Ask clients: How do youwant to be remembered?
Imagine asking someone on his deathbed how he would like to be remembered and getting the following response: "As a person who had an estate plan that saved taxes." Yet, that seems to be the overriding factor for many advisors when they recommend estate-planning strategies for their clients.
Avoid Lawyers Who Define
Saving Taxes As Estate Planning
When referring estate planning attorneys to
our clients, we look for professionals who are not only technically
proficient, but who also understand the human nature of estate
planning. Recently, a law firm that we have used with good results sent
an attorney to work with one of our clients. The lawyer we usually use
in that firm was on a leave of absence, so they sent a replacement.
Since it was the first time we worked together, I decided to have a
brief meeting a half hour before the client was to arrive, to make sure
that we were "on the same page." I told him that what I liked best
about his colleague at his firm was the holistic approach he took, and
that taxes didn't drive every recommendation that he made. He agreed
that that was the best approach to take, so I described my client's
situation to him.
This was not a complicated case. My client (we'll call him Alan) was a single father who had custody of his 12-year-old son. He told the lawyer that he wanted his assets to be placed in trust for the benefit of his son and that his two sisters should be co-trustees. Everything seemed to be moving along fine until the lawyer began to ask questions about what would happen to the money if neither Alan nor his son were alive. Alan told him that he would want his estate split evenly between his sisters. "What if one of your sisters dies, do you want her share to go to her children (per stirpes) or to your other sister?" the lawyer asked. Alan didn't need to think about this, and he answered that he would want the surviving sister to inherit the assets.
"That's not a good idea," the lawyer responded.
"Why?" Alan asked.
"Because your surviving sister may have an estate tax problem if she were to die with all of that money in addition to other assets she may have," the lawyer answered.
This was the holistic, non-tax-motivated advice that he promised he would give my client. Let's summarize his recommendation: Leave your money to someone else just to save taxes. It would have no impact on your assets, or even on your sister's. But it may affect the money she may be able to leave her children-children you have already told me you do not care to have inherit your money! What, I wondered, would he have advised if we did not have the brief meeting before the client arrived?
An extreme example? Perhaps, but it actually happened, and it illustrates the obsession many attorneys have with taxes when they do estate planning. Of course, I interceded on my client's behalf and, regardless of how remote the possibility was of these contingencies occurring, his estate plan reflected his desires and not the lawyer's tax-motivated strategy.
Focus On Their
Goals-Not Their Tax Bill
Some financial planners are also quick to jump to tax savings strategies before understanding what their clients' desires are. In June 2004 my son, A.J., decided that he wanted to move to California, where he lived for three years and met his wife. He was a stockholder in our firm, so we had to buy his shares in accordance with our company's stock redemption plan. He joined a financial planning firm in Newport Beach. This, of course, was a blow to our business. Moreover, having A.J. and my three grandchildren 3,000 miles away was going to take a huge personal adjustment. At a national meeting, a planner who knew A.J. asked about him and I informed him of the move. Now, this planner could have asked how A.J and his family were adjusting to living on the West Coast. He could have inquired about how our firm was replacing him. He may have asked me about how I was doing and what it was like to have my grandchildren so far away. Instead, he said, "I guess that messes up your estate plan." I am not even sure what he meant by that. (My estate would increase because of the additional shares?) I only know that I would not want to be his client! Are we so well trained in the technical issues that we lose sight of the more important human side of planning?
While it is certainly our responsibility to discuss the tax effects of estate planning decisions our clients make, our first duty is to understand what their desires are regardless of the tax consequences. Too many planners are quick to recommend credit shelter trusts, irrevocable life insurance trusts and other tax savings strategies before having an in-depth conversation about what is most important for their clients.
An obvious example would be in the case of a second marriage. While it may be tax-efficient to take full advantage of the marital deduction and maximize the unified credit with a trust, many of our clients may want to leave the major portion of their estates to their children, even if it exceeds the unified credit. We need to be open to that scenario, and avoid proclaiming, as the attorney did in the above story, "That may not be a good idea."
Is it our responsibility to point out the tax implications of that decision? Of course. But to attempt to change their plans just to save taxes would be a classic case of "the tail wagging the dog." I have asked many estate-planning attorneys what they would do if the estate tax were repealed. Most have told me that their practices would suffer, if not die, because the basis and motivation of most planning was the avoidance of estate taxes. One lawyer, however, told me that it would liberate him to concentrate on what really matters to his clients. Taxes, he said, are too often the overriding factor in planning and more planners need to focus on their clients' legacy. Amen!
Understand Their Motivation
Marcee Yeager, a CFP licensee who practices in the San Francisco area, tells a story that clearly demonstrates that it often takes time to completely understand our clients' motives, and to help them to get what they want, regardless of the tax effects. In this case, her clients, Joan and Dick, were recently married-both for the second time, with children from their previous marriages. She had inherited a family trust and was wealthy, but he had little left from his divorce settlement. He earned his money by buying real estate, remodeling it and selling it. When first asked what he wanted, he told Marcee that he wanted everything he owned to be in community property because he believed in the marriage partnership. So Marcee told him how that would work. Then he said, "O.K., but now my kids will get nothing."
She suggested that he purchase life insurance for their benefit. He thought that was a good idea, until he objected to paying premiums just to insure that his children would get money. She couldn't get him to articulate what the real issue was. On the one hand, he wanted everything in community property. On the other hand, he felt poor, because "what's his is hers and what hers is hers." No matter how many plans were devised, he refused to sign off on any of them. It was becoming apparent to Marcee that something that he wasn't sharing was bothering him, so she stopped suggesting solutions and began to concentrate on his issues.
She said, "I need your help. You are torn between two conflicting goals, and I need clarity about what is troubling you so I can make this work for you." After several meetings and much discussion, he told Marcee, "I feel so guilty for having gotten a divorce and so angry about the effects of that. Having to give my ex-wife so much of what I owned and being estranged from my kids has caused me to be anxious about money. My new wife is rich and can support me, but I am an old-fashioned guy and I'm torn up inside over this."
It was clear to Marcee that they needed an estate plan that would consider these feelings, and that taxes had no bearing on these feelings. She said to him, "Your wife has money from her inherited trust. You have money from your business, which is a sole proprietorship. Since this asset is now community property, let's have Joan (who agreed) sign the entire business over to you so you can leave it to anyone you want in your will. You will know that what is yours will remain yours and what is Joan's will be hers. You have both agreed that you would want the house (which was owned solely by Joan) to be owned jointly."
The essence of this plan is that both Joan and Dick are happy and feel in control. Her assets will go to her children, and his estate to his kids. She uses her money for their support, and Dick's money is used for "fun" things.
This was a successful plan because Marcee stuck with it until she got it right, and had the competence and creativity to offer the solution to a problem that many estate planners never would have uncovered. Imagine how this would have turned out if Marcee had clouded the process with a discussion of the estate tax laws.
End Of Life Questions
We all know the adage about not getting a second chance to make a first impression, but we do get an opportunity to alter people's opinions of us later. One thing is certain, however. When leaving a legacy, you never get a second chance to make a last impression.
The Mayo Clinic lists "The Three Big End-of-Life Questions":
1. What was the meaning of my life?
2. Did I make a difference in the world?
3. What is my legacy to the world?
When approached properly and asked the right questions, it is our experience that people are more concerned about how they will be remembered than how much tax planning they did before they died. It is our job, as financial life planners, to remind our clients of this, and to make sure that their estate plan and the legacy they leave reflects their core values.
Roy Diliberto is chairman and founder of RTD Financial Advisors Inc. in Philadelphia.