We're still in the first quarter of 2002, but the odds are good that most New Year's resolutions-not having that second piece of chocolate cake, working out twice a week, finally learning Spanish-already have been conveniently forgotten. For financial advisors and their clients, however, there's one resolution that needs to stay at the top of the must-do list in this and every year: estate planning.
Because of the amount of money people made in the stock market over the last decade or so, the growing awareness that even baby boomers get old and die and the feeling of mortality accentuated by the events of September 11 there seldom has been as much interest on the part of the affluent to get their estate plans in order. Now it's up to their advisors to help turn that interest into action before another distraction comes along and estate planning is put off once again.
Outdated Estate Plans
A few years ago we conducted an extensive survey of the affluent and their advisors about estate planning and the statistical storyline is still very much valid when it comes to getting a perspective on the subject. We asked 356 people with at least $1 million in investable assets whether they had an estate plan, and 327 did. But almost three-quarters of that group - 73% - had not updated their plan in at least three years. At the same time, 84.7% of them said they had become wealthier in the last three years. In other words, their estate plans did not reflect their current affluence, and that could mean big trouble for beneficiaries if their rich relatives died before revising the plan.
Plenty Of Excuses
It's easy to understand why people put off estate planning. To begin with, no one likes to spend too much time thinking about their death. An estate plan also entails wrenching decisions about who gets what and who gets left out, particularly dicey issues if a lot of money or a family business is involved. Finally, estate planning for the affluent is very complicated from the tax and legal standpoints. It requires a team that generally will include, in addition to a financial advisor, an attorney, an accountant and an insurance agent. That's a lot of people to have on the payroll for a job that clients would prefer to ignore.
Why Updating Matters
If well-articulated, however, the case for an updated estate plan is far more compelling than the one for ignoring it. After all, an updated and comprehensive estate plan enables clients to:
Safeguard the best interests and lifestyles of spouses and children;
Establish a legacy;
Make sure that their wishes and intentions are followed;
Help reduce or eliminate estate taxes;
Avoid the time and cost of probate;
Have someone on board who can take charge of their affairs if they become incapacitated;
Protect their family's privacy by keeping the estate out of court.
If that list isn't incentive enough for a client, introduce them to someone whose parents have died without an updated plan in place, leaving behind a legacy of higher taxes, legal fees and acrimony among squabbling heirs.
As mentioned earlier, there are other reasons to get an estate plan in order. For starters, despite the two-year downturn that we're still in the midst of, anyone who had money in the stock market throughout the 1990s is considerably richer than a decade ago. Indeed, even with the Internet bubble and the official recession, as we began 2002, stocks were just about where they were in mid-1998, when the bull market was considered to be in full swing. As a result, though there is an ongoing debate about the exact numbers, almost everyone seems to agree that there have never been as many millionaires in America as there are today. And the more money people have, the more they need estate plans designed to lessen death taxes.
Baby boomers and their parents also are beginning to get older and die. We've all heard about the multi trillion intergenerational transfer of wealth that is under way as the parents of baby boomers die, but the recipients of that bonanza also are getting on. Those baby boomers who are putting off their estate plans because they think they have plenty of time to get their affairs in order need to face up to the actuarial facts.
Then of course, there's September 11. A study of affluent investors that we conducted in the two weeks after the attack showed that estate planning was at the top of (and very often the only item on) their immediate financial agenda. Of the 1,952 respondents with $100,000 to $1 million in investable assets, 29.6% said they planned to update their estate plans, and of the 417 affluent investors who had more than $1 million investable assets, 33.1% said they planned to do the same. These admittedly are not great percentages, but they still are ones that are above the norm. More telling, when we asked clients what they had talked about with their advisors following the terrorist attacks, there was only one financial topic in the top five: estate planning, which easily outdistanced the state of the stock market or the investor's portfolio as a subject for conversation. Anecdotal evidence tells the same story-lawyers, accountants and advisors all have been fielding more calls than usual about estate planning since September 11.
The First Five Steps
Given all the arguments in favor of a current estate plan, the next question is where to start. There are some obvious, rudimentary steps that everyone should take, including writing a will, naming an executor and leaving a paper trail. It's also a good idea to get clients to act now. That's because, whether it's gifting stock to a favorite niece or taking out a life insurance policy, the sooner people act, the more their estate-and their beneficiaries-will benefit.
Though most wealthy people have an estate plan of some sort in place, Gary Rathbun, CEO and president of Private Wealth Consultants Ltd. in Toledo, Ohio, nonetheless suggests starting with the basics. Rathbun, who works with clients with $5 million or more in investable assets, has been in the business for 20 years and written books on the subject. Here are the five steps he puts at the top of the list:
1. Set Up An AB Trust : "The AB trust is an absolute given, a staple. It takes full advantage of the Unified Tax Credit, helps avoid probate on most assets and ensures privacy. Because it's revocable, it's also easily altered or even terminated."
2. Write A Will : "A living trust is essential, but it doesn't completely replace a will. Anything that doesn't have a title, personal items such as jewelry and furniture, for instance, can't be held in trust, so you need a will to make sure they go where you want them to."
3. Assign Durable Power Of Attorney For Your Financial Affairs: "You should always have someone designated to act on your behalf in case you're hurt, ill or simply out of reach. It's only valid while you're still alive, and it's usually a spouse. If not, make sure it's someone you trust because they could do a lot of things, including selling your house without your consent."
4. Assign Durable Power Of Attorney For Health Care: "This is different from the regular power of attorney because it only relates to health care-and it's not yet available in every state. Essentially, you entrust someone to dictate the way that you want to be treated by doctors, covering whether you might not believe in transfusions for religious reasons or think it's OK to be treated with an experimental medicine."
5. Write A Living Will: "A living will addresses the way you want to be treated, particularly as it relates to life-prolonging procedures. Unlike the durable power of attorney for health care, you're not naming someone else to make decisions for you; you are, in effect, making the decisions for yourself in advance. It's an important document because such a set of circumstances can have a devastating emotional effect on your family and a serious financial impact on your estate."
The Advisor As CFO
Finally, it's essential to remember how important a role a financial advisor plays when it comes to estate planning. The argument over whether to involve an advisor in estate planning doesn't need to be made any longer. Affluent clients realize the complexity of the estate-planning process, particularly given the regular changes in tax laws. In fact, those advisors who are not proactive when it comes to estate planning may end up being blamed by their clients for not pressing the subject.
A few months ago, we wrote an article suggesting that financial advisors were in a great position to improve client relations by taking the lead on estate planning and being the CFO of the estate planning team of accountants, insurance agents and attorneys that affluent clients need. Our research had shown us that affluent clients want someone to do just that, and with their understanding of the client's financial picture and their network of professional contacts, advisors were well-suited to the job. Assuming the leadership role also is a great way for advisors to enhance client relationships and get referrals.
In sum, clients should have an updated estate plan, and advisors are the ones who actively should be promoting the process. The message for those clients is time-worn but still pertinent: Write your will as if you're going to live forever, then take into account the fact that you may drop dead tomorrow afternoon.
Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.