Based on our experience working with clients in both Canada and United States, as
well as conversations with other professionals on both sides of border (a purely
unscientific survey to be sure), successful high net worth families have a difficult
time completing a satisfactory estate plan. It’s not unusual for a family to say they
have tried “four or five times” to complete an estate plan without success, which
prompts us to ask the question, “Why didn’t their advisors get it right the first time?”
There are three steps to the estate planning process:
- (1) Establishing objectives i.e., What is it we are really trying to accomplish here?;
- (2) Designing a plan to fulfill those objectives;
- (3) Implementing the plan.
Typically, the majority of time is spent in plan design - as much as 80% to 90% -
with minimal time devoted to step one, establishing objectives. One of the world’s
oldest adages may be the reason: follow the money.
Estate plan advisors are paid only when a plan is implemented. For example, an
attorney is paid to create documents, an insurance professional is paid when he sells
a client a policy, a public accountant is paid to do the tax analysis, a stock broker is
paid to handle the securities transactions. They are all paid for plan implementation;
nobody gets paid to delve into client’s real values and objectives.
But how can an advisors design an effective plan if they don’t understand a client’s
objectives?
In addition to “following the money,” there is also an “advisor bias” created by
differing levels of training and expertise. Steven Covey, author of “The 7 Habits of
Highly Effective People” states it this way, “People see the world not as it is, but as
they are.”
Consider four advisors:
- Insurance professional
- Investment professional
- Attorney
- Accountant.
Pose a problem and ask for a solution. We are willing to bet you will get four
different solutions, each from a different perspective.
Because different advisors have different opinions, it’s difficult to know who’s right.
When this occurs, more often than not, the end result is....NOTHING! The client does
nothing, because he or she isn’t sure who or what is correct.
This “advisor bias” creates confusion for the primary advisor who’s trying to take
responsibility for the estate plan. When people become confused by the process, all
they want to do is get out of the process...end the conversation...eliminate the
anxiety.
The estate planning process presents many dilemmas, some of which are conflicting objectives in direct opposition to one another. These may be:
The client versus his or her heirs;
The client’s heirs versus his or her favorite charities;
The client’s favorite charities versus the client;
One heir versus another;
One charity versus another;
And in some cases, the client against his or her spouse.
Another reason for plan design “paralysis” is the complexity of the process. It’s
understandable. There are over 100 different Tools, Techniques, Strategies and
combinations available in creating an estate plan. Which apply in your client’s case?
These conflicts and complexities call for a comprehensive discovery process to clarify
a client’s family objectives in estate planning. Instead of spending 80% to 90% of
the time on plan design, it is suggested to spend that time in the discovery process,
which will make the design process practically complete itself. When significant
clarity exists, those 100 different possibilities may be reduced to 3 or 4 viable
options that actually fit the client’s situation and this is manageable.
The purpose of the discovery process is to create a written document known as the
Family Financial Philosophy (FFP). We must credit the late Scott Fithian for
introducing this concept into the estate planning process in his 2000 book “Values-
Based Estate Planning”. Fithian was a strong advocate for the idea that advisors
must place much greater focus on what their clients’ values are over just focusing on
what their clients own.
The FFP is an extremely valuable tool for successful families with strong values to
incorporate into their planning. The process of developing the FFP allows couples to
confront questions they may have not discussed before. In the process, they may
also discover conflicts they didn’t realize existed. The objective is to establish clarity
and, as much as possible, a united statement of values and objectives for the
family’s wealth.
The FFP addresses three significant categories.
1) What does financial independence mean to a client? It has a different
meaning for each family. The goal is to quantify a client’s definition of what financial
independence is for them because it’s the most important number in estate planning.
As you may be aware, the key to eliminating estate taxes on both sides of the border
is to separate your client from their assets, as soon as possible and permanently.
This may be a scary proposition. Some strategies that eliminate taxes on death also
eliminate a client’s financial independence - obviously, not a good idea. So, we first
have to determine what a client’s definition of financial independence is and whether
he or she has achieved it. That number becomes sacrosanct and inviolable.
2) What does your client want his or her Family Legacy to be? Advisors often
assume that the objective is to reduce estate taxes as much as possible and give the
kids as much as possible. That might be what the client would want to do, but an
advisor should never assume that to be true. Some parents are concerned that
leaving an excessive inheritance would ruin their children’s lives and so they limit the
amount left to their kids. Once we determine a client’s definition of financial
independence and what is an appropriate Family Legacy, we can address the final
issue.
3) What is your client’s Social Capital Legacy? What does your client want to do
with the assets and income he and she or their heirs don’t get to keep? Does the
client prefer to default these monies to CRA or the IRS by paying taxes because of
poor estate planning? Or, given the option, would your client prefer to direct those
assets or income to causes they hold in high esteem, fulfilling their philanthropic
urges?
These are the issues we address and clarify in the process of creating a Family
Financial Philosophy. Clients who have embraced this process find it to be invaluable
and tremendously fulfilling.
One of the most powerful effects of creating the FFP is that your client now has
control of the planning process. What used to be a mystery is now resolved. No
longer will you or your client be the victim of advisor bias. Simply put, no strategy
can be presented by any of your client’s advisors unless it specifically supports a
client’s FFP. You and your clients now have clearly stated objectives and values
supported by well-designed plans.
If, as a client’s primary financial advisor, you are not comfortable with starting the
conversation about the Family Financial Philosophy approach to estate planning
perhaps you might want to direct your clients to work with a CERTIFIED FINANCIAL
PLANNERTM (CFP®) who specializes in this area. The CFP® is an internationally
recognized professional certification owned by both the Financial Planners Standards
Council (FPSC, the Canadian regulatory body) and the Certified Financial Planner
Board of Standards Inc. (CFP Board, US regulatory body). Through education,
training and experience CFP® Professionals are called upon to be ‘financial
psychologists’ who understand the life clients want to create for themselves, their
families and charities in the future and the life they live today. Through training in
the Six Step Financial Planning process CFP® Professionals are able to help their
clients’ bridge their estate planning gaps.
Remember if a client has an estate planning need and if that need is not being
addressed, the client will eventually find a way to satisfy that need. So think and be
a proactive and creative force in your clients’ lives by providing solutions for your
wealthy clients’ very real planning needs, today!
Charles L. Stanley, CFP®, ChFC, AIF® is an author, educator, speaker and a fee-only
financial planner with Capital Financial Advisors, LLC, in sunny San Diego, California.
Charles has been serving retired physicians, business owners, corporate executives,
retirees and many widows helping them with their estate planning, tax strategies,
risk management, investment selection, business succession, and retirement planning over the last 17 years. He can be reached at 858-395-8694, or
cls@charlesstanley.cc or www.charlesstanley.cc
Peter J. Merrick, BA, FMA, CFP, FCSI, is President of MerrickWealth.com a fee-for-
services financial planning and executive benefit advisory firm in Toronto, Canada.
He is a professor of financial planning, author of “The Essential Individual Pension
Plan Handbook” (Lexisnexis Canada, 2007) and the Canadian Securities Institute’s
Individual Pension Plan Course. Peter can be contacted at 416.854.1776 or
peter@merrickwealth.com
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