Most of us who have been in public accounting for some time have no difficulty describing hypothetical clients, John and Jane, who used to sit down together once a year to discuss family finances but, despite best intentions, have not done so for several years. Jane typically pays household-bills, may manage her own checking account. John manages their investments, insurance, and tax planning. But lately he has become so involved in work that he no longer spends enough time on their personal finances. If John dies, Jane finds that she is unprepared and almost overwhelmed by the responsibility of handling family finances alone.
I have encountered variations of this common situation many times over the years, nearly always when the surviving spouse had little role in managing finances.
The first that I remember was an elderly lady who came to me as a client when her husband died, leaving almost their entire portfolio invested in one significant commercial real estate venture. She was overwhelmed by the task that most of us take for granted, that of paying bills. My next client of this type was a man whose wife’s death left him almost as perplexed with bills and other financial details. His entire investment portfolio consisted of bank accounts (of a significant amount). More recently, a client who handled all family finances informed me of an estate plan that called for his son to assist the client’s wife with their finances, which were substantial and complicated. After my client passed away, his son was deeply involved in his own business and personal life, leaving very little time to provide the assistance his mother needed.
These situations arise from incomplete or non-existent financial communication between spouses and the lack of a plan to deal with financial issues in case of death. Some common reasons for this neglect include: “We are just too busy”, “Money is an uncomfortable topic”, “We just never developed a habit of discussing money”, “Things are going well, so why should we?” Whether family finances are simple or complex, problems of communication can exist. Insufficient communications extend to maintaining relationships, as well. Arguments, even divorces, often arise from disagreements about money matters.
Open and serious communication between spouses is important to keep on-going relationships healthy, as well as to relieve at least some of the burden on the survivor. Once the need for discussion of financial matters is understood and agreed upon, some of the topics that should be discussed are:
- Estate plans: How do they work? Who should the surviving spouse talk to first (i.e.-family attorney, investment advisor, insurance broker, &c)?
- Current investments and accounts: What do we own? Why? Who is our advisor?
- Insurance: What do we have? Why? Who is our contact?
- Letters of instruction-advantages/disadvantages: Can this be effective for some issues?
- Business issues of closely held business, such as terms of buy-sell agreements: What are our succession plans, if any (and if none, should we create them)?
- Legacy planning, if relevant: What impact can our finances make on the world? What charities would we like to support for potentially many generations?
As CPAs and financial advisors, we can help our clients during life and at death. The first step is to raise the subject with the client. This can be done during the tax interview or whenever estate planning is discussed. Once the dialogue has begun, we should encourage open financial communication between both parties in a relationship. We should also provide some subjects pertinent to their individual needs for clients to consider, such as some of those listed above.
For my first client mentioned, whose portfolio consisted almost entirely of one real estate investment, I helped with the most basic advice on how to pay bills. Then we focused on diversification of her investments and had her list and sell the property to free funds for diversification. She also sold her home and moved closer to her children. The proceeds of property sales were invested in a new home and a diversified portfolio suited to her risk tolerance (in her case almost none, as often the case with many who have no experience with finances). She was my client for over 20 years, and when she died last year at over 100 years of age, it was good to reflect that we were able to keep her “financially comfortable” while sustaining her lifestyle. She was also able to leave a portfolio for her children; her planning was successful.
With the second client mentioned above, the focus of our services again began with very basic task of paying bills. Then we were able to help implement estate planning and investment assistance. He died recently and also had significant assets to pass on to his legacy and heirs.
For the heirs of the third client mentioned, we are providing ongoing services/continuing to provide services. Working with her investement advisors, we have assisted with the creation of an “investment policy statement”. Then we had the investment advisor prepare retirement planning calculations to give us an idea of how much excess her assets represented. This information is being used in her estate planning.
A related service that CPAs can provide is similar to those offered to the entertainment industry called “business management.” With one of my client couples, the wife had not discussed with her husband what would happen if he died first. When he died, she was completely unprepared. Fortunately, a family member was able to move in with her to help out. However, neither the wife nor the relative had experience with investments, estate planning, taxes or finances generally. Our office was asked to assist, once more beginning with paying bills. We went on to aid her in preparing an investment policy statement and in finding investment professionals to make the investments. We also continued with income tax services that I normally offer, as well as the trust funding and estate tax related matters.
Estate planning in general is an important service that accountants can, and should, provide. Encouraging clients to discuss their financial matters with spouses or partners is an essential related service whether or not general estate planning is involved. Finally, even where communications and planning are lacking, CPAs can still provide valuable services to help our clients through difficult transitions.
*Michael B. Allmon, CPA of Michael B. Allmon & Associates LLP CPAs is the founding chair of the CalCPA Estate Planning Committee (www.calcpa.org/estate). You can reach him at firstname.lastname@example.org .
The author wishes to acknowledge the assistance of Danika Allmon, Chapman University, for her editorial assistance relating especially to the field of “money psychology”. You can reach her at email@example.com .