Strate­gies and tac­tics for deal­ing with a client’s fam­ily

Deal­ing with your client’s fam­ily

Accounting Today - - Contents - BY JOHN P. NAPOLITANO

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 as­set­man­age­ment 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. AT

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