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
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.