WHEN PLANS GO SIDEWAYS: INSIDE THE DAILY LIVES OF FINANCIAL PLANNERS
This series of articles highlight the complications and challenges they face, using real-life situations they encounter.
In our daily lives as financial planners, we not only have to develop plans that satisfy all the objectives and “wants” of our clients, but also manage situations where planning was not previously optimal and where complications arise due to unforeseen circumstances or simply a lack of a solid plan.
I thought it would be helpful to readers if I started a series of articles highlighting the complications and challenges we face, using real-life situations that we encounter. Obviously, the names of clients will not be mentioned, but the cases will be real. I often hear comments from clients where they say that it sounds like an article is based on them and that the article is directed directly at them. The truth is that your circumstances are not unique. There are many people who face the same challenges as you, but who knows, a specific article may be based on your situation, and if an article has a positive influence on your situation, I will have succeeded in my mission.
We tend to focus on wealth creation articles most of the time. They seem to be more popular among readers. After all, it’s more uplifting to read about getting richer than it is to realise that there is a crack in your plan’s armour that may lead to some unintended consequences. In many cases, it is a case of either not understanding the rules and regulations or assuming that your plan is structured optimally. We also encounter comments like “but they said”, referring to friends or Dr Google, who often lead people astray ….
My first case study deals with three unrelated clients who face a similar challenge. The three situations can be summarised as follows:
The client suffered a health setback and feared that he was not going to recover. His concern was that he suspected that his wife was suffering from early stages of dementia (he did not inform anyone about his suspicion), and that she would not be able to take care of her own financial affairs should he pass away. She was nominated as our client’s beneficiary in his will. Unfortunately, our client did not survive his illness and he passed away about a month ago.
Two weeks ago, our deceased client’s widow had a serious fall and she was admitted to the hospital with severe blood loss due to a head wound and after lying on the floor unnoticed for the best part of the day. During her hospital stay, it was decided that she should undergo tests for dementia, and our deceased client’s concerns were confirmed. Her dementia was more serious than her family anticipated.
We now face some very serious challenges. What could have been done differently, and what do we stand to do now?
Our second client has a similar challenge, fortunately, he is in good health but his spouse has been diagnosed with the early onset of dementia. His challenge is that his largest asset by far is a living annuity. His wife is currently nominated as beneficiary in his will and as the primary beneficiary in his living annuity.
This client faces another challenge. They recently sold their comfortable home and are renting in a retirement village where there is no frail care facility. He has now decided to purchase a two-bedroom apartment in another retirement village that has a frail care facility for the benefit of his spouse. He hates the idea of moving to a small two-bedroom apartment in a retirement village. I suspect that he is mildly depressed about the thought of the move and concerned that he may become more depressed when the move happens.
The additional costs associated with frail care are also weighing on him.
Our client is further considering changing the beneficiaries on his living annuity so that his three children become the primary beneficiaries. It will then be their responsibility to look after their mother financially.
Is this the correct option?
The third case is based on a simple question raised by one of our clients. The husband of a friend of hers is seriously ill, and they fear that he will not survive. The friend’s question is whether their joint bank account will be frozen should her husband pass away.
Let’s now consider some options for solutions that may be considered.
Scenario 1
We suggested that our client change his will and include a testamentary trust that would receive the assets and take care of his wife. Unfortunately, he passed away before he could sign the new will.
After our client’s widow’s fall and diagnosis of dementia, the family has agreed that we start the process of requesting the appointment of a curator for her. Her children requested that they enter into an agreement with her where they would take charge of her affairs through a general power of attorney (GPO).
The problem here is that one can only enter into a GPO if the person who grants the GPO, in this case the mother with dementia, has the mental capacity to understand and the ability to cancel the GPO. A person with dementia cannot enter into a GPO agreement.
Where a GPO is in place and the grantor develops dementia, the GPO automatically ceases due to the mental disability of the grantor. Unfortunately, in South Africa, enduring GPOs are not allowed. The only option left is the appointment of a curator, which is expensive and cumbersome.
In this scenario, the testamentary trust would have been a much better solution. When one drafts a will, these situations must be considered.
Scenario 2
In this scenario, there are three areas of concern:
The fact that our client’s wife is still nominated as his sole beneficiary does pose a potential problem should anything happen to him. This should be addressed promptly.
In this scenario, an Inter vivos trust will make sense. One can keep costs to a minimum by keeping it as a “dry trust” (one without assets), until his death. Since there will be no activities in the trust until his death, accounting fees will be minimal.
Upon his death the trust can inherit the property and investments for the benefit of his spouse as an income beneficiary. His children can be nominated as capital beneficiaries for the day his wife passes on.
The only reason we would favour an inter vivos trust over a Testamentary Trust is the time it takes to register one. The testamentary trust will take several months to form since it can only be registered after the appointment of the executor. An inter vivos trust can be registered immediately, subject to normal registration time frames.
The indication of our client’s depression following his move into a small retirement home needs to be addressed urgently. We will suggest initiating transition consultations, during which we will explore different options to help him identify acceptable solutions. These may include more holidays with his spouse and activities away from the retirement village as often as suits them.
They also need to discuss when our client’s wife will require full-time care in the frail care facility. This will lead to a new transition and a challenging time for both parties. The cost implications also need to be considered and planned for.
The important lesson here is that these issues need to be discussed while all parties are still fully functional. This is similar to deciding when one will stop driving. As much as we hate it, the time will come when we can no longer drive. Frail care and other health issues that may separate partners are more serious, but even the small things in life present their challenges. Without planning for these events and agreeing on the steps that will be taken, trauma and heartache are bound to follow. Irrespective, these transitions always present various challenges.
Families like to trust each other and entrust each other. I often comment that money is the greatest destroyer of families. The obligation you will place on family members to use money bequeathed to them to look after other family members presents many challenges. Firstly, you have no control over what the financial position of family members will be in the future and whether the intended funds will flow to dependent loved ones. Future marriages can, and often do, place different levels of pressure on finances.
Our advice to our client will be to nominate a trust as the beneficiary of the living annuity. The trustees, who can include family members, then have the responsibility to look after the beneficiary or beneficiaries with the income of the living annuity. The risk that someone suffering from dementia will receive a large sum of money is too great to take lightly.
Financial abuse and incorrect decisions can lead to financial ruin and a state of destitution.
Scenario 3
The simple answer is that any asset in which a deceased had an interest will be frozen to safeguard their estate. When spouses have joint bank accounts, the bank will freeze the account until an executor is appointed to instruct them on distributing the funds.
In cases where people are married in community of property, the assets of both parties become frozen. In such situations, it is advisable for the surviving spouse to open a new bank account as soon as possible after the death and have all future funds and income paid into this new account.
Our advice to our client’s friend is to open her own bank account and transfer funds to it with urgency. She is married by ANC so there will be no impact on the account.
Conclusion
The overarching theme in the three scenarios is quite similar. Essentially, we need to develop the habit of discussing the challenges the future may bring. Don’t just talk about and plan for the pleasant aspects.
Have the tough conversations as well. Include your family, particularly children, and don’t only tell them what they might inherit. Ask your children: “What happens if Mum and I can no longer make decisions for ourselves?” Plan ahead and include the enjoyable parts, but agree on the way forward should you no longer be able to make rational decisions.
I’ve mentioned before that ageing introduces a whole new set of difficulties. Prepare for these, and don’t let issues like dementia undo your hard work and wealth accumulation. A well-thought-out plan can ease the burden on you and your family, preventing crisis management at a time when it is least tolerable.
On that happy note … have a great week and set up that family meeting to have the tough talk. Failing to plan is planning to fail.
