Tough Conversations

By Linda Leitz

Estate planning is a relevant element of financial planning. Because most of us are not attorneys, we don’t prepare the legal documents that put estate planning strategies in place to protect our clients if they are unable to make financial or health decisions. However, as planners, we can address issues such as tax efficiency, charitable intent, and the orderly transfer of wealth to heirs as part of estate planning.

Helping Clients Think Through Their Estates

Kenneth F. Robinson, JD, CFP^®, of Practical Financial Planning Inc. in Cleveland, understands why it can be difficult for our clients to take action on their estates. “This whole subject is frightening. It’s about mortality and lack of control,” he says.

To help clients overcome their inertia, Robinson helps clients think through what they want and documents it for them in a summary of their wishes. He feels very strongly that the summary he prepares must reflect their values—not his—so, in addition to addressing the basics of who receives what assets and who will be responsible for taking needed actions in the event of death or disability, he addresses difficult contingencies with clients. What if their heirs predecease them? What if the people who agreed to settle the estate or make financial or healthcare decisions are not available or become unwilling to serve? Once the client has thought through the issues and made decisions, Robinson creates a written summary of their wishes and gives it to the client to provide to an attorney, who draws up the documents. If asked, he’ll review the drafted documents before the client signs them.

Robinson also creates a spreadsheet summarizing the proposed distribution of assets. When clients leave some assets to charity and some to friends and family, he advises them about the wisdom of having the charities receive their share of the estate from qualified accounts, which allows the people who inherit to get more of the wealth from the nonqualified accounts. Many clients don’t think about the tax benefits of heirs inheriting assets that can have a step-up in basis instead of getting retirement assets with tax implications that will be subject to required minimum distributions (to learn more, see “5 Estate Planning Mistakes Every Planner Should Avoid” in the February 2023 NAPFA Advisor).

Direct Involvement

Robert Maloney of Squam Lake Financial Advisors LLC in Holderness, NH, finds that about one-fifth of his firm’s new clients have no estate documents. He feels that it’s important enough that he makes the preparation and execution of those documents the first priority in the financial planning process.

Similar to Robinson, Maloney works through with the clients what they want in the documents and prepares a summary memorandum of the proposed elements of the estate plan, along with a financial summary of the structure and ownership of each asset. Once approved by the client, he sends this information to an attorney and has a preliminary conversation with only the attorney. He then attends a meeting with the clients and the attorney, who confirms the client’s wishes and gives additional input on the directions. Maloney reviews draft documents with the clients after they are prepared, contacts the attorney with any requested changes, and attends the signing at the attorney’s office with the client and the attorney. The attorney handles any deeds and retitling of related assets. Maloney handles any changes in investment account titling as well as updating beneficiaries on accounts as appropriate. He has found that clients appreciate his hands-on approach.

Avoid Online Document Preparation

Robinson discourages clients from using online estate planning programs. He points out that web-based documents are legally binding when executed, even if they are poorly written or if the clients have not carefully thought about what they put in the document. He has seen people make the big mistake of giving away their homes to avoid probate when using do-it-yourself documents. This is why he emphasizes the importance of having the direct advice of a legal expert.

Financial planners who help clients set up estate planning documents through online providers might be practicing law without a license, which could potentially land them in legal trouble. Merely answering client questions—such as what to put in a given response in the online questionnaire or asking for an explanation of a passage in the documents—may step over the line between financial and legal advice. Even someone like Robinson, who has a law degree but has chosen to have his standing with his state bar association be inactive, should avoid practicing law without a license.

Given those restrictions, what can an advisor do? Robinson says discussing a client’s desires with them, discussing contingencies, and providing a summary of those wishes along with financial summaries can provide needed information and objective input while staying on the right side of the line.

Monitoring

Part of ongoing financial planning is regular monitoring. While many advisors may feel that monitoring applies mainly to investments, it’s important for other elements of financial planning, including estate planning. As with many aspects we advise on, estate planning can shift with changing finances, life circumstances, and the legal landscape.

Robinson gets copies of the executed estate documents from his clients. He reviews the documents with them approximately every three years after the documents are initially completed. Even if Robinson recommends an estate document review and the clients decline at that time and wait another few years to do the review with him, he finds that his nudge spurs clients to review documents more frequently than they would otherwise. As he says, the subject isn’t a pleasant one.

If the existing documents no longer reflect the client’s situation and desires, the planner can provide similar support for their revision. As you know, changes in retirement accounts and life insurance beneficiaries can generally be done without updating estate documents. These changes can often be done more quickly and avoid legal fees because they don’t require an attorney.

When clients already have estate documents, a review with them is helpful. It gives the financial planner an overview of who the clients are relying on to handle their affairs and what their wishes are. If you get a call saying the client is incapacitated or has died, you know who you can work with on the client’s financial affairs.

A Matter of Trust

Just as there is no one-size-fits-all solution for investments, taxes, or insurance, each estate plan can be specifically tailored to the client. Some clients need a simple will, and some need a trust. While you don’t want to give legal advice, you can have some sense of which is appropriate for your client on the basis of their individual circumstances, such as legal residence, health, marital status, children, and values, in addition to their financial situation. Some states have estate taxes and probate complications that a trust can circumvent. And some states have a very simple, inexpensive probate process and no estate tax. Without giving specific advice, you can give input on general topics such as whether probate is simple or complex in a certain state.

Estate Attorneys

As a financial planner, you’re not required to refer to other professionals. But it is helpful to your clients if you can offer referrals to professionals you’ve vetted. As directed by CFP Board’s Code of Ethics and Standards of Conduct, CFP^® professionals must have a basis for recommending other professionals, disclose any relationship with the other professional, reasonably look out for clients’ interests, and inform the clients if we do not believe a professional has provided services in accord with their promised services.

A Critical Element

As financial planners, we realize that each aspect of financial planning is important. Poor estate planning or a complete lack of estate planning can derail a financial plan. Each financial planner can decide how best to incorporate that important element into their client services.

 

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Linda Leitz, CFP®, EA, is a NAPFA-Registered Financial Advisor in Colorado Springs, CO, with Peace of Mind Financial Planning Inc. and can be reached at linda@peaceofmindfin.com.

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