A Changing Landscape
Addressing Trust, Estate Planning and Wealth Management Issues
An aging population, a revised tax structure and an improved economic picture are changing the landscape for trust and estate planning, and wealth management services. To address these issues, South Florida Legal Guide held a roundtable discussion on “Trends in Wealth Management, Trust and Estate Planning” with leading professionals on September 16. Sabadell United Bank hosted this special event for our Financial Edition. Editor Richard Westlund moderated the 90-minute discussion, which featured comments from six participant
For participants Bios please follow this link: Bios
- Fredric Hoffman, shareholder, Cohen, Chase, Hoffman & Schimmel
- Nancy K. Watkin, member of Berger Singerman
- Robert Judd, shareholder, Hackleman, Olive & Judd, P.A.
- Stanley I. Foodman, CEO, Foodman CPAs & Advisors
- Jerome Wolf, partner, Duane Morris
- Orlando Roche, regional president, Sabadell Bank & Trust Miami-Dade County
- Richard Westlund, editor, South Florida Legal Guide
Q. What trends are you seeing in South Florida and the nation that will affect demand for wealth management, trust and estate planning services in the next few years?
Judd: In South Florida, we see a migration of the senior community northward. I make regular trips from Fort Lauderdale to Vero Beach and Jupiter these days. Also, South Florida has a higher percentage of seniors than other parts of the country. As the Baby Boomers age and retire, the demand for accounting, investment and legal trust and estate services will increase. Another trend that I see in Fort Lauderdale is a dramatic increase in the number of same-sex couples relocating to Florida, including those who have married in other jurisdictions. While waiting for Florida to get on board with that national movement, they need to look at their statutory rights and make plans to provide as much protection as possible through legal documents.
One of the unusual aspects of our community is that with the large number of retirees we have many second marriages. That usually makes the estate planning dynamic more interesting because you are usually dealing with a second spouse and children from the first family. As a result, there is a high level of litigation, and you have to be very careful in preparing plans and documents. Another issue is that Florida is basically a no-tax state. Therefore, we are often dealing with the double domicile issue. That’s why the New York Tax Commission’s representatives ride up and down I-95 looking for New York license plates.
Hoffman: All these points are right on target. In addition, we see a lot of second- and third-generation Miami residents buying substantial homes in states like Colorado, Massachusetts and California. They want to spend several months of the year in those homes, while maintaining their Florida residency. In South Florida, we also see a tremendous amount of financial abuse of the elderly. That may be because many retirees don’t have family members living nearby. Finally, we see a lot of trust modifications in our practice. There is a large movement of wealth to the younger generations, whose expectations are very different than their parents. Those situations call for a far higher level of professional advice than most people are used to getting.
Watkin: The elderly population is growing more rapidly than other demographic groups. The U.S. Census Bureau has estimated there will be 86.7 million Americans age 65 or over by 2050. So there will be far more Boomers with estate planning on their minds. However, I have found that the bulk of my estate practice now falls into the $10 to $20 million range. I have found that it takes more time to counsel clients today. They come for tax advice because they don’t want to give anything away. The dynamics of our field are different than they were before. Also, when you layer in the international component — advising people who are part time U.S. residents — you get a level of complexity that you don’t see in other metro areas.
Foodman: Elder abuse is a large component of my forensic practice, as I am called in to follow the money in these cases. Many times it is family members who are abusing the elderly. That’s one aspect of the graying of America.
I also see a lot of inward-bound people with substantial assets. They work with an immigration or real estate lawyer to acquire a big piece of property without getting any tax advice at all. As a result, they end with a structure that cannot later be unwound very easily. If the owner passes away and is still a non-resident alien (NRA), none of the estate issues are considered. The family is usually shocked to learn about the federal estate taxes. We see a lot of that because we do a lot of work internationally. Another trend is that the generation of Baby Boomers has not saved at the same rate as our fathers did. In addition, our children have a different set of expectations, wanting to have it all now. That’s creating a lot of stresses for estate planners because many people in South Florida are income wealthy, but not asset wealthy.
Roche: Even though our private banking clients have significant wealth, they need to address a wide range of issues. For instance, people are living longer, which means they need more money to maintain their lifestyle and cover future medical expenses. Also, with interest rates so low now, it’s difficult to create a portfolio with a significant cash flow. As people get closer to retirement, they tend to go from a more aggressive equity position to a greater emphasis on fixed income. Because the stock market is basically a mechanism of supply and demand, we all have to be careful and watch for a potential correction there. From a trust point of view, grantors are living longer so there is more importance in lifetime documents, healthcare surrogates and living wills, especially in the gay community. Because many residents don’t have family members close by, fiduciary services are becoming increasingly important. On the wealth side, Miami has always had strong international ties, but today it is really a global city. Our economy benefits from the wealth and intellectual capital coming here, including an greater inflow from Europe, Asia and the Middle East. I like to say that Miami is one third international, one third domestic and one third that is somewhere in between. These wealthy families need a good international banking platform with professionals who understand their culture.
Q. The national economy has improved since the recession and people are feeling better about their financial positions. How has that affected your practice?
Judd: I have observed an increase in philanthropic planning, including the creation of private foundations, charitable trusts and donor advised funds. To add to that, the gay and lesbian community in Fort Lauderdale created a foundation called Our Fund and serious dollars are flowing into causes perceived as LGBT friendly.
We are at a watershed time in the industry. Historically, estate tax rates have been very high — 70 percent and then 55 percent, and planning strategies have focused on minimizing estate taxes. Now, with estate taxes at 40 percent and an income tax rate of 38.6 percent for high earners, you have to look carefully at both aspects. That has resulted in a shift in how we look at estate planning for our clients. Another change is that estate planning was usually aimed at one creditor — the Internal Revenue Service. But wealthy people recognize that they have other creditors, and asset protection is one of their growing needs. For instance, in Boca Raton, a child who turns 16 gets a car. Because the child is a minor, the father buys the car. Then when the child has an accident one night, the father finds himself on the hook, because wealthy people don’t have fender-benders. So, many people with assets in the $10 million range are more concerned about protection from creditors than minimizing estate taxes.
Hoffman: Our practice includes many doctors and professional corporations, and we have been helping them with asset protection strategies for many years. But we have also seen a change in recent years as other wealthy individuals are trying to avoid being a litigation target.
Another trend is that we used to do a lot of estate planning for families under $3 million in net worth, which is the vast majority of people. We are not seeing them anymore, because they use the Internet to shop for price without understanding the benefits of working with an estate planning attorney. For example, one couple paid $150 for a will that failed to recognize that Florida has a homestead law. As a result, everything they did in the will doesn’t work. I think these low-cost documents will proliferate in the next few years, though, and result in a lot more litigation. As we all know, family members will fight over almost anything, regardless of the size of the estate.
Watkin: With the changing tax laws, I am finding more clients who are redoing their estate plans. In some cases, they no longer have taxable estates, and there may no longer be a reason to put their assets in a trust structure. Other clients need to revisit their plans after a change in their personal situations, particularly when they involve blended families. For instance, does it make sense for a child from another marriage to control a trust with the current spouse as beneficiary? Another issue is who should be the trustee? Is it someone who is able to handle that role? I still see a pushback from clients in regard to corporate trustees because of issues relating to cost and control. But the biggest wealth preservation issue I see is when parents don’t like the son- or daughter-in law. They want to care for their child or grandchild, but don’t want the spouse to have access to those assets if there is a divorce or another issue arises. Finally, we are talking with more clients about prenuptial and postnuptial planning. It’s particularly important for same-sex couples in Florida. These are some of the ways our practice is changing.
Foodman: Everyone looks at accounting services as a commodity, so we have developed a niche in serving the international sector. Our referral business has grown dramatically because so many wealthy international people are fleeing economic or political instability. The U.S. is still considered the most stable haven in the world, and many clients want to start a business or make investments here in South Florida. While all the estate planning issues should come up right from the start, all too often our international clients don’t realize what’s involved with our U.S. system. So, I reach out to tax attorneys who do international tax and estate planning and can help them with their plans.
Roche: In private banking and wealth management, clients are looking for greater simplicity and transparency in the investment platform. In our world, passive investments can play a big role because there is a lower cost for the client. We also try to find them the right actively managed accounts.
In Miami, there is a great deal of younger wealth from successful entrepreneurs and professionals. They are investing in real estate, private equities, and other assets, as well as lines of credit for the business, and value one-stop service.
Q. Let’s look at the need for education. Clients don’t understand what they need in terms of estate planning services or appreciate the help a professional provides. How do you address that issue?
Hoffman: That’s what I came here to learn! That’s a great question, because it is an extraordinarily difficult task. Last week, we got a referral for a client who was going to inherit $2.3 million from her father, who had a second wife. He had an irrevocable trust agreement prepared in another state that did not take into account Florida’s elective share rules. She wanted to get a second opinion from us after her father’s lawyer in Melbourne said she would have to give up 30 percent of the estate. We looked at the documents, and told her that she didn’t have to give up anything. At that point, she asked if should retain us on an hourly basis so she could call from time to time if she had other questions. The issue of fees seems to drive other clients, too. We were called by a business owner who wanted to liquidate a $2.5 million company. Another attorney offered a lower fee, but was not qualified to give the owner tax advice, which was an important consideration in the transaction. We also have clients worth $150 million on up who don’t understand that they need an institutional trustee for a generation-skipping trust. So in all these kinds of situations, we spend a lot of time talking to clients about the benefit of using a qualified and experienced attorney.
We usually get paid from the client’s personal checkbook, so we are sensitive to fees. We often do fixed-fee work, but in those cases we rely on our partners, including financial advisors, trust officers and accountants, to help educate the client and develop the financial profile. Those clients know why they are talking to us and understand the value of our services.
Hoffman: We have started to quote clients a fixed fee for their documents, but an hourly rate to get to the point where we know what we’re drafting. That reassures the client and protects us in case it requires many hours of initial work. I send those clients an engagement letter and a memorandum that outlines the documents we will provide, and have been successful with this approach.
Watkin: We quote an hourly fee for the planning and a fixed fee for the components. We have also learned to add language to the retainer agreement outlining that our fees are based on the “agreed-upon planning”, in case they decide later on to change direction and ask us to work on a new plan.
Foodman: My engagement letters are very detailed, and lay out what documents we are preparing and the time we expect to spend on the documents. In many cases, clients like a fixed-fee for the initial work, and go over to hourly as we continue to work together.
Wolf: I am active in the Real Property, Probate & Trust Law Section of The Florida Bar. A few years ago, the Supreme Court of Florida asked us to look into whether or not it made sense to create statutory forms for wills and living trusts. We debated the topic for a year and decided the answer was no. If you have a form, someone will forget to check a box or fill in an important answer, as evidenced by a major case involving a person who downloaded and printed out a will from the Internet but never filled in the residual clause. We concluded that having statutory forms would do more harm than good.
Q. Please comment on the importance of bringing together a collaborative team of professionals who bring different perspectives to the table.
Foodman: We strongly believe in a collaborative approach, and bring in attorneys, insurance agents, bankers and wealth planners, depending on the engagement. Nobody knows everything, and the client benefits from a team approach. However, this is not always an easy task. Everyone at some point in life has been angry at an attorney, a CPA, a stockbroker or an insurance agent. It’s amazing how difficult it can be to create a team and educate the clients that you’re doing this for their benefit — especially when clients start counting every penny.
It is super important to create a team of professionals for your clients. Wealth management, for instance, covers a big umbrella of services. There is often a need for attorneys, real estate experts, antique and art dealers to get involved. We make it a point to get to know the other professionals well and foster ongoing communication. In many ways, it’s like creating an unofficial family office for these clients. That’s also very helpful with estate planning, because by the time they reach out to an attorney, much of the research and valuation work has already been done. Plus the clients have a better understanding of your services, making it easier for you to draft the legal documents and give your legal opinions.
Foodman: Orlando makes some great points. Recently, we were called by a probate lawyer who asked us to prepare a return for the client’s $12 million estate. He sent me the detailed inventory and after looking it over, I told him that he would need to hire an art appraiser, a real estate appraiser, and real estate market analyst because the residential property in the estate was a teardown. The attorney had never handled an estate of this size and had to go back to the heirs and explain why there needed to be a significant increase in the fees for the return. I also recommended that the attorney recommend engaging a tax attorney, because that was not one of his practice areas.
Q. In your experience, do attorneys and accountants have their own estate planning documents in place?
Judd: I have found that accountants in particular are very diligent about putting plans in place. Attorneys are also generally good with their planning, although sometimes they will come in on a Friday before leaving town for a week and want to put something in place immediately.
Q. How often should estate planning documents be updated?
Judd: Generally, people should review their plans whenever there is a significant change in the asset mix or a change in their lives. That might be a marriage, or the birth of a child or grandchild. If you are an attorney advising a client, though, you need to consider your representation agreement. Most attorneys want to avoid the continuing liability of reaching out to all clients and asking them to get in touch whenever there’s a major change. Therefore, the representation agreement usually will include language that puts the burden of updating on the client.
The issue of when your representation ends is a hot topic today in estate planning legal circles. If you have an engagement letter from a client, do you have a duty to notify two years later when a change in the tax law occurs? In other words, how long do you need to continue to advise them?
Hoffman: One thing for sure — clients think representation continues far longer than the lawyer does. We suggest that they see us every two years, but we also let them know that in most cases our representation ends 30 days after they signed their documents. After a year or more goes by, we don’t know if they are still our clients or not. In fact, if they are not our clients, sending a letter might be construed as solicitation.
Foodman: As CPAs, we see our accounting clients at least once a year. The AICPA (American Institute of Certified Public Accountants) recommends that you have a new engagement letter every time a client gives you a new shoebox full of documents. We also send clients an annual organizer that includes a list of questions related to estate planning, such as assets acquired, changes in ownership and offshore structures. However, it’s safe to say that if we haven’t heard from someone for two years, they have terminated our representation. Then, when they call us ask for a copy of last year’s return, we send a thank-you note, which states that our representation has ended.
Q. For many business owners, the sale of a company provides significant funds for retirement and estate planning. Why should the owner bring in tax, accounting and estate planning professionals right from the start?
Watkin: That is very important for a successful result. I try to work with clients at an early stage of their business planning and determine what they want to happen. Do they plan to sell to the highest bidder or do they want to pass the business along to someone in the family. If so, are there family members who are interested and have the skills and financial wherewithal to keep the business going? We are finding that in many cases the kids want to do something else and often have no interest in maintaining a family business. So that requires a different approach to maximizing the value of business if the founder is the heart and soul of the company. For instance, we are working with clients on ideas for ESOPs (employee stock option plans) or other ways to keep the company in operation and allow the owner to keep working, either full- or part-time well into the typical retirement years. That’s just one of the possible strategies to capitalize on the value of the business and pass on that value in a way that meet’s the owner’s goals.
Every summer, I teach a course on business succession planning at the Florida Trust School (a Florida Bankers Association program). In my experience, most trust officers and bankers don’t understand the importance of looking at the estate planning issues related to a business sale. So, it’s up to us as attorneys to raise these issues. Many owners think they will live forever, and the son will be as bright as they are and want to inherit the business. Since that’s not the case, succession planning should get far more attention than it does now.
Watkin: That’s a good point, because what really differentiates an experienced attorneys from someone who will prepare a will for $750 is that we bring a 360-degree vision to the engagement. For example, it can make a big difference who is appointed trustee — it’s much more than just filling in a name on a form.
Roche: As trust officers, we deal with the personal side of estate plans. In many cases, it may be best for the children to sell the business because they lack the desire or skills to run the company, and a sale will result in a high valuation.
Foodman: Owners come to us when they’re getting ready to sell a business. We regularly refer clients to our colleagues in the legal profession who can bring their skills to bear on the succession planning process.
Hoffman: In many cases, the family needs a psychologist more than a lawyer. The family dynamics can make it hard to reach the point where you can start preparing the documents.
Q. Any final words of advice?
Judd: Early in my career a mentor advised me not to give investment advice to any estate planning clients. I have followed that advice, because clients often ask questions about the performance of their assets. Because lawyers are trained to have an answer for any question, it’s unnatural for us to tell them to speak to their fiduciary or investment advisor. But that’s the right approach for both attorneys and their clients.