Financial planning is a well-defined process that takes time and attention to detail to do correctly. Most CPA firms still don’t take this responsibility seriously and look to put in as little time as possible to maximize their realization rate. This is unfortunate for the profession, and even more so for the clients who feel that you’ve got their back, on all issues. The comprehensive nature of planning is even more important as your clients age and face a whole new range of issues that they weren’t concerned with during their working and accumulation years. Many of these issues are important to all of us. They are exacerbated by age for several reasons, not limited to the fact that time is not on their side anymore.
Cash flow is the lifeblood of any financial plan and life. As the planner, you should have a clear picture of what your clients’ cost of living and wish list look like. At the onset of a planning engagement, even the sloppiest planner typically prepares a cash-flow forecast to assess the longevity of their client’s financial resources. As we all know, some of the largest firms in the world think that this alone is financial planning; making sure that your green line leads you to the finish line with money to spare. We also know that stuff happens, and situations can change in an instant that make yesterday’s cash-flow forecast irrelevant.
An annual check on cash flow should be an ordinary part of your services. Start by looking at total spending as shown in their bank statements. Reconcile this with their actual income for the year and the taxes they’ve paid, and you can spot if something is materially deviating from the forecast.
It’s common for clients to overspend in the first few years of retirement. This isn’t typically a deal killer if it is recognized with a plan for when the additional spending may end. If they can’t stop spending, it’s your responsibility to let them know that they are on an unsustainable path that will not end well.
Prepare a cash-flow stress test. To stress test cash flow, revisit all the assumptions to see how any major changes may impact the long-term viability of your client’s income and expenses. The stress test would recast the forecast under a varying range of changing circumstances such as earnings on investments and savings, inflation on cost of living, large one-time expenses, family issues, home improvements, and the possibilities of a large medical or dental expense or a long-term illness.
This stress test is also important for your wealthy clients. The extent to which your client may be willing to utilize their unified credits by making material gifts during their lifetime is made more comfortable by understanding that there are plenty of other resources to maintain their cash flow desires.
Review all of your clients’ insurances. Life, health and long-term-care policies should be scrutinized. You want to know what they have, and whether it’s adequate, not needed or deficient. The same with their property and casualty coverage. This isn’t the ideal time of your clients’ lives to be underinsured. Make sure everything is current and adequate.
Estate issues
Keeping the estate plan current has profound implications. While your clients nod their heads and sign where they are told to by the attorneys drafting their estate planning documents, that doesn’t mean that they truly grasp all of the implications. Prepare a memo in plain English to summarize the power of the documents, all the moving parts, and the frequency with which you will review these with the client. This is one of the most important services that you can deliver for your clients. Don’t short-cut this process, as it may cause issues later that may not reflect well on the planning you’ve done (or not done).
Start the estate review with the presumption of a catastrophe hitting your client today, such as an accident, sudden death, or a diagnosis that will impact their ability to live independently. Most clients should have the following core estate planning documents: a will, trust(s), a durable power of attorney, a health care power of attorney, and directives. If your client tells you that they have a will, then it’s time to start digging.
The will may be important, but it shouldn’t really be the driver of the estate plan. A well-drafted estate plan will simply use the will of an elderly person to direct all assets that are not in trust to the trust. This is known as a pour-over will. Sadly, many attorneys do a half-attempt job, and let the pour-over will be the driving document. At times, the professional skeptic comes out in me as I ponder whether the attorney did this on purpose to drag the estate through the probate process for more billable hours. An elongated probate or, even worse, a family or beneficiary challenge, would really make all involved in the planning process look as if they didn’t care.
Check the appointed persons to see if they still make sense. If your client has their 85-year-old sister as their alternate trustee, it may be wise to change. Naming a trustee who’s younger, or perhaps an institution, may be appropriate for trusts with legacy language that may limit withdrawals. In this world of mergers and acquisitions of institutions, I prefer individuals to institutions. Institutions will be bought and sold, and you never know who is going to be the fiduciary for your beneficiaries. If you must elect an institution, make provisions for a potential trustee change down the road in case the institution doesn’t fit the bill at any point in time.
Does the trust have a trust protector? A trust protector is someone who is appointed to watch over a trust that will be in effect for a long time and ensure that it is not adversely affected by any changes in the law or circumstances. According to law firm Borchers Trust Law, “There are a number of reasons for appointing a trust protector. Having a protector allows a long-term trust to be more flexible and adapt to factual and legal changes. For example, beneficiaries may get divorced or die prematurely, or the law may change. A protector can also be helpful if you believe there may be conflict among the beneficiaries and the trustee, or if you don’t fully believe that the trustee is able to fulfill your wishes.” Trust protectors are common and appropriate in any trusts that are intended to last a long time.
Review beneficiary elections for the trust and any qualified assets. Ask questions to determine if the beneficiary elections are still appropriate. An example may be a beneficiary who has predeceased the grantor of the trust or a situation where the beneficiary is already wealthy and adding assets to their estate would only cause additional taxation. In the case of a predeceasing, do the heirs of the deceased beneficiary get the assets, or will the assets be redistributed among the other living beneficiaries? Ideally, any redirected assets to the children of a deceased beneficiary, for example, may be better delivered with spendthrift protection.
As we know by now, the SECURE Act has altered the rules for inherited IRAs. Ensure that the beneficiary elections still make sense and, if directed to a trust, that the trust specifically be amended to provide protection for the qualified distributions that now must be made by the end of the 10th year.
For many clients, they are the trustees of their own trusts until they pass or cannot serve. But what does the language inside the trust say with respect to replacing a trustee during a period of temporary or permanent incapacity? In my opinion, the worst language in the world is the most common language that I see, that frequently requires two board-certified doctors being willing to say that the client is incapacitated and unfit to act as trustee. This takes time, and competing forces can insist on a medical professional who will side with them.
I believe that a better way may be to appoint people in the trust, sometimes referred to as a disability board, who can decide if the trustee should be replaced. You can name people who know the parties well and can decide among themselves if the new successor trustee should take control. This may sound trivial to some, but several times in past years I’ve seen this language utilized for the benefit of the grantor and the beneficiaries. It becomes significant in the case of dementia or other memory-related issues where the client fails to see that there is a problem.
If you’ve had experience in this area, you know that the financial institutions themselves may be the biggest issue. They may or may not honor the language that you have in your trust. Find out now, before there’s an issue, whether your language works for them and obtain their answer in writing. If they claim that your trust language will not work, change institutions.
It would also be wise to have current durable powers of attorney for all clients, but particularly for elder clients. These documents are hardly the favorites of financial institutions, so be sure to keep them current. I’d suggest they be refreshed at least every three years. But here again, check with the financial institution now before any issues arise. It may also make sense to consider having the alternate trustee and the durable power of attorney holder be the same person.
Health care directives are important for everyone. These, like the durable power of attorney, should be kept updated. In addition to making sure that the directives are current, make sure that your client sends an executed copy to their primary care physician, and see to it that your doctor has that recorded and noted in your files. Furthermore, your clients should never sign a “canned” hospital or clinic health care directive. Clients should provide the ones you’ve properly executed with your planning team.
Both durable power of attorney and health care documents may need to be redone if your client changes their primary residence to another state. Get this done in conjunction with their move.
As clients age, it’s more important to review these documents annually or more frequently as circumstances change. The changing-situations conversation should expand beyond the day-to-day affairs of your clients, but also get into the shifting lives of any appointed persons or beneficiaries named in the documents.
A thorough review of your clients’ estate plans will almost always reveal deficiencies. At this point, your obligation should be to see that a qualified estate planning attorney gets involved to edit or draft what is needed. Do not let your client use their generalist attorney for this specialized work. Then, after everything is signed and executed, be sure that the titles to assets are changed to either be owned by the trusts or whatever other directives have been given by the planning team.
Once the plan is executed and funded, it’s a great time for a family meeting. You don’t need to get into specifics of the balance sheet unless your clients want it. But at a minimum, it’s a good idea to bring in the beneficiaries and other named parties to talk about what was done. Just like the client, they’ll probably forget by the one-year anniversary what you showed them, but at least you have set the stage for being in the center of this arrangement and a friendly face for them to call when the documents get called into action.
