Whether you’re young or mature, rich or just getting by, married or single, it’s important to talk to your family, spouse, or significant other about your financial affairs. Ensuring you have the right documents in place in case something unexpected happens provides peace of mind for all of you. Death or incapacitation isn’t a topic that anyone wants to talk about, but too many people (over 50%!) pass away without a will or estate planning documents, leaving it to the court system and the probate process to sort out. Why so many? Some simply don’t want to face it. Others can’t agree on what they want so they put it off or avoid it completely.
The best place to start is with a conversation about finances and final wishes with those who are important to you. There may be someone in your family that typically handles most or all of the finances, so bringing others into the conversation and planning will make everyone more aware and put them at ease. It’s good practice to keep a list of all accounts, assets, policies and debts owed, including what financial institutions are used and the types of insurance policies (disability, life, long term care, etc). BrightDime’s Balance Sheet is a great place to start – you can add everything there. Maintain a list of all beneficiaries for life insurance, 401(k), pensions, bank accounts, names on deeds, etc and review and update periodically to ensure they continue to reflect your current wishes. Talk about where the important documents are kept (safe deposit box, files, on computer, with attorney, etc) so they can be easily located if need be.
Next, it’s important to put a few legal documents in place that make your wishes clear in case you’re not able to.
(1) A last will and testament documents your final wishes and gives you the assurance that whatever assets you personally have at the end of your life will be distributed to the people (or organizations) you intend. Without a will, your assets will be subject to your state laws, which may determine a distribution that’s different than you wanted. If you have children who are minors, one of the most important questions to talk about and document in your will is who will take care of them (be their legal guardian) if something were to happen to both parents. What assets will be used to provide care for them? Make sure the guardians listed are aware and agree to take on this responsibility.
(2) A living will or advance medical directive lets you decide now what would happen if you couldn’t make medical decisions for yourself later. You complete this form that outlines your wishes about things such as medical treatment and end of life care (ie. life support.) You name a person that you trust to follow your directive and make important medical decisions on your behalf. This person would be your health care proxy (or durable health care power of attorney).
(3) A durable power of attorney (DPOA) is a document you execute that names a person of your choice to manage most, or all, of your financial affairs for a period if you are incapacitated. It allows this person to make bank transactions, pay bills, sign checks, invest, etc if you are incapacitated and not able to. A standard power of attorney (POA) works the same way except is only valid while your mind is still in good mental status and you are capable of making decisions on your own. A standard POA is no longer valid if your mental or physical capacity has worsened (incapacitated) and you are no longer capable of making these decisions. All POA’s expire at the named individual’s death.
(4) A trust (there are many different kinds) is prepared by an estate attorney and can be an effective tool in more complex situations such as dividing assets based on multiple marriages, providing for children from different marriages, or managing large estates. A trust can help simplify your financial affairs, add privacy by keeping it out of the court system, provide professional management of assets by a trustee, add protection from creditors, and possibly reduce estate settlement costs.
You can create all of these documents except a trust on your own by finding the appropriate forms for your state online, or you can have an attorney do them for you. Once you create these documents, it’s prudent to review them (and all beneficiaries on other documents) at least annually, or sooner if you have life changes (or a change of heart.) Death may be a difficult topic for some, but having your financial affairs in order will bring relief to you and your loved ones.