6 reasons why there’s never been a better time to offer estate planning services

18 Oct 2022

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Advisers are ideally placed to act as the facilitator of estate plans for their clients.

If there were a prize for the financial advice topic with the most associated myths and misunderstandings, estate planning would have to be in with a strong chance.

“It’s all about what happens after death”, “it’s mainly about Wills and life insurance”, and “only a lawyer can do estate planning” are just some of the misconceptions that are preventing many advisers from getting more actively involved in the discipline of estate planning. Which is a great shame and a missed opportunity, not just because estate planning has long been one of the top advice needs of consumers^[1], but because the evolving social, cultural, and technological landscape is making the complexity of estate planning considerations, and thus the need for expert advice, greater than ever before. And arguably, no one is better placed to help everyday Australians navigate these complexities and optimise their decision making than financial advisers.

In this article, we will examine 5 macro trends shaping the estate planning landscape, and why these trends in turn present 6 key reasons for advisers to strengthen their estate planning offering now.

The key objectives of estate planning

Before we explore the 5 trends, it is worth briefly revisiting some common objectives in estate planning (many of which don’t involve an ‘estate’ as such):

ensuring that wealth is passed on to intended beneficiaries, and not unintended beneficiaries
optimising the taxation of wealth transferred
allowing for any special future needs of beneficiaries and protecting them in the event of their own challenges (divorce, bankruptcy, health issues)
providing for situations where decision making capacity becomes limited (for example due to dementia) through the use of ‘living estate planning’ mechanisms
optimising the provision of aged care
giving special consideration to a family-owned business, in terms of the ability/desire of family members to carry on the business, and any complexities relating to multiple owners.

As can be seen, there are a great many issues, many of them complex, that make effective estate planning beyond the realms of ‘do it yourself’ for the vast majority of people.

1. The great wealth transfer is underway, but it may go astray

Around the world, the great intergenerational wealth transfer will shift trillions of dollars in wealth from older to younger generations.

In the US, the quantum of this transfer is projected^[2] to be between USD $30 and $68 trillion over the next two or so years, whereas in Australia around AUD $3.5 trillion is expected to be handed down over the same period^[3]. By 2050, Australian Baby Boomers will be passing on an estimated $224 billion each year^[4].

While the majority of that $3.5 trillion may be a decade or more from changing hands, researchers from Queensland’s Griffith University have calculated that around half a trillion dollars is currently sitting with individuals aged 80 or older, the transfer of which is therefore likely to be imminent^[5].

Unfortunately, without proper estate planning, these transfers are unlikely to go smoothly, with the real risk of assets ending up with unintended recipients, tax reduction opportunities being lost, and the irreversible breakdown of family relationships.

Some of your clients may be the ones about to transfer, or receive, these inheritances, making their estate planning arrangements directly relevant to you.

Research conducted on over 3,250 families who transferred wealth found that 70% of intergenerational wealth transfers fail because no preparation of the successors was taking place.^[6]

And yet despite this, it is estimated^[7] that up to 70% of Australians don’t have a legally binding will.

2. Changing family structures make disputes more likely

As society and cultural norms evolve, so too are family and household structures changing.

According to 2020 Census data^[8], around 3.5% of families are ‘blended’, meaning families with two or more children, at least one of whom is the natural or adopted child of both partners, and at least one other child is the stepchild of one of them.

A further 6.5% of families are stepfamilies, where there is at least one resident stepchild but no child who is the natural or adopted child of both partners.

Collectively that means around one in eight families are step or blended, an increase of around 20% since the 2016 Census. Additionally, we are seeing a significant increase in grandparent led families, as well as the emergence of ‘rainbow’ families, parented by LGBTI couples.

Divorce rates are also on the rise, with nearly 200,000 Australians filing for divorce in the past two years, the highest number in more than a decade^[9].

This evolving complexity in family structures makes the recalibration of estate planning strategies even more crucial, with one expert believing it to be the main driver of an 80% increase in family disputes about wills and estates in the past decade^[10].

Critically, the application of the law in this area is also evolving, with a ground-breaking ruling by the Victorian Supreme Court in early 2022 putting parents of blended families on notice that their Wills must consider their stepchildren and not only biological offspring^[11].
The court ruled parents are under a “moral duty” to consider the financial well-being of children who come from another relationship, even when the offspring contesting the inheritance did not live with them.

3. The growth of SMSFs and associated estate planning complexities

The growth of self-directed investing, underscored by the surge in new, mainly younger, retail investors since the start of Covid, has also been mirrored in SMSF establishments, with ATO figures showing that FY21 saw the largest increase in the number of SMSF being established since FY18, with 25,312 new funds^[12].

Much of the growth has come from the 35 to 44 age group, which represented around one-third of all new establishments. SMSFs now account for around one quarter of all superannuation assets in Australia.

Aside from the complexities in managing compliant funds – which can often take new SMSF members by surprise – the rules around death benefits are different to those applying to APRA regulated funds, bringing different, more nuanced, estate planning considerations into play.

Some of the challenge lies in the ‘mum and dad’, nature of SMSFs.

According to the ATO, around 69% of SMSFs comprise two members^[13] (around one quarter are one member funds), with these members typically being life partners. It is also common for these members to be trustees of the SMSF, as well as executors as each other’s estate, creating the potential for conflicts of interest, and associated legal action, if the appropriate estate planning instruments are not in place.

One of these instruments is a binding death benefit nomination. An advantage of an SMSF is the flexibility for members to have binding death benefit nominations which do not expire or lapse, and which are not subject to the prescriptiveness of Regulation 6.17a of the SIS Act in relation to signatures and witnessing^[14].

A recent court case provided clarity around this and is highly relevant to SMSFs and financial advisers.

In Hill v Zuda [2022], the High Court dismissed an appeal by the daughter of an SMSF trustee, who had earlier tried to stop a death benefit being paid to that trustee’s widowed de facto partner, on the basis that the Binding Death Benefit Nomination didn’t comply with regulation 6.17a and was therefore of no effect^[15].

In dismissing this appeal, the High Court reinforced that regulation 6.17a does not ordinarily apply to SMSFs. It should be noted, however, that the regulation does apply to an SMSF where its trust deed refers to or imports the application of the regulation.

Another common scenario in SMSFs is choosing to make superannuation pensions reversionary on death. What on the surface can seem a sensible idea can actually remove a great deal of flexibility from the surviving spouse/member, and may create an unwanted tax burden, especially if transfer balance caps are breached.

These are just two of a myriad of evolving estate planning considerations applying to SMSFs around which most people would need up to date expert advice.

4. As our longevity increases so does the incidence of dementia

Robust estate planning isn’t just about what happens after death, it’s also about putting mechanisms in place should accident or illness rob us of the ability to make current decisions ourselves. This is becoming particularly important in the context of our ageing population; whilst we are living longer, the prevalence of dementia is also increasing (see Figure 2).

The essence of ‘living estate planning’ is the ability of spouses and children to easily – legally – make decisions on behalf of a person who has lost their capacity to do so themselves. Those decisions could relate to financial affairs, accommodation arrangements, and health care.

Health care and medical treatment can be a particularly sensitive issue. Each individual has their own personal philosophy on living and dying, and whilst the default objective of health care professionals may be to save a life at any cost, this may not align with the wishes of the individual themselves, for whom quality of life is more important.

It is for these increasingly common circumstances that the variety of ‘living estate planning’ instruments – such as Powers of Attorney, Guardianship and Advanced Care Directives are designed, and with which people need expert help.

5. Digital assets and digital wealth

A few years ago, a survey by the NSW Trustee and Guardian found that only 3% of Australians with a Will had decided what to do with social media accounts after their death^[17]. At the time, this finding was probably dismissed as amusing trivia.

Now, however, in our highly digitalised world, the concept of digital assets and digital wealth is becoming increasingly accepted, as is the recognition that – as with traditional wealth – digital wealth will form part of an individual’s estate. Digital wealth can include digital stores of value such as cryptocurrency, PayPal accounts, and even flight credits. Along with non-financial digital assets (including social media accounts which can have valuable connections and followers, and online photographs), digital wealth needs to be considered as part of a comprehensive estate and succession planning strategy, so that on their death or incapacity, their digital wealth together with their other wealth is dealt with tax effectively and in an asset protective manner.

6. The majority of estate planning work doesn’t require legal advice

Notwithstanding the obligations imposed by ASIC via RG 175, sections 354 and 403, many financial advisers perceive estate planning to be solely about the preparation and execution of formal legal documents, and as such, beyond their expertise and the legal boundaries of their advice licence. As a result, some tend to only give cursory attention to such discussions, generally recommending the client discusses their testamentary wishes with their lawyer.

In actual fact, neither assertion is true. Not all aspects of estate planning require the involvement of a legal professional.

Furthermore, whilst only qualified legal professionals may be able to execute certain documents, financial advisers are generally far better qualified to help clients make the actual decisions that are being codified in those documents.

This is because the financial adviser generally has a far more holistic understanding of the client’s family and financial situation, and also because most lawyers are not qualified nor experienced to deal with the vast range of estate planning issues that planners often see within their clients’ affairs.

One example might be the navigation of superannuation death benefits post the 2017 reforms^[18], particularly with SMSFs with pension and accumulation balances. Other areas where many lawyers lack experience and expertise include Centrelink, aged care, and taxation issues arising on death.

Arguably the most time-consuming parts of the estate planning process revolves around fact finding and decision making, based on discussions that require a familiarity with a client’s circumstances, and which do not constitute legal advice. As such these are discussions a financial adviser is well placed to facilitate:

appointment, selection, and remuneration of an executor
choice and selection of guardians and trust appointors
identification of beneficiaries and their special needs or circumstances
the identification of the client’s assets, ownership structures and the entities that control those assets
the distribution and control of assets to beneficiaries
superannuation interests and binding nominations
life insurance claims
relationship issues, including family conflicts and marital breakdowns
financial insolvency, and
asset protection issues.

Advisers are often the best placed to facilitate the estate planning process

Financial advisers are often in the best position to assist clients with estate planning issues because much of this information is usually within their files as part of their “know your client” duty, and because they already have the client’s trust. As such, advisers are well placed to project-manage and co-ordinate an estate planning process directly with their client.

In this process, the financial adviser is working with the client to identify estate planning issues and motivating the client to solve those issues with appropriate legal mechanisms, provided either by the client’s lawyer, or the adviser’s own legal services provider.

It is a model where the financial adviser is very much at the centre, allowing them much more control over the quality and integration of the process, minimising any disconnect between client intentions and outcomes, and allowing the adviser to deepen their relationship with the client and the client’s family.

A major benefit of moving into estate planning facilitation is that it needn’t carry any ongoing administration or compliance burden, involves minimal upfront costs to introduce within a practice, and no legal responsibility if managed correctly in conjunction with a competent estate planning lawyer.

It is also an opportunity for the adviser to demonstrate value and charge appropriate upfront fees (commensurate with what other professionals would charge in this area).

Of course, whilst estate planning advice is not in itself a financial service, it may give rise to the provision of a financial service or product, and the usual compliance guidelines will still apply to these circumstances. Plus, there are other boxes advisers still need to tick before such a move is made, including issues around your licensee, the limitations of your Professional Indemnity cover, and your ability to give tax advice.

In conclusion

Whilst many advisers believe estate planning to be the exclusive domain of legal professionals, in reality financial advisers are often far better placed than other professionals to facilitate the estate planning process, due to their holistic and more up to date understanding of the client’s financial and family circumstances. Whilst some estate planning documents should be left to qualified legal professionals, this generally represents the very end of a process of fact finding and decision making which is not classed as legal advice, and as such is a process which financial advisers are generally more than capable of managing for, and with, their clients.

Understanding this reality is increasingly important given there is an evolving context for estate planning which makes the need for advice – and therefore the adviser opportunity – in this area greater than ever before.