Filling the gaps in a client's financial plan

Sports fans have heard the adage, “The best offense is a good defense.” I feel the same way about the financial planning process. To be competitive in the ever-changing landscape of professional services, financial planners need to be as holistic as possible. Your defense against competitors is going to be your thoroughness and attention to detail.

This great defense is important for many reasons. It can mitigate professional liability, identify other service providers who are not doing a good job, and find many gaps that need attention. It also helps to strengthen a client relationship.

Do you realize that some of the largest firms in the country don’t allow their advisors to talk to clients about certain matters? Taxes are one of them. You’ve seen the disclosures: “This is not tax advice; seek qualified tax advice from … .” This alone is a slam dunk for CPA financial planners.

This defense turns to offense when you realize how tight your client relationships are. This offense gets a further boost once the word gets around that your service is distinct, and truly holistic. People will find you.

Now, let me share some of the more common gaps that I’ve seen in my 40 years of practice.

Insurance issues

Insurance concept image
Concept of insurance with hands over a house, a car and a family
Property and casualty insurance, and risk management in general, is an area where most financial planners look the other way.

The risk management engagement should start with a full assessment of the protections and policies that a client currently has in place. We request copies of the entire policy, even though much of the information needed is on the declaration page of the policy.

A common gap we see in homeowners policies are homes being under- or over-insured. Have a realistic assessment of just how much coverage is appropriate and necessary to prevent a total loss. To that end, a replacement-cost policy is better than the actual cash value types.

Business use of a home is another area often left untended. Depending on the policy and just how much of a home office the client has, they may or may not be covered.

Looking at auto policies also needs to be a part of the risk management plan. In addition to having the right coverage, ensure that the client has each driver insured for the cars they are driving. Where the car is garaged, and therefore where it’s insured, is also important.

Both home and auto coverage need coordination in order to have proper umbrella liability protection. In this case, we frequently see gaps where the underlying limits for both homeowners and auto aren’t maximized, therefore leaving a gap to be paid by you until you reach the umbrella policy. This could be expensive. Ensure that your clients have adequate catastrophic umbrella liability coverage.

Who owns the business?

Another area of overlooked liability is in the form of asset ownership. As accountants, we’re trained to understand the risks of a sole proprietorship, yet I see businesses all the time that would benefit from an LLC or corporate form of ownership for asset protection where the incumbent accountant had no opinion.

Who owns the house?

Mortgage Loan savings
House with twenty dollar bills background and piggy bank
Ownership of real estate poses its own risks. I’ve seen rental properties insured as personal residences, business real estate owned by the company instead of a separate entity, and real estate titles in a basic nominee realty trust with zero asset protection. The sad part about the realty trust is that the owners of the property typically think that there is some sort of asset protection with that nominee trust — whereas you and I know that there really isn’t.

The real estate problem also exists in vacation homes where there is an occasional rental. Ask your client and make sure that the occasional rental is covered.

A very common issue with real estate is joint ownership between non-spouses. This is a liability and an estate planning issue, especially for business or rental property.

Have your client place their jointly owned business real estate into an LLC for liability protection and to be sure that each owner’s share goes as they wish. They don’t realize that joint ownership overrides the terms of their estate plans and that the joint owner becomes the entire owner when one passes, regardless of what their will says.

Issues in estate planning

man in suit showing where the testator must sign in a last will and testament document
We see the most gaps in this area, starting with outdated durable powers of attorney and health care powers of attorney. These should be updated every three to five years, or sooner if facts and circumstances dictate.

All too often we see a client with wills and trusts that will be funded upon death. Why go through probate to get assets into trust when you can own your assets in trust while you’re living and avoid the hassles and expense of probate? In addition, the terms of many existing client trusts are also inadequate, and frankly often boilerplate.

The triumph of hope over experience

One hundred dollar bill in a gold wedding ring
Another common gap in trust planning is addressing the issue of remarriage. We all hear stories of how the new trophy spouse is getting everything to the detriment of the marital children. I like to see language in the trust that specifically requires action, such as a prenuptial agreement for a second marriage.

Keeping trusts up to date

Erasing mistake on a tax return
Some trusts may have older unified credit language in them. This is especially significant if your state exemption is different from the federal exemption.

Under the SECURE Act, trusts that are the beneficiaries of qualified accounts may also need revising. The old language refers to the old lifetime spread rules, versus the 10 years now in effect under the SECURE Act.

Checking beneficiaries

Beneficiary word on checks as payouts of insurance policies or inheritance from a will or trust from a family member who has died
A good look at all beneficiary elections should be a part of the financial planning process. Benefits from work, such as 401(k)s, rarely get another look after the first day of employment.

Life insurance and annuity beneficiaries also need a closer look for the same reasons as an IRA or 401(k). For life insurance, take it a step further and decide if that insurance would be better off in an irrevocable trust.

Minor matters

Children dependent credit
Happy little girl and boy throwing banknotes
Address UTMA and UGMA accounts. Most clients don’t realize that their children have full access to these funds by age 18 or 21. Some choose to use these funds for the kids’ expenses such as school, autos or health care, and others ask their child to close the accounts when they reach the age of majority and then place the assets in trust or some other type of investment account to prevent them from blowing that money.