we'll do estate planning next year and we'll get your investment structures right over time."
Often the cart is before the horse. You have to start the way you want to end. Your strategy needs context. With insurance fees, if you need $2 million when you die, you need to know what you're going to do with it, whether you're holding it in super, so it may not make it into your estate.
You're talking to them about things that matter to them. How you're going to look after your children, how you're going to educate your grandchildren. Things that resonate. Things they care about more than pure returns. Once you engage them in that sense, you often tie them in a lot longer as well as an advice business because you know a lot about them.
AW: The complexity that comes about is that, after hours of discussion, the client has numerous objectives in many, many different areas. If you try to do everything at once, it's information overload. You can cover things with a reasonable degree of depth in a broad sense, and then have an action plan that deals specifically with them, in order of priority, and very often that will require an SOA to be limited to the next action plan so you can cover it in more depth.
RM: Most people understand they need a will, but most don't understand they need estate planning. The starting point is the medical analogy - you have to make a proper diagnosis. Know the client. Is the ultimate aim to benefit them and their spouse? Do they have children from a previous relationship who depend on them? Do they want to ensure that the monies ultimately go to those children and bypass their spouse from the second relationship?
PB: How many times have we heard the phrase: "Raise estate planning with a client and they'll say 'I don't give a bugger 'cause I'm dead'?" Don't do that. To enable a client to understand, ask: "What has someone else done or not done in your circle, such that if it happens to them it will impact you?" What has someone else done?
Men are dumb emotionally, women are emotional. I'm sorry if that's a revelation, but when you talk about estate planning, women will hear the emotional part, men will hear the money. Understand who you're talking to. Raise it from a selfish perspective.
I've given hundreds of public seminars and I say the same thing. I say it in two ways: emotional and money. The money way, the men pick it up. Emotion, women pick it up.
What can someone else do that will impact you? Suddenly, the blokes get it. The women always get it, but they don't maybe understand how they then get into estate planning. If my wife died, as a businessman, how will it impact upon me? I need a nanny if I have young kids. For her, the question is - and forgive me for taking the sexist approach - if something happens to him? This can help planners get into simple areas with no investment products, so they evidence care, because the client then says "there's no products pitch in this, so these people must be genuine".
NL: On the fee-for-service and the cost, that's an issue because it's "I've come to see you as an adviser. What do you charge?" Then we say the client needs to see Robert at AET. "What's the charge? Then there's another bloke over here. What do they charge?" The fees are clicking up and they're saying "Which one's the most important to pay?"
Costs can be an issue, particularly if you're dealing in the mum and dad market. In the high net worth space where they spend $4000 to $5000 on an estate planner, there's value for everybody. But, paying out that physical cheque to do that can be prohibitive for some people.
Misconceptions
RM: Mr and Mrs Public have very little knowledge about estate planning. They don't understand the difference between estate planning and a will. It comes back to the basic education of the professional advisers. You sit with a client and if you give them too much information, there is information overload. The correct approach comes from the lead adviser, who is the person the client turns to for advice on different things.
This lead adviser says these are the areas you should be looking at, and gives the client the pros and cons of each of the areas, costing it, then project manages it so the client can make an informed decision.
AW: Because of the quantity of subjects you cover as a financial adviser, you can become their confidante where they will reveal information to you that they won't reveal to anybody else, including family members. With the comprehensive understanding you have of the very broad aspects of a client's life and activities and issues, you then identify and prioritise those things that need to be done.
PB: One of the myths is that estate planning is for lawyers only. But, financial planners plan, lawyers draft. Planners have learned a skill in their education and their experience with putting a plan in place, which is future thinking. Lawyers take the information and prepare it. There's no future thought there. Some lawyers - I'm one of them - have learned from financial planners how to do estate planning.
Planners are better at it than general lawyers. That's why it's collaborative. Planners who want to do estate planning carefully and properly need to give thought and structure as to how they're going to do it, including that they will be given sensitive information.
From a financial services legal context, how do you manage that in your client relationships? If you have 'he and she' as clients and he or she provides significantly personal confidential information, the conflict of interest issue has just jumped enormously. Put that into a FOFA best-interest context and it means you need to sack one of the clients.
RM: A financial adviser in that situation would probably retain the role of financial adviser, refer the two clients off for separate advice on the estate planning and not act for either of them.
PB: As a lawyer, if I'm told certain information, in my mind I'll say "damn", because then I now need to cut a client relationship. That's more the exception than the rule.
NL: One of the myths is these groups work in silos. In the past, clients were sent to a lawyer to do their wills. The lawyer wouldn't tell us what was going on. The accountant wasn't involved from a tax perspective. So three people were working for the client independently of each other, without a thought to the overall outcome. This has changed recently, but there's still reservation on all sides. I work with Robert, so we work very closely with the client and often we're meeting with the client at the same time. If those conflicts arise, it's not Robert third party to us or third party to somebody else.
The impact of FOFA
SD: FOFA will drive people to a higher level in this process. The "do you have a will?" then "see your lawyer" will no longer be acceptable because that old separation of duties can't work anymore. Accountants need to be brought into these processes a lot more. They're left out and then they're the ones who later ask why you didn't set up a trust. At some point there's going to be a big lawsuit for negligence.
AW: The whole point of the lead adviser project managing is to identify areas to be addressed and incorporate the appropriate professionals so the complete job gets done.
Of torts and negligence
PB: FOFA is not going to change anything because the liability and responsibility are already there. The court cases are running. Advisers' marketing material, their SOAs comment on estate planning. If you comment on it but choose not to do it, then you need to exclude it. You are liable. It's the tort of negligence. A disappointed beneficiary can sue a professional if the professional knew what the deceased client wanted, and if the professional did not achieve it. As a consequence, the beneficiaries, with whom you don't have a client relationship, missed out. That's a lawyer case about negligence in estate planning. It applies across the professions, in any area where you provide financial planning.
FOFA is not doing anything to change that. What FOFA is doing is focusing professional planners on fee-for-service. They should be entirely gearing up their whole engagement structure. In the engagement structure they should be delineating the various aspects of the services they provide, putting time frames to it - excluding those that they're not going to do and thereby establishing a more firm relationship with a client.
They will then be taking on liability and responsibility only for the areas they will be good at. Right now, we are lodging and ghost writing for disappointed beneficiaries for a financial planner who knew what dad wanted, and didn't do it.
Insurance
NL: We've seen clients with an estate plan where there's an obvious gap in their plan from what they'll need at the time of death and what they have now. There's a bridge there with insurance. That insurance need has not necessarily been met by the lawyer.
People know they need $3 million of life cover if they die prematurely to pay their debts and provide for their family. Often, lawyers have been reluctant to refer to a planner, due to conflict of interest.
PB: What a lawyer says is "I'm going to draft your will". Hence the major gap. Australia has a massive underinsurance problem because the focus is not on it. Estate planning, done correctly, brings the focus.
RM: A mistake that lawyers make when they don't collaborate with the client's financial adviser or accountant is understanding the client's assets and their structures. Sadly, a lot of lawyers who don't practise in estate planning have a very simplistic view of superannuation.
They automatically assume superannuation is an asset of the estate, which it isn't. Many sophisticated clients have trusts. Clients themselves don't understand the nuances of these things. They think "I own all the assets". Yes, they may control the assets. It's very important for a solicitor who's doing estate planning to speak with the client's accountant and financial adviser.
SD: That ties into one of the misconceptions about estate planning costing too much. The cost of it not being done right is ridiculous.
RM: You don't need to have complex family structures. A simple example. The client instructed: "I want all my Australian listed company shares to go to this cousin, that cousin, this cousin." She thought she'd given away all her assets, and then said "the rest and residue to three charities". Then she died. But, she didn't own any Australian company shares. They were all in her self-managed super fund. All of them. All $2 million worth. So what did that mean? Did it mean the rights in the superannuation that fell into residue and went to all of the charities, and all of the cousins missed out?
NL: You have to demonstrate to clients that the only reason they're taking out life insurance is in case one of them dies prematurely. If you don't think you're going to die prematurely, don't take it out.
PB: The key to getting this stuff done is to ask: what has someone else done or not done? Greed moves people, spurs them to action. Self-interest.
AW: Look at outcome first, otherwise you have no direction. Ask questions that start a client thinking about the issues from financial to emotive - that's what prompts clients to action.
The old man and the wills
Delaney & Delaney Brisbane solicitor Bill Delaney
An old man was reviewing the wills he'd made with solicitors. In his previous wills he had left his considerable estate to his children in equal shares. Now he was unhappy with the children. Rather than engage his solicitors to update his will, he picked different clauses out of the old wills and had his granddaughter type a new one, which he dictated.
Modest amounts went to each child and the balance - about $4 million - was left for his trustees to distribute as they saw fit. He did not give them any specific directions and it left the trustees in a state of uncertainty. Now the trustees need to apply to the Supreme Court so a judge can interpret what the will means and who should receive the benefits. The old man saved $500 - so far, the trustees and their lawyers, and the lawyers for other family members have spent more than $50,000 debating the meaning of the document. A typical scenario for a solicitor is: "I have a son who is a nasty bit of business. I have been told that he could bring a claim against my estate if I don't leave him anything. I have also been told that if I leave him a small sum of money, say $1000, he will not have any legal right to bring a claim." It is a mistake to think you can prevent a spouse or child from making a claim against your estate simply by making a gift in the will of a small sum of money. The law gives the family members the power to apply to the court if the will maker fails to make proper provision for them. There are safer ways to deal with a family member who does not deserve any gifts under your will.
What if Adam and Eve had used an SMSF?
Townsends Business & Corporate Lawyers principal Peter Townsend
Adam and Eve have a self-managed super fund (SMSF) with a corporate trustee. Adam dies, leaving Eve as the sole member of the fund and the sole director and shareholder of the trustee company.
In her will, Eve appoints their two sons and only children, Cain and Abel, as joint executors and equal beneficiaries of her estate. She does not leave a binding death benefit nomination. Because Cain and Abel are to share Eve's estate equally, on her death they become joint owners of her shares in the SMSF trustee. Because she appointed them as joint owners rather than actually gifting her shares separately to them, they own the shares jointly. Eve had read the case of Katz v Grossman (2005). After his wife died, Katz appointed only one of their children, the daughter, as co-trustee of the super fund. When Katz died, his daughter appointed her husband as trustee of the fund and they both resolved to pay all of Katz's super to her to the exclusion of her brother, regardless of Katz's request that she ensure she shared the money with her brother. Despite Eve's concerns to avoid trouble, she had not gone far enough. The constitution of the super fund trustee company stated that if more than one joint holder of a share is present at a meeting of members of the company, then "that one of the joint owners so present whose name stands first in order in the register in respect of such share shall be entitled to vote in respect thereof". In other words, the first registered joint owner votes the shares and the other joint owner has no vote. So, Cain lists first in the share register as joint owner with his brother, Abel. He then controls the company because any meeting that both attend will only recognise Cain's vote.
Cain and his wife can plot to:
. remove Abel as a director of both companies,
. appoint Cain's wife as replacement,
. pay all of Eve's super fund death benefits directly to Cain as a non-death benefit dependant, and
. leave Abel without any entitlement from the SMSF.
Four estate planning myths
Morgan Soloman, Bowen Buchbinder Vilenski director
A reluctance to deal with one of the two great certainties in life - the other being taxes - has led to four big myths about effective estate planning.
1.A cheap will is a false economy. Have a will that is well considered and properly drafted so the writer's intentions are clear and discourage a challenge. Have in place legal instruments to manage assets outside the estate, such as beneficiary nominations under the trust deed of a self-managed super fund (SMSF). Review wills and estate plans every 18 months.
2.Your SMSF and binding nominations. One of the most widespread misconceptions about SMSFs is that the assets held in them are subject to a person's will. The two are entirely separate. SMSF assets are strictly controlled by the trustee appointed under the trust deed. The only way to ensure the trustee pays your super benefits to the person you want is with a binding nomination, a separate document outside your will.
3.Assets held in discretionary trusts are not protected from divorce. It is a widespread fallacy that discretionary trusts can protect the assets of a person in divorce. In reality, they cannot arrive at the Family Court and say "I have nothing" when assets are held in trust. Under part 106B of the Family Law Act, assets transferred to a trust to defeat a claim can be clawed back as part of an overall settlement. The High Court has ruled conclusively that a trust such as a family trust can be easily penetrated and its assets divided in event of divorce. Interestingly, assets held in trust are far less open to challenge once the person who controlled them has died, because they do not form part of a person's estate. The matter is no longer under the Family Court, but under the Supreme Court. The assets are not owned by the deceased, but by the trustee.
An enduring power of attorney has limited scope. While enduring powers of attorney have become almost as commonplace as wills, the misunderstanding is they cover a wide scope of activity. But they deal with financial decisions only, typically giving a spouse authority over bank accounts and investments. For lifestyle decisions, as opposed to financial, an enduring guardian under an enduring power of guardianship must be appointed to make decisions on your behalf.
Estate planning mistakes
Equity Trustees estate planning senior manager Anna Hacker and legal consultant Stephen Hardy
Mistake 1: Believing your estate is too small. Rarely is an estate too small to warrant some type of planning. Suddenly a person who struggled through life working three jobs and who has no dependents has an estate worth thousands of dollars and no plan.
Mistake 2: I'll wait until I'm old. Everyone over 18 should seriously consider having an estate plan, especially families with young kids.
Mistake 3: Failing to plan for incompetence. Every estate plan should address what happens if you become mentally incompetent.
Mistake 4: Failing to understand the difference between ownership and control. While you may control an asset, such as business premises or bank accounts and shares, the assets may be held in a company or trust. This means that what is actually owned is control of the company or trust, which in turn deals with the asset. A will does not pass the asset itself to a beneficiary, but rather control of the structure.
Mistake 5: Not understanding the risk of a challenge to your estate. In Australia, each state has its own legislation dealing with who can challenge an estate. The list of potential challengers is extremely broad and can encompass anyone to whom an individual has an obligation or responsibility.
Mistake 6: Planning around specific assets. Many times, people try to dictate exactly what is to happen with each specific asset they own. The problem is they may have different assets when they pass away. The better way is to plan based on the value of your estate rather than specific assets.
Mistake 7: Ignoring tax planning. Estate planning is not all about taxes, but tax planning is often important. Good planning can minimise the impact of income tax, particularly in regard to income paid to children.
Mistake 8: Ignoring asset protection. Many people structure their assets well for protection during their lifetime, for example, the family home being held in one spouse's name only to protect against creditors of the second spouse. However, they don't consider the consequences of their will when the house transfers to the second spouse, destroying any asset protection established during the first spouse's life and leaving the asset potentially open to creditors or a trustee in bankruptcy as a resource.
Mistake 9: Do-it-yourself planning. Super death benefit nominations cause confusion among members who do not understand the concept of dependent and attempt to nominate simply a friend or other non-dependant, creating an invalid nomination.
Mistake 10: No estate plan at all. If you don't have a plan, state law has one for you and you may not like it.
