Estate Planning

Appropriate analysis would have identified Estate Planning concerns. Recommendations would have been made to the client for the ownership structure of the existing life insurance cover to be changed to the trustees of his SMSF. His sons would still own the business but instead are employees.

AFRM’s advisers are trained: 

  • not to merely look at the facts
  • not to presume anything about the client
  • to evaluate assets / liabilities (to be sold or retained?)
  • to identify specific family needs (care of children/education)
  • to identify and quantify income required for surviving family members
  • to identify and quantify income required if client becomes disabled and can’t work.

The issue in this case study is that proper due diligence was not adhered to. The financial planner did not insist that a review of the client's current insurance cover needed to be done and the client thought that all of his insurance policies were adequate to look after the needs of his estate and especially his two sons. The client, a male in his fifties died in a truck accident leaving his estate and business in disarray.

Although adequate insurance cover was in place, the ownership was structured under the Trustee of the insurance company’s superannuation trust deed instead of the Trustees of his SMSF. As you know, the Trustee has the responsibility to undertake due diligence prior to payments being made and there were no binding nominations in place. 

The death occurred in December 2001.  Prior to his death, the client had hand written a new Will after his second wife left him. The new handwritten Will left everything to his two sons from his first marriage who worked in the business. 

A court case ensued because his second wife, who had left him, contested the hand written Will.

Why? The Will lodged previously with the solicitors left the second wife with the majority of the assets. In February 2006, the Supreme Court held that the handwritten letter was indeed the last Will and Testament of the deceased. 

In the intervening four year period, the bank called in the business debt, the two sons could not raise the capital and the Insurance companies would not release the $2.35m in death cover to the estate because of the required due diligence by the trustees. The business was sold and the two sons now work as employees for the new owner. 

Had appropriate due diligence been adhered to, the financial adviser would have referred the client to AFRM. AFRM would have identified the ownership problem and changed the ownership to the trustees of the client's SMSF. 

The bank advised that if that had happened this would have been sufficient security (sons were trustees of the SMSF) not to call in the business debt and the business would have still be owned by the sons. The problem was simply an ownership issue that could have been simply corrected. 

As a result of this major event, the Financial Planning firm initiated major changes to their processes and all clients, no matter what stage in life they are in, all have their insurance cover reviewed.