Let’s face it: Nobody lives forever. No matter how much you want to deny it, you need to prepare for this fateful event. Your loved ones will have some tough and critical decisions to make, from handling funeral arrangements to managing your financial matters.
At your death, all the assets you own, whether it’s your bank balance or your antique quilts, have to be parceled out to family and friends—hopefully according to your wishes. Titles to your stocks, real estate, and cars must also be passed on. This process can be incredibly unsettling to those you leave behind and unfair to those least able to fend for themselves, financial advisers warn, so it’s best to do the groundwork while you’re still breathing.
Besides, one of the most important reasons for accumulating wealth is being able to pass it on to your children and your grandchildren. Transferring wealth to the next generation requires that you engage in solid tax and estate planning, says Danny Freeman, a financial adviser with Darda Wealth Management in Winston-Salem, North Carolina.
Make matters less complicated for your survivors by following these solid steps:
Step One: Take inventory of your assets. Your estate ultimately includes your investments, savings, insurance policies, real estate, and business interests. What will be the value of your property when you die (i.e. equity investments, real estate, and personal property)? What debts will you owe (i.e. mortgage)? What deductions will be taken from your estate (i.e. administration costs and marital deductions)?
Step Two: Draft a will. “The biggest mistake people make is to die without a will or any other estate planning,” says Lori Anne Douglass, a partner with the New York-based law firm Moses & Singer L.L.P. A will allows you to appoint the person of your choice to handle your estate administration.
This representative, known as the executor, is appointed to distribute your property in accordance with the terms of the will.
When someone dies without a will, known as dying “intestate,” your property will be distributed according to the laws of your state and the person in charge will be appointed by the court. “This can be costly to your heirs and leaves you no say [in] who gets what portion of your assets,” Freeman says.
Moreover, a will is the only document that can appoint physical guardians for minor children in the event of death of the sole caregiver parent or both parents.
Hire an estate planning attorney to help you draw up a will, no matter how simple a document, he suggests. Also, you should review and amend your will periodically, especially after major life changes such as marriage or divorce.
Step Three: Reevaluate your beneficiary designations. Who are the beneficiaries for your 401(k), IRA, pension, and life insurance policy? These accounts will automatically go to your named beneficiaries when you die. You need an entire organized plan. For example, minors cannot inherit assets, including life insurance proceeds.
Step Four: Name a financial power of attorney and medical power of attorney in the event you become disabled. You need someone who can handle your medical and financial matters in the event you cannot do so. Appoint a trustworthy relative who will make medical decisions consistent with your feelings regarding your medical treatment. Your financial power of attorney should not only be trustworthy, but someone who has some financial acumen. Douglass says “in addition to a family member, many people often chose a professional advisor such as an attorney, or accountant to act as a financial power of attorney.”
Also, draw up a medical directive (often known as a health care proxy or durable power of attorney for health) and financial directive (often known as a general durable power of attorney). A medical directive legally appoints someone to make your medical decisions if you are unable to make them yourself. A financial directive legally appoints someone to handle all your financial matters should you be unable to do so.
With a medical directive, your chosen representative will be able to gain access to your medical files and interact with medical personnel. “You can’t assume that you can leave these decisions in the hands of family members,” Douglass adds. “Your spouse, parents, siblings, or even children may all have differing opinions about your care. Failure to appoint one person who can act on your behalf could significantly affect your medical care.”
With a financial power of attorney, the appointed person manages your financial affairs. “This would include, but is not limited to, signing checks, paying bills, collecting benefits (i.e. Social Security), and making financial decisions on your behalf,” Douglass says.
Step Five: Review your life insurance policies. “To determine whether one has the proper amount of life insurance, you first must consider the purpose of the insurance,” Douglass advises. Are you buying life insurance in order for your family to replace the income lost by your death? Are you buying life insurance as a vehicle to save money for your own retirement while having a death benefit for your family members should you die prematurely? Will there be a need for immediate cash upon your death to pay debts, including any taxes? Once you know why you need the insurance, you can then determine the amount and type that is needed. The general rule of thumb, financial experts say, is to have ten times your current income in insurance coverage if the purpose of the insurance is to replace income only
“In general, I find that most people are underinsured,” Douglass adds. “Even when people have the right amount of insurance they often own it in their own name which may have disastrous effects in terms of estate taxation. Moreover, it is crucial to make sure that the beneficiary of any policy properly coordinates with your overall estate plan. If one family member is responsible for paying debts and taxes at death but another family member is the beneficiary of the life insurance policy, there is no guarantee that the money will be used for its intended purpose.”
Further Reading: Wealth For Life Principles
1. I Will Live Within My Means
2. I Will Maximize My Income Potential Through Education and Training
3. I Will Effectively Manage My Budget, Credit, Debt, and Tax Obligations
4. I Will Save At Least 10% of My Income
5. I Will Use Homeownership as a Foundation For Building Wealth
6. I Will Devise An Investment Plan For My Retirement Needs And Childrens’ Education
7. I Will Ensure That My Entire Family Adheres To Sensible Money Management Principles
8. I Will Support the Creation and Growth of Minority-Owned Businesses
9. I Will Guarantee My Wealth Is Passed On To Future Generations Through Proper Insurance And Estate Planning
10. I Will Strengthen My Community Through Philanthropy