Generational issues: Dealing with your clients’ families

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In these emerging days of Watson the computer and robo-advisor platforms, the revenue-generating methods deployed by many firms are in serious jeopardy. The idea here is that doing forecasts and asset allocation with an intelligent program to guide your client is something that may be adequate for many of your clients. The only way to prevent the extinction of the advisory firm dependent on fees from asset management is to render advice on a broad range of technical tax, financial, legal and economic issues, as well as having a complete understanding of what is most important to your client. For many, the answer is consistently their families.

Successful operators of traditional accounting and tax practices do not always have much interaction with the client’s family. The exceptions to this intergenerational gap may include clients with a business that involves family members. But even in the case of a family business, the accounting firm may only have relationships with the family members who actually work in the business, and know very little about the client’s other family members.

In the world of financial planning, knowing the client’s family and anyone or anything that is important to them is vital. It’s easy to do a financial plan in a bubble. Many advisors want to take the shortest route to completing the plan and do forecasts, gather assets, and send their clients around to estate planners, insurance agents and other needed professionals. These others may interact with the family through their traditional services, and ultimately get to know the client’s family members and perhaps begin a business relationship with them even before you do.

Contrary to popular belief, it’s not harder to do a financial plan where you invest the time to dig deeply into what is most important to your clients; it’s more time-consuming but becomes the foundation for a richer client experience that transcends the generation gap, market ups and downs, and investments.

Strategies and tactics

The mechanical part of planning cash flow and cost of living is an essential foundation for a financial plan. So is building a portfolio that will meet the client’s long-term needs. As you go through that process, begin asking questions about the family to find out what may be driving many of their financial decisions. Do not assume that “family” only includes children. Family may include parents, aunts and uncles, siblings, close friends, or anyone else who is an important part of your client’s life.

When building a cash-flow forecast, begin asking if your client is providing any support or regular gifts to anyone. Probe a little deeper and ask if there have ever been one-time gifts or loans to anyone. Also find out if they would like to provide any financial support to anyone else. Some clients may want to help out their child or their older sister, but don’t know if they can afford to do it.

For clients with younger children in their life — whether your client is the parent, grandparent, uncle or something else entirely — find out what kind of gifts they’ve given. A new tennis racket or concert tickets are nice to know about, but what we’re really looking for here is whether your client has made material gifts, like tuition payments, 529 contributions, or expensive tangible gifts like a computer or car. It’s common for grandparents to want to help with their grandchildren’s college expenses. Many aren’t aware that they can pay certain expenses directly to the institution in addition to their annual gift exclusion of $15,000.

Once again, the pattern that the planner needs to consider is how significant family issues are in your client’s financial decision-making process. When you show that you really care about what is most important to your client, they’ll know that their goals and objectives have been heard and that you’re definitely out for their best interests, because you know what they are. As the planner, do not feel awkward probing for anything else that they may want to do for their family.

For a real example of how probing can pay off, let me digress: Early in my planning career I served a single woman who had never married and wasn’t too excited about endowing her nieces and nephews with any more than a nominal amount if there were any assets left over upon her passing. There was one issue, however, for which she always asked to set aside a rather substantial sum of money in her forecast, and she wouldn’t tell me what that was for.

After several attempts, she finally confessed that this sum of money was to build a mausoleum for her deceased mother. Once we knew what she was contemplating, it was factored into her cash flow and the conclusion was that this expense was something that she could easily afford, and the mausoleum was built a year later. For her, this was a lifelong dream come true.

Another black hole for many CPA firms lies in the form of beneficiary planning. Beneficiaries for life policies, retirement accounts or trusts are something easily hidden in plain sight from the firms simply offering tax or commoditized forecasting and investment services. In the course of tax preparation or financial planning, it’s imperative that you ask and understand the why behind your client’s choice of designated beneficiaries. For example, do you really think that your client would want a $2 million IRA to pass equally to his 21-year-old son and 18-year-old daughter if he’s predeceased by his spouse or divorced? Most clients with a $2 million IRA would agree that the risk of putting so much money in the hands of a young and possibly vulnerable person would not be in the child’s long-term best interests.

This issue of beneficiary planning can get even worse in the case of a large life insurance policy. It’s not uncommon to see life policies for families in the millions of dollars. The compounding of errors here may span from death tax issues to tax-free cash in the pocket of an immature beneficiary. A better choice for the life policy may be a trust.

Properly drafted, the trust can kill two birds with one stone: It may be able to avoid death taxes and provide spendthrift protection for the immature beneficiaries through the use of an independent trustee. For the planner who merely looks at their clients’ life insurance policies from a capital needs perspective or through the examination of in-force ledger statements prepared by the issuing insurance company, you are missing a very important part.

The estate plan is probably the best way to understand and interact with a client’s family. Once again, many of the commoditized forecasting and asset-management shops simply send their clients to an attorney to get a new estate plan. A well-run wealth management practice has the conversations about estate planning with their clients first, prior to involving an attorney. The wealth manager needs to know how a client feels about their children, their children’s spouses, anyone with special needs in the family, or any charities that your client wants to endow.

This is also the time to have the conversation about how to leave assets between spouses, and the use of independent trustees for asset protection purposes or protection for a possible second, future marriage. An estate where everything is simply left to each other with no trusts can leave these assets vulnerable to a second spouse. If there is no language to the contrary, and the widow or widower does remarry, they’ve got to make a decision. Absent making a decision, the new spouse will get some or all of the estate, depending on if there are any new wills or trusts in place.

Without a will, your client’s state of residence will dictate who gets what under their laws of intestacy. A good wealth manager will help clients figure this out before there is a problem. If this issue was not adequately addressed before the passing of the first spouse, the planner can have the discussion regarding the division of the assets between a new spouse and children from a prior marriage, or anyone else that your client wants to take care of in their dispositive documents. This may also be a good time to introduce the notion of a prenuptial agreement.

A reunion — of sorts

The ultimate conclusion of a family wealth plan where family is essential is a family meeting for the purpose of communicating the plan. Anyone who may be a future part of the family finances who is old enough to care should be a part of this conversation. The planner should coordinate and facilitate the meetings where family is briefed on their role, or for a general update as needed or desired. This type of meeting is also something that may need revisiting as the parents’ situations and plans may change.

For example, your client’s brother or best friend should know that they’re the backup trustee for the trust established for their children, and the sister-in-law needs to know that she is the backup guardian of the minor daughter.

Your client’s closest family members, those either receiving assets under a will or trust or empowered in crucial roles as trustee or health care power of attorney should also know about their potential roles in your client’s financial life. Adult children, for example, really care about their parents’ financial wherewithal, what their plan is and how they’d like to be cared for in the event that they cannot care for themselves.

This meeting is also a great time to inform the family of the provisions in your clients’ trusts. It’s better for them to know while your client is alive that the trusts have an independent trustee or restricted access to assets.

Many clients may try to conduct these conversations with family by themselves. For very simple situations, that is probably OK. But for more complicated and larger situations, it is best for the wealth manager to be the communicator. It clearly establishes their role as the head coach or go-to person for the entire family in the event of a problem. This role, coordinating everything and knowing the family members, is a great service for all clients. It becomes a legacy of great service after your client passes and the family continues to benefit from your great planning and ongoing wisdom.

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Financial planning Wealth management Client strategies Estate planning