Financial advisors are in a unique position to quarterback a client’s entire financial picture, including the all-important estate plan.
As most advisors know, effective estate planning takes a whole team, including certified public accountants, estate and elder law attorneys, and insurance specialists. Some client estates may be large enough to also require trust services and valuation experts.
If you assemble the right team and call the plays well, you can create real value for your clients and help them tackle potential problems before they arise.
Here are five common estate planning mistakes advisors should avoid, plus business opportunities in each circumstance.
The Client Procrastinates
Procrastination is the most basic mistake that a client can make when it comes to estate planning.
And the drawbacks to wasting time can be severe. A client’s heirs can easily incur unnecessary taxes, losing precious dollars. A business owner may unwittingly create discord with existing partners and vendors. A client’s estate may be too complicated and require more extensive planning than a simple will affords.
Business opportunity. Show clients that you can adeptly steer the right experts their way, leading to a better outcome. 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 advisors routinely gather documents from their clients in order to prepare a financial plan. These documents may include wills, trusts, divorce settlements and pension statements.
A key step that is easily overlooked during the review is to make sure is that the documents are in full force. A missing signature or incomplete document can quickly blow up an estate plan.
For example, an unfinished divorce decree could derail a client’s plans for passing on wealth to their children, especially in a complex situation where remarriages have occurred and there are competing interests in the property.
Business opportunity. A financial advisor can help guide a client through a complex situation with missing documentation, helping the client understand what is happening and assisting in vetting new legal representation when necessary.
Will Assumes ‘Equal’ and ‘Fair’ Are the Same Thing
A will that divides the estate equally among heirs can create devastating disharmony within a family, even with a simple estate.
For example, when a client wants to pass along a business to his two adult children, he might default to giving 50% to each child. But if one adult child is involved in the business, while the other pursues his own professional dreams, that equal distribution of assets might not be fair.
Business opportunity. Proper planning can create both a fair and equal distribution of assets.
In the example of passing down a business, an advisor can work with an attorney to help the client create a buy-sell agreement for one child to take control of the business, coupled with a life insurance policy for the less involved child, which would create a more equal distribution.
As an estate asset, cash from a life insurance benefit is generally tax-free to a designated beneficiary. So the more independent child would be receiving an asset unburdened by the financial and tax obligations of the business. This creates a new imbalance. To remedy that, the life insurance professional can also fund the buy-sell agreement with policies that will equalize the value of the asset inherited by the business-minded child.
[READ: Q&A: Women and Estate Planning.]
Major Assets Have Not Been Professionally Appraised
Heirs are taxed on the value of the estate they’ve inherited. The total estate is calculated by adding up the values of all the individual assets, including investments, housing, land, businesses, cars, collectibles and personal effects.
Although the value of some items is relatively easy to assess, other asset values are dependent on changing conditions. For example, a stock has a definitive value on a specific date, but raw land can be relatively worthless for a long time, then suddenly become very valuable when a new development is announced. A business can have a higher value during the owner’s life than after his or her death. On the other hand, an oil painting may skyrocket in value upon the artist’s demise.
All of these factors are important because the IRS will establish a value for an estate at the time of death. In the absence of a previously established value, the IRS may impose its own valuation at a substantially higher number, increasing the amount of taxes due.
Business opportunity. Bring in 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 present day, but can do so using a formula that can be readily updated over time. Both are critical to minimizing taxes and maximizing the distribution of assets.
Key Players Are Not Still Viable
Estate plans are a living document and need to be regularly reviewed.
A client’s situation can rapidly change with a career move, 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 outdated.
For example, a client may choose to pass along her assets to a younger sibling, who is also named executor of the estate. But decades later, that younger sibling may be showing signs of failing health or declining mental competence.
In that case, a contingent executor would be an important addition to the client’s plan.
Business opportunity. An efficient advisor demonstrates attention to detail in situations that expose risk in clients’ plans. Clients tend to reward advisors who do this with referrals to their children and grandchildren, giving the advisor a more valuable, resilient multigenerational practice.
Although estate planning is complex and the potential for mistakes is constant, robust business opportunities emerge for financial advisors who can bring a team of professionals together to address clients’ needs.
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