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I know, I know–you don’t want to talk about this topic. And I understand.
We don’t like to think about death, especially our own, and for that reason, we have a tendency to leave the big to-do of estate planning undone. But, unfortunately, death is one of our only guarantees in life.
For most of us, it feels like it’s a lifetime away, and indeed, the probability of you meeting your end in the near term is hopefully very small. But–and this is a very BIG BUT–the harm done when someone dies without a plan is so great, that planning for death can quickly become the most important financial planning recommendation of all.
So, what can you do? Here are three steps that will help ensure you’re prepared:
Step One: Draft the Most Important Love Letters You’ll Ever Write
If you do this correctly, you won’t actually be writing the letters yourself. You’ll be paying a seasoned scribe–an estate planning attorney–to capably write them for you. There are three documents that can be packaged together and likely will be appropriate for most adults:
Letter #1: The Will
Your will gives instructions to the state you live in, describing how you’d like your earthly possessions to be split up after you’re gone. In this letter, you’ll actually recommend who you’d like to run point on this exercise, your Personal Representative, that super detail-oriented friend or family member who will help ensure your stuff gets where it’s supposed to go.
But perhaps you don’t think you have enough stuff to warrant this exercise. Maybe you don’t feel like you have an estate worth planning.
Well, do you have any kids? If so, it is in your will that you determine who should be the replacement parents if Mom and Dad go down with the ship. You’ll name a Guardian, your recommendation to the state of who you’d like to raise your children in your absence.
And whatever assets you do leave behind for your children’s benefit (like any real estate, cash, non-retirement investments or life insurance proceeds, for example) can be managed inside of a bucket (called a trust) by the third person designated in most wills–the Trustee.
If you’re single and don’t have kids, having a will is still a good idea–but if you do have children (especially minors), it becomes an imperative.
Letter #2: Durable Power of Attorney
This letter simply gives another person the authority to act on your behalf in financial matters. The fact that it is “durable” means the authority you’ve granted is still empowered even if you’re unable to make those decisions for yourself due to disability.
These tend to be easy decisions if you’re married–hopefully!–in which case each spouse gives the other this power. It can even come in handy when one person is travelling while you’re in the process of, for example, buying a house together. But even if you’re not married, the DPOA is a helpful tool to ensure that life keeps moving financially even if you’re unable or unavailable to make those decisions.
Letter #3: Advance Directives
In 2005, a very sad story ended as the Florida courts directed Terry Schiavo’s feeding tubes to be removed, hastening the end of her life and a legal battle that extended for more than a decade.
In 1990, Schiavo was deemed to be in an irreversible coma–a “persistent vegetative state”–by the medical community. Her husband claimed that Schiavo expressed her wishes to be removed from life support. Her parents disagreed.
A nasty legal battle ensued that ultimately required federal intervention and involved years of heartache. Unfortunately, this all could have been avoided if Schiavo had written Advance Directives, expressing her wishes herself.
This final letter has two parts: a healthcare power of attorney, which determines who should make medical decisions if you are unable, and a living will, in which you make end-of-life decisions so your family and friends don’t have to make those impossible choices for you.
The big motivation to write these letters? If you don’t decide what should happen, the state you live in will. The state could make end-of-life decisions, decide who should get your assets and, scarier still, determine who is best suited to watch over your children.
And that’s only step one? Yes, but the important decisions you make here will inform the remaining two steps, making them a lot easier.
Step Two: Update The Most Powerful Estate Planning Documents
True story: A jerk leaves his wife for his secretary, and as soon as the divorce is final, he updates his will, leaving everything to his newer, much younger muse. He celebrates with his buddies on the golf course and gets struck by lightening–dead–in the middle of his backswing.
Even though he’d changed his will, he had never updated his beneficiaries on his retirement savings accounts and life insurance policy–where the majority of his wealth resided. As a result, his ex-wife’s grief was no doubt lessened by the news that she would be receiving most of her husband’s estate.
That’s right, your beneficiary designation forms–for retirement accounts, annuities and life insurance policies–will actually supercede the wishes in your will when they are in conflict.
Even more powerful than beneficiary designations, however, is the titling of assets. For example, the joint owner of a house can’t give away more than his or her share of that asset.
The moral of the story? Don’t cheat on your spouse, of course, and also be sure to update your beneficiary designations and asset titling information to ensure they’re in alignment with the wishes in your will.
Step Three: Fund Your Estate Plan
If you’ve got enough money for you and anyone you might leave behind (those who rely on you financially) to live out the remainder of their days, your estate planning may end with step two.
If you’re like most of us, however, not yet financially independent, and someone is dependent on your economic contribution to the household, you likely need to help fund your estate plan with some life insurance.
Yes, this begs a whole new series of questions:
How much life insurance do I need?
What kind of life insurance do I need?
There are specific answers to these questions for each individual and household, but most will be covered with this simple rule:
Buy 15 times your annual salary in 20-year term insurance.
For example, if you make $80,000 per year, consider buying $1.2 million (80,000 X 15) of life insurance. (I know the death benefit numbers start to look big, but I think you’ll also be surprised how relatively inexpensive term life insurance is as well.)
By compensating for the income that you’d no longer be generating, life insurance supplements your estate plan to ensure that your family’s financial goals can still be met even after you’re gone.
And that’s the whole point of estate planning, really. None of us knows the hour of our death. But effective estate planning helps us live more confidently knowing that if we should leave this earth unexpectedly, we’ll leave behind a tidy financial blessing, not a curse.