Clients have worked hard to amass their wealth. Many have developed
close ties to their advisers in the process, including financial
advisers, CPAs and attorneys. Will those ties be broken if they become
incapacitated or die? Do they want their successor Trustee or their
Personal Representative to make that decision? This issue of The Wealth
Counselor examines some ways in which the planning team can help
clients address this important issue.
Shaping the Level of Adviser Involvement
Your clients have carefully chosen their adviser to provide them
advice. The strength of their desire that such advice continue if they
become incapacitated or die is often related to the length of the
relationship and the amount of assets under that adviser's management.
Once apprised of the possibilities, clients often choose to have
continuity of that advice and the client/adviser relationship, so it is
incumbent upon the planning team to discuss and address these issues.
There are at least two distinct approaches that clients can use:
- Create a document stating their desires
- Provide direction in their estate planning documents
The advantages and disadvantages of each of the above approaches are discussed below.
Naming the Trusted Adviser in a Separate Document
The simplest and least formal approach is for the client to express, in
a signed document that is separate from their estate planning
documents, the desire for the continued use of a trusted adviser.
Commonly, the document is a memorandum or letter that refers to the
adviser by name or as, for example, a "financial adviser who is
managing a significant portion of my estate, as determined by my
Trustee (or Personal Representative)." Significantly, this approach is
merely precatory - that is, it is a suggestion that reflects the
client's desire but the successor Trustee or the Personal
Representative is not obligated to follow the client's suggestion.
Planning Tip:
Using a memorandum or letter to express a desire for continued reliance
on a particular adviser is the simplest and most flexible approach. On
the other hand, it provides the least predictability because it is not
binding and thus does not ensure realization of the client's
objectives.
Planning Tip:
To increase the likelihood that the client's desire will be realized,
copies of the memorandum or letter should be put with their estate
planning documents and provided to the attorney, adviser, CPA and, as
the client ages, to the named Successor Trustee or Personal
Representative. To avoid confusion, later changed expressions of the
client's desires should expressly supersede earlier ones.
Incorporation in Client's Estate Plan Documents
A client can also direct, instead of merely suggesting, that if they
become incapacitated or die the relationship with their trusted adviser
will continue. To avoid unintended and unanticipated consequences, this
should only be done with the advice of experienced counsel. It is done
by making appropriate provisions in the client's estate planning
documents. Clients can accomplish this through any of three ways:
- Provide express direction to the client's successor Trustee or
Personal Representative to continue the relationship with the trusted
adviser;
- Appoint the trusted adviser to serve as "Investment Adviser" to the successor Trustee or Personal Representative; or
- In the case of the client's investment adviser, separate Trustee
responsibilities, assigning some to an "Investment Adviser," and
appointing the trusted investment adviser to serve as Investment
Adviser if the client becomes incapacitated or dies.
Planning Tip:
The first two options are the most commonly used. They typically take
effect when the client becomes incapacitated or dies, and they appear
in the trust or will article guiding administration (i.e., provisions
that direct the Trustee in managing the trust or the Personal
Representative in managing the estate).
Planning Tip:
For consistency's sake, incorporate similar language in the client's
Durable Power of Attorney to ensure continued input by the trusted
investment adviser into all asset management decisions.
The third option - appointment of a separate
"Investment Adviser," is a newer concept recently codified in
Delaware's trust law. While Delaware law obviously does not govern all
trusts, it is instructive as to how to establish an Investment Adviser
relationship.
Planning Tip:
The trust instrument can separate trustee duties as the client
desires, including separate Administrative Trustees, Distribution
Trustees, Investment Advisers, and General Trustees (who manage the
general operations of the trust).
The "Investment Adviser" Under Delaware Law
The purpose of creating the Investment Adviser role is to separate
investment decisions from the other responsibilities of the Trustee.
Under Delaware law, the Investment Adviser can have broad, even
absolute discretion, and decisions made by the Investment Adviser are
not generally subject to review. Unless state law provides otherwise,
the authority of the Investment Adviser may be conferred in either a
fiduciary or nonfiduciary capacity. For example, 12 Del. Code Sec.
3313(a) provides that an Investment Adviser is a fiduciary unless the
trust instrument says he is not.
Planning Tip: Investment Adviser powers typically include the powers to direct
the sale or exchange of property; hold, maintain, or cancel life insurance; and open, manage, and close accounts.
Title Holder vs. Power Holder
A Trustee is a title holder. The Trustee's name is actually on the
title to the property subject to the trustee's authority; e.g., John Doe, Trustee of the Jane Doe Trust. By contrast, an
adviser may have power over an asset, but does not hold title to it.
This is intended to insulate the trust, the Trustee, and the Adviser
from liability that might arise from the actions of the others.
Conclusion
Clients, particularly those with strong bonds to their adviser, often desire continuity of advice after their
incapacity or death. By raising these issues with clients, the planning team can help their clients to achieve their planning
objectives. Doing so often establishes a bridge to a new relationship with the client's surviving spouse, children, and other
beneficiaries. This issue of The Wealth Counselor examines "safe" retirement account
withdrawal rates in light of the recent bear market and what
adjustments clients should make, if any, to ensure that they do not run
out of funds in retirement. These issues are critical to clients and
can open the door to discussions of other topics, including the
adequacy of funds for retirement, planning needs, and life insurance,
among others. Therefore, these issues are equally important to all
wealth planning professionals.
