What Does a Financial Planner Need to Know About Estate Planning?

In our practice, we talk and work with numerous financial advisors.  When an advisor speaks with us, he or she generally knows about estate planning – it’s just the nature of the business.  What are some of the estate planning topics that we discuss with our financial advisor colleagues?

If your client doesn’t have an estate plan, you are committing malpractice.  In your first meeting with a client, a financial advisor typically determines a client’s risk tolerance to determine an appropriate investment mix for their respective clients.  There is no greater risk to that client and their assets than not knowing who will control their assets if that client becomes disabled (Durable Power of Attorney) or to let a random state statute (intestacy statute) determine who is to receive their assets.  If their children are minors, the children receive all the parents’ assets when the children are 18 (still, sometimes children).  Risk – that is risk and it is a risk which can be eliminated and it should be addressed by the financial advisor.

A financial advisor is critical to the Estate Plan.  A lawyer only does part of the estate plan; the Financial Advisor actually does quite a bit of estate planning.  Not all assets pass through the Estate, assets may pass though a beneficiary designation or through account titling, such as joint accounts or another account designation.   With a number of clients, a large portion of their estate passes through beneficiary designations or account ownership.  These steps which a financial advisor may consider routine are actually critical to estate plans and the elections for account titling or beneficiary designations must be coordinated with the estate plans.

Account titling may also interfere with an estate plan.   One of the first questions that an estate planner asks a client is: how is that account titled?   A client’s casual account titling has significant effects on an estate plan.  For example, when a client wants a child listed jointly on an account to help them write checks or invest money, the client has designated that joint owner to receive that account’s asset on his or her death – regardless of the Will’s direction of the asset.  In addition, the account’s joint owner may use the money in the account for personal uses, in contrast to a Power of Attorney which doesn’t permit an agent to comingle money.

Fiduciary obligations are important and must be understood.   Presently, there is a big debate over whether a financial advisor or broker needs to be a fiduciary.  An agent under a Power of Attorney is a fiduciary and must act accordingly, including acting in the best interest of his or her principal.  When an agent under a Power of attorney acts, he or she must keep their assets separate from the principal and must keep a written record of the transaction.  These are basic obligations of the agent under the POA.  If an agent wants to conduct a transaction and it isn’t clear how that benefits his or her principal, you must ask about the transition.

You must pay attention to a client’s ability to understand his or her assets and the particular transaction that you are discussing.  We all try to make sure that client understands his or her respective financial plan or a specific transaction.  However, you face additional hurdles concerning older clients or clients who may be showing early signs of a disease which impairs the client’s ability to appropriately understand your explanation.  Is the client repeating questions, are they asking the right questions, are they asking questions at all.  Learn to detect the signs of a client who is struggling with attention or understanding aside from the normal complexities of the decision.  In addition, when a client makes a bad decision, move to understand why he or she is making the decision so you can determine if it is just a bad decision or whether there is something else at play.  If you suspect there is an issue, talk to someone about your client (e.g., his or her child, or accountant).

You are part of a team.  There are three legs to the stool – the financial planner, the estate planning attorney and the accountant.  Know the advisors and coordinate on advice and direction.    There are other professionals who may be added to the mix depending on the client (e.g., insurance agent).

Know what a Basic estate plan looks like.   A basic estate plan is comprised of an advanced health care directive, a durable power of attorney and a Will or Revocable Trust.  Every individual should have all three documents.  Once a client has a basic plan, there are items to look for in each document.  We were cover that in our next blog.