Errol Tenenbaum of Robins Appleby LLP explains what can happen when high net worth clients don’t build a real plan
The biggest mistake that high net worth families can make in their estate plans is failing to build a plan in the first place. So says Errol Tenenbaum, Managing Partner at Robins Appleby LLP in Toronto. Tenenbaum explains that high net worth families and clients might avoid making concrete estate plans for a host of reasons, from the complexity of their estate to the difficult interpersonal relationships that might need to be managed in a plan. Complacency, he explains, can become an avenue to risk.
Tenenbaum outlined why avoiding plans can be so risky for clients and what advisors need to do to help motivate them to build a plan. He explained some of the mistakes advisors should avoid as they play a role in this process and outlined some of the issues and questions that can be raised to motivate planning on the client’s part. He emphasizes the importance of building an estate plan with the same core approach that advisors take with financial plans: focus on the unique goals and needs of the client.
“A plan is different for every client. A mistake that clients make and some advisors make is taking the one-size-fits-all approach,” Tenenbaum says. “So there is no one plan for sure. It really depends on the specific situation, in terms of the nature of the business, the nature of the family, and fundamentally what their goals are for their estate and their family. A plan is really built on understanding what they want and giving them the tools to understand what they need to think about.”
Why reticent clients need to be convinced to plan
Tenenbaum acknowledges that some clients may not want to do much advanced planning, or that the client might have thought about these issues without putting them into a real plan. Complexity can be a serious roadblock for clients, especially if plans need to be implemented during the client’s lifetime. A common strategy among some clients would be to implement an estate freeze, for example, capping the value of the shares they own in a business and passing additional shares that can accrue value on to their heirs. This helps mitigate the capital gains tax that has to be paid when a business is inherited by the successor generation.
The issue, Tenenbaum explains, can be that the client is unsure if the capped value of what they own in the company is enough for them to live on in retirement. Longevity and the cost of living can be uncertainties even high net worth clients have to grapple with, making final decisions on pre-death estate planning strategies like an estate freeze difficult.
It’s the job of lawyers and financial advisors to show clients where these strategies are appropriate. In the case of a client’s reticence to cap the value of their business as the primary asset they own, a financial plan could be a valuable touchstone to help show them what they need to live a long life in retirement.
Without decisions on strategies like this, the family is subject to the capital gains tax that comes from a deemed disposition. In the case of businesses built by the generation passing on, the value accrued could be in the tens or hundreds of millions of dollars. Huge liquidity issues can arise and force the heirs to make decisions they otherwise wouldn’t, such as selling assets from the business or the business itself. Even a relatively straightforward strategy like an estate freeze can go a long way towards mitigating the impacts of that tax bill, Tenenbaum explains.
Advisors’ role in building plans
While estate planning lawyers will lead in the execution of these plans, Tenenbaum says the financial advisor plays an important role. For advisors who have longstanding relationships with high net worth clients, Tenenbaum says they can issue spot and identify what the client’s goals really are. Advisors often have a deeper and longer-lasting relationship with their client than some of the other professionals who serve them, and that understanding can be powerful in making sure they plan for what matters to them.
For advisors newer to their relationship with a high net worth client or family, Tenenbaum says that the relationship and discovery process should involve conversations about estate plans and the goals a client has for their business and their family. Questions can be a powerful tool for advisors, and Tenenbaum says that asking clients if they’ve explored an opportunity to multiply the capital gains exemption for their business, or whether their business will meet those eligibility requirements, for example, can prompt further thought and discovery on the part of the client. Sometimes the conversations can be uncomfortable, but Tenenbaum believes that they’re conversations advisors must have.
“It is important for advisors to have those uncomfortable conversations, but I think it fundamentally starts at the most basic level with trust,” Tenenbaum says. “It's very unlikely that a client is going to be amenable to what could be a complex or involved plan, putting aside the emotional elements or otherwise, if you don't understand who they are and what their goals are and what they're trying to ultimately achieve.”
