5 Estate Planning Mistakes Advisors Make | Financial advisers
Financial advisers are in a unique position to arbitrate the entire financial situation of a client, including the all-important estate plan.
As most advisors know, effective estate planning requires a whole team, including chartered accountants, estate and elder law attorneys, and insurance specialists. Some client estates may be large enough to require trust services and valuation experts as well.
If you get the right team together and organize the games well, you can create real added value for your customers and help them resolve potential issues before they arise.
The customer procrastinates
Procrastination is the most basic mistake a client can make when it comes to estate planning.
And the downsides of wasting time can be serious. A client’s heirs can easily pay unnecessary taxes and lose valuable dollars. A business owner can unintentionally create a wedge with existing partners and suppliers. A client’s estate can be too complicated and require more planning than a simple will.
Business opportunity. Show clients that you can skillfully steer the right experts as they see fit, resulting in better results. A satisfied client develops a new level of trust in the advisor, often transferring additional assets to coordinate plans.
Review of existing documents is incomplete
Financial advisers regularly collect documents from their clients in order to prepare a financial plan. These documents can include wills, trusts, divorce settlements, and pension statements.
A key step that is easily overlooked during the review is to ensure that the documents are in full force. A missing signature or an incomplete document can quickly blow up an estate plan.
For example, an unfinished divorce decree could derail a client’s plans to pass his estate on to his children, especially in a complex situation where remarriages have taken place and there are competing interests in the property.
Business opportunity. A financial advisor can help guide a client through a complex situation with missing documents, helping the client understand what is going on and helping to control new legal representation if necessary.
Will assumes that “equal” and “fair” are the same
A will that divides the estate evenly between heirs can create devastating discord within a family, even with a simple inheritance.
For example, when a customer wants to pass a business on to their two adult children, they can by default give each child 50%. But if one adult child is involved in the business, while the other pursues their own career dreams, this even distribution of assets might not be fair.
Business opportunity. Good planning can create both a fair and even distribution of assets.
In the example of a business transfer, an advisor can work with a lawyer to help the client create a buy-sell contract for a child to take control of the business, coupled with a policy of life insurance for the least involved child, creating a more equitable distribution.
As an estate asset, cash received from a life insurance benefit is generally tax-free for a named beneficiary. Thus, the most independent child would receive an asset freed from the financial and fiscal obligations of the company. This creates a new imbalance. To remedy this, the life insurance professional can also fund the buy-out agreement with policies that will equalize the value of the asset inherited by the entrepreneurial child.
Major assets have not been valued by professionals
The heirs are taxed on the value of the estate they have inherited. Total wealth is calculated by adding together the values of all individual assets, including investments, homes, land, businesses, cars, collectibles, and personal effects.
While the value of some items is relatively easy to assess, the value of other assets depends on changing conditions. For example, a stock has final value on a specific date, but raw land can be relatively worthless for a long time and then suddenly become very valuable when a new development is announced. A business may have a higher value during the owner’s lifetime than after his death. On the other hand, an oil painting can skyrocket in value when the artist passes away.
All of these factors are important because the IRS will establish the value of an estate at the time of death. In the absence of a pre-established value, the IRS may impose its own assessment on a significantly higher number, increasing the amount of taxes owed.
Business opportunity. Hire a professional appraiser to assess the current value of key assets.
The IRS will accept a qualified appraisal, which is a document prepared by a qualified appraiser in accordance with generally accepted appraisal standards. Additionally, in the case of a business, an appraiser can not only determine a valuation for the present, but can do so using a formula that can be easily updated over time. Both are essential for minimizing taxes and maximizing asset allocation.
Key players are not yet viable
Estate plans are a living document and should be reviewed regularly.
A client’s situation can change quickly with a change in career, a change in marital status, or the needs of the family. The financial situation can change whether something bad happens or not, rendering the estate plan obsolete.
For example, a client may choose to pass their assets on to a younger sibling, who is also named the executor of the estate. But decades later, this younger brother may show signs of failing health or declining mental skills.
In this case, an executor would be an important addition to the client’s plan.
Business opportunity. An effective advisor demonstrates attention to detail in situations that put clients’ plans at risk. Clients tend to reward counselors who do so by referring them to their children and grandchildren, which gives the counselor a more valuable and resilient multigenerational practice.
Although estate planning is complex and the potential for errors is constant, strong business opportunities emerge for financial advisors who can assemble a team of professionals to meet client needs.