Working with the procrastinator client in financial planning

To some clients, just about anything is more important than tidying up the loose ends of their business and financial plans. My fear of the procrastinator client is that if — or should I say when? — the mess hits the fan, then whose problem is that? The client or any succeeding member of the business or family may feel that the clients’ incumbent team of advisors is to blame. They may also feel that the incumbents are not very good if something bad happens that was avoidable or protectable. I’d like to sort out a few of the most common procrastination areas for clients and share my thoughts about firm risk mitigation and best practices.

One of the easiest topics that your busiest clients easily dismiss is updating their estate plan. This is especially true if the plan isn’t that old, but you recognize it as inadequate or in need of improvement and updating.

If you are the financial planner for the client who is dragging their feet about updating their estate plans, you are responsible for laying out the optimal estate plan. There’s no avoiding it if you are in fact engaged as the financial planner. Just like any other engagement, your best defense is a great offense. Make sure that your written advice to the client regarding the recommended changes to their estate plan is clear and delivered to the client, including any spouse or partner, and that you document your conversations.

While updating documents that clients may have paid a pretty penny for just a short while ago isn’t optimal, neither is an inadequate estate plan. The following are the areas where I find most of the estate plans that I review appear inadequate:

Trusts that have assets going to children too soon. The old-school way of giving half at 25, and the balance at 30, or some other weird age-based strategy, is flawed as it provides no asset protection against that child’s bad decisions or potential future divorce. A better way is for an independent trustee to have the reins, putting a shield for the child that may protect against some future problems. You can give the right to change trustees to your beneficiary at a specific age, getting them de facto control if they feel they need it.

Not having language in the trust to protect against a second marriage of a widow or widower. A well-thought-out trust would require the surviving spouse to sign a trustee-approved prenuptial agreement or run the risk of getting cut out as a trust beneficiary.

Beneficiary elections that are improper. The worst that I’ve seen is a former spouse who was still named as the primary beneficiary of a large retirement account. After a prolonged legal battle, the ex-spouse kept half, and the balance went where it should have gone. Even the common naming of a spouse with the balance directly to children may not be appropriate given the children’s ages, life circumstances, and amount of the underlying asset. We are talking about more than IRAs here: This applies to all qualified accounts, as well as any life insurance or annuities that your client may own.

Titles to assets are not optimal. To me, nothing is more negligent on the part of an attorney than drafting an estate plan and not following through with the changing of the title to assets. When we see assets in joint or individual names, we try to get them retitled to the clients’ revocable trusts. This would include any homes, ownership interests in a business, and any financial accounts including life insurance policies. As for beneficiary elections, in most cases making the trust the beneficiary helps govern those assets the same as the balance of your clients’ estate.

Not having any legal documents for children over the age of 18. Just because they are your client’s children does not mean that a hospital near their out-of-state college will talk to your client about their condition should they get injured or fall ill. Their adult children should all have a durable power of attorney as well as health care powers of attorney. Also investigate any states where the child may be staying to see if any state-specific documentation needs to be in place.

More foot-draggers

Your clients who own businesses, particularly the more successful ones, also drag their feet on certain issues. Typically, getting a business owner to act is easier than an individual, so for them it may be more about issues that they just didn’t realize were open. For example, most businesses have operating agreements that address many important issues among the owners, but most businesses also put those documents on the shelf the minute they are executed and never look at them again or until there is an issue. Some of the more common deficiencies in these agreements are:

• Weird entity valuation language. Older documents will frequently ask for several valuations, where the highest and lowest get tossed out with the middle one being used. Some use dated formulas or have dated actual valuations that have no resemblance to the real value. Suggest that their document be updated with a real valuation agreed to by all owners that is updated annually by board vote, with a new formal valuation performed every three years.
• No language regarding compensation during times of disability. While this may be better addressed in the context of a salary agreement, your client probably doesn’t have anything like this, either. I like to see language that helps to define compensation to owner-workers during times of disability. I also like to address the ownership structure should a partner become permanently and totally disabled.
• No real succession plans. While a shareholder or LLC agreement may define what happens to one’s ownership after death or disability, it frequently doesn’t get into the weeds about who will succeed whom. The creation and subsequent communication of a real succession plan is something that eliminates confusion among staff, clients and stakeholders.

I realize that calling your client a procrastinator may be a bit judgmental. It is possible that they don’t realize that many of these issues need addressing. And if that is the case, and they call you their financial planner, make sure your errors and omissions insurance is adequate and current!

Lagging on insurance

Another area where procrastinator clients like to kick the plan down the road is with risk management and insurance. I feel that risk management in general may be one of the most overlooked areas of scrutiny for financial planners.

Common risks that we find clients delay addressing can frequently be fixed quickly, and include the following:

• Having no home insurance. Some people without mortgages brag that they have no mortgage, and therefore they don’t need home insurance. Well, I witnessed Hurricane Ian firsthand, and later learned about people who were totally wiped out because they formerly bragged about not having a mortgage and not needing insurance. Please check to see if your mortgage-free clients have adequate home coverage.
• Ownership of rental properties in individual, joint or a nominee realty trust. While most landlords pay attention to risk management at the site, they don’t think about how any risks at the site may impact their other personal assets. A protected entity such as an LLC may offer better asset protection by preventing contagion from the LLC assets to your other personal assets. If there is more than one owner of the rental property, your client should also have a written agreement with that partner that addresses all the pertinent issues.
• Inadequate life insurance. While you can’t get life insurance in a day, you can assess the need in a minute with even the simplest of financial tools. Make sure that your financial plan determines the need for each spouse, analyze their current holdings, and then make recommendations for what is needed. The most common misses with life insurance are not having enough coverage and having no coverage on a stay-at-home spouse.
• No umbrella liability coverage. Not having umbrella or catastrophic liability coverage today is not a good planning decision. This coverage is not very expensive for most of us and will prevent a complete financial meltdown if the client has a catastrophic loss from liability.