“The Baudelaire orphans stared at the scrap of paper, and then at Hector, and then at the scrap of paper again. Then they stared at Hector again, and then at the scrap of paper once more and then at Hector once more and then at the scrap of paper once again, and then at Hector once again and then at the scrap of paper one more time.”
— Lemony Snicket, The Vile Village
They weren’t always orphans
In fairness, the trials, tribulations and series of unfortunate events that befell the Baudelaires could have easily been avoided if the orphans’ parents, like most other orphans’ parents, had seen a good adviser or more properly considered their estate planning. Only the Wayne’s, to Bruce’s benefit, seem to have understood that point.
Great financial and estate planning advice offers peace of mind. A comprehensive estate plan is one of the most overlooked aspects of the client circumstances, but at the same time so essential to most advice being provided.
The law requires advisers to identify the objectives, financial situation and needs of their clients; the subject matter of the advice being sought (explicitly or implicitly); and the (reasonably relevant) objectives, financial situation and needs. In my view, compliance with Best Interests Duty (s961B) requires advisers to provide strategic advice that considers their clients’ broader needs, including those of their dependants and beneficiaries). This is also reinforced, not introduced, by FASEA Standards 2 and 6.
“If you fail to plan, you are planning to fail. ”
— Benjamin Franklin CFP
Estate planning is not always given the time it requires during the advice process and some of the statistics are alarming. For instance, research suggests that around 52% of Australians don’t have a Will at all.
Advisers are in a unique position to assist their clients in this area due to their comprehensive understanding of personal, financial, and family circumstances, as well as their goals, needs and objectives. They are also well placed to work with external professional advisers, beneficiaries and their client’s estate.
Often, this is distilled down to a generic recommendation somewhere within the Statement of Advice, but this is arguably insufficient.
During our reviews, we see a large range of ways in which advisers address their client’s estate planning needs.
The most common examples are:
- Completely overlooked.
- Inappropriately scoped out.
- Boilerplate recommendations to update a Will.
- Bland recommendations to update Wills and POA (with information provided).
On other occasions, we see advisers accompanying their clients through the whole process and offering:
- a considered and well thought out estate planning discussion, including specific references to relevant areas and a referral to a professional for the remaining needs.
- to act as an intermediary between their client and other professionals to provide information and ensure the external professional understands the client’s position and needs.
I appreciate that advisers can be limited by a number of things, including knowledge, experience and Licensee guidance, but it simply cannot be ignored, and advisers need to demonstrate how they have addressed the client’s identified needs.
Estate planning requires specialist knowledge, and we’re not suggesting that advisers wade into areas where they are not authorised, or competent; but all advisers should be able to assist their clients in identifying their specific needs and considering the effects of inefficient estate planning provisions. So much time, effort and focus is given to building assets, so it’s prudent to at least consider how they’ll be retained, distributed or maintained in the future.
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A practical example: Estate planning and superannuation
Recently, REST Super were involved in a publicised determination of the treatment of superannuation benefits when one of their members passed away.
Miss Ashleigh Petrie, late REST member, had nominated her mother as beneficiary on her superannuation. Her fiancé, Rodney Higgins, argued that this was non-binding to the Trustee of REST, as Miss Petrie’s mother was not considered a dependent under superannuation legislation.
Even though the late member’s file contained a binding nomination, benefits were not distributed in line with this. REST decided to pay Miss Petrie’s superannuation benefits to her fiancé, and de facto partner, Mr Higgins.
Read the article HERE
This is obviously a sad situation and highlights the need for proper estate planning advice and ensuring appropriate mechanisms and structures are in place to support the financial plan, at any age. Miss Petrie was 23 years old at the time of her passing.
In another article in SMSF Adviser, the importance of a holistic approach to estate planning is again highlighted. Coincidentally, the core focus is on binding nominations, but it also highlights the role of the adviser and the need for them to more broadly consider their clients’ relevant circumstances.
The article also covers the risks assumed by advisers who lack competency in estate planning, or who give recommendations without understanding the complete picture.
They should not be involved with the construction of the documents, selecting beneficiaries or recommending distribution of specific assets but they should be able to understands their clients’ circumstances, alert them to the consequences and implications of their arrangements and, where required, to assist them obtaining specialist estate planning advice.
For example, we sometimes see binding nominations, filled out as part of the advice process, that nominate the client’s Legal Personal Representative, or their Estate.
This is quite common, but when the adviser has not completely understood the client’s overall estate plan, it’s also very dangerous. If the estate plan is insufficient, or ineffective, then the benefits may not be distributed as per the client’s wishes, or excess tax may be payable. A benefit of a good discovery process is clarifying, and documenting, the client’s specific preferences.
“It requires you to assess the professional services required by each client with regard to their individual needs, priorities, circumstances and preferences, expressed or implicitly identified as the subject matter of the financial advisory engagement.
It requires your regular self-reflection and the exercise of professional judgement to determine when to augment your knowledge, skills and experience with assistance from other professional financial advisers, or indeed other professionals with specialist expertise in the service of the client’s best interests.”
— FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance (FASEA Values)Quote Source
In my view, the adviser’s most important estate planning responsibilities are to ensure that their client articulates their preferences and alert their client to any relevant issues that may jeopardise their preferences or the interests and rights of their beneficiaries. For example, it includes discussing which assets are considered estate and non-estate assets, documenting the client’s preferences, assessing their current and proposed arrangements and the role of their current structures and assets.
Estate planning is often reduced to a broad recommendation to update wills, but appreciate that if you make the wrong decision initially, it can have disastrous consequences.
A good starting point for advisers considering how to address estate planning is to explore the client’s immediate family position and gain an understanding of the next two generations, when relevant (children and grandchildren). This type of discussion often prompts clients to articulate their current and future plans for any family members, any specific requirements or barriers, and explore the ways in which assets can be distributed.
Even if your client has no family or dependents, they may still have estate planning needs to consider. I’d even argue that some areas are more important, especially if the client becomes incapacitated and can no longer meet their own physical needs, or loses the capacity to make decisions. The client may end up in a worse position without anyone understanding their preferences or needs. This offers a professional adviser an opportunity to understand the client at a deeper level, consider any boundaries or risks in their plans, and understand whether any assets should be transferred during life, rather than after their death. It can also provide opportunity to make any provisions for specific family members.
It is during these discovery discussions that forward planning can occur and a range of strategies can be explored to provide the best possible outcome including:
- Reducing tax on a death benefit.
- Reducing CGT when assets are transferred.
- Getting the assets to the right beneficiary at the right time.
- Protecting assets in the event of bankruptcy.
- Divorce.
- Extended and blended families.
- Controlling assets for younger, disadvantaged, or dependent family members.
- Decision making in the event of mental or physical incapacitation.
I also think it’s critical to regularly review their estate planning provisions as part of your ongoing service arrangement.
