5 Most Critical Items You Need Before You Pass
The most often talked about part of the journey to financial wellness is saving and investing for growth. However, less often talked about but just as equally necessary are the measures that ought to be taken in order to secure against unforeseen circumstances while we are working on building towards that goal. I know this is a morbid topic, but mortality is inevitable. So I ask you this one question: “If something dire happens to you tomorrow, are your financial affairs in order, and is your family protected?” If your answer is no or you are unsure, then read on for my Top 5 things you need to do today to change that.
My duty as a financial advisor is to be thinking ahead continually. When someone in their 30’s is coming to me for guidance, and as I’m getting to know them in our initial meeting, I’m already thinking ahead into their 40s, 50s, and trying to assess what needs to be addressed. The same goes for someone coming to me who is close to retirement in their 50s and 60s. I’m assessing their current situation, but more importantly, I’m envisioning their needs and worst-case scenarios when they turn age 80 or 90.
Most of you will probably be surprised or maybe not surprised if you haven’t thought about it yourself, but about 8 out of the ten people who walk through my office are unprepared for unforeseen circumstances. And listen, I get it. The mass majority of us are working 40, 50, and even 60 hours a week. The majority of us are already stressed enough about our daily lives, balancing work and home life that when the weekend comes, we’re ready just to hit the brakes, and zone out to reset for the upcoming week.
The important thing that needs to be done gets pushed back to next week because there’ll always be the next week. But herein lies the problem; next week becomes next month and next month becomes next year. We blink and all of sudden we’re celebrating the coming of a new decade. So I implore you to break this cycle and get these top 5 items knocked out of the way. Your life is important, your family’s well-being is important so let’s not put the hard work of saving and growing your nest egg in jeopardy.
I should state that I am not an estate planning attorney nor can I give legal advice. But through my work, I have been able to joyously celebrate hundreds of clients retiring with sound financial planning. Unfortunately and with great heartache I have also seen a multitude of clients pass. Preparedness is critical so, here are my top 5 things you need to do right now in order to protect yourself and your family from unforeseen circumstances.
Number 1: Protecting Your Family through Life Insurance
We often think of life insurance as a scam, or it’s just flushing money down the toilet. Some of us may think of life insurance as an asset. Well, I’m here to tell you that life insurance is not an asset. It is just an expense, and it is an expense that I carry while I am building my financial nest egg to offset my unexpected death. As a husband and a father, I have a duty to my family to care for their financial well-being through the good times, the bad times, and when I’m no longer here. And for that, I use life insurance as a tool, and so should you. But I’m not talking about expensive cash-value life insurance like whole life or equity life. I’m talking about just straight up term life. It’s super low-cost and maintainable.
How much life insurance you need depends on your situation. If you’re young and you’re single, or you don’t have any dependents, then you probably don’t need any.
Now, if you’re married or have dependents, then the rule of thumb is to have enough to cover outstanding debt and possibly provide for lost income. So, for example, if I pass, I want to make sure that my wife and son are covered from any outstanding debt. Namely, that’s the home mortgage. I want to make sure they can pay off the house entirely because housing is one of the most significant monthly expenses we endure as Americans.
So what you want to do is calculate all joint debt with your spouse. As I said, this would be your mortgage, and it would be any joint credit cards, joint auto loans, student loans that are secured by two individuals, home equity loans, and things of that nature. At the very least, that is what your policy coverage should be. Debt held individually like student loans taken when you were single or single holder credit cards need not be added to this. A debt obligation that is owned by you and you only are forfeited-these typically don’t pass as a burden to your spouse.
The next consideration is the loss of income or otherwise known as income replacement. If your financial situation is that one works and the other is a stay at home dad or a stay at home mom, you’ll want to make sure your surviving spouse will have assets they can use to continue on their lives. Now, you may not need to insure for complete income replacement because that can get pretty expensive but at least enough until they can grieve and get back on their feet. If you, yourself, are the primary breadwinner, you may want to ensure that they have enough of a lump sum to maintain a semblance of an income.
How much would that be? Well, the rule I use is between 3 to 3.5% withdrawal based on the principal. Back in the early 2000s, a lot of financial advisors would suggest using a 4% withdrawal rule. Still, with life expectancy as high as they are today, we’re seeing that a 4% withdrawal could negatively deplete the principal. So, based on that above rule, for every $1M you have, you can expect about $30,000 to $35,000 a year in income.
Just FYI, I’m going to be having another in-depth segment being released shortly that goes further in-depth on life insurance such as calculating coverage, how to buy insurance, what to expect when purchasing insurance, and it’ll also go into the pros and cons of straight-up term versus cash-value policies.
Number 2: Naming Your Power of Attorneys
When it comes to financial matters, just being married isn’t enough. Sure, my wife can access our joint bank accounts, but she can’t access anything that is held in my name only. Real estate property that is obtained before marriage or a vehicle that is only under my name because it was bought before marriage is restricted. Investment accounts like IRAs, which are individually-owned or individual brokerage accounts, are blocked from spousal access.
These types of restrictions can be mentally challenging and an unnecessary stressor if you are incapacitated in a hospital, or you are in a foreign country and access is needed immediately. Please note that POAs are only for when you are alive and unable to conduct business. POAs expire upon death, okay? That’s a very critical point there, so again, POAs gave to others allow for them to transact on your behalf if you are unable to do so while alive. Terminally ill is still alive; if you are mentally incapacitated while in a coma, you are still considered alive.
POAs can be extended to others, so it’s crucial that even if you’re single or unmarried that you have a POA structured so that a trusted person can execute on your behalf. This could be your parent, your sibling, your children, or even a trusted friend. I very often meet single individuals who don’t feel the need to have a POA because they are not married. That is not true, prepare yourself by providing the power of attorney privileges to someone you trust. And as your relationship status changes, you can also modify it to include a future spouse.
POAs come in two forms: general durable and health care. You need both because one does not give authorization on the other.
General durable is the ability for someone to transact on your behalf on financial matters. These are things like accessing an account that is in your name only. Signing on the purchase or sale of real estate or even filing your taxes.
The health care POA relates to health care directives only. To be able to speak with your physician on your health matters or to make decisions related to your health. This is what health care POA is for.
Now, I started this segment by prefacing that these are things you need to do now to protect yourself, but when it comes to the POA, I urge you to have this conversation with your parents. Especially so if you have aging parents, make sure they have these documents in order naming each other or perhaps even naming you so that if something happens to them, you’re not stuck waiting around for information and being left unable to act.
Number 3: Checking to make sure your beneficiaries are correct
Updating your beneficiaries is an extremely important thing to do that can oftentimes be forgotten due to the hustle and bustle of daily life.
Very early on in my career, I had met with Maria who had come in asking for guidance. Her 40-year old husband Mark had passed recently in a T-bone car accident. There were no goodbyes and there were no last-minute chances to say “I love you.” The two were very happily married with their lives ahead of them raising two beautiful children both of whom were under age 4 at the time. Maria was trying to get her household financial affairs in order while grieving and caring for her two children and it was not an easy ordeal. Matters turned for the worst when we found that Mark’s 401k at his place of employment did not list Maria as the beneficiary. The retirement account where the bulk of Mark’s life savings had been listed his ex-wife whom he had married out of college. That marriage lasted less than 2 years before they separated and went off on different paths. For years Mark had just forgotten about updating the beneficiary and when the topic about finances came up years later when he remarried it was just a matter of updating each other on the account balances and where they are at. That decision ultimately could not be refuted. A listed beneficiary, regardless of whether it’s an ex or someone who is no longer in the individual’s life could not be contested. Not a single penny of Mark’s hard-earned savings went to Maria or their children.
My experience with Maria reminded me that ultimately it is up to us to protect our house. Changes in your life will happen and your life will be made better or worse but there isn’t going to be someone out there reminding you to make these changes. Mark didn’t mean to not update his beneficiaries. He just thought that he had more time to come around to that task. I’m here to remind you that regardless of how much time we think we have if we didn’t get around to it when the time comes, there just isn’t enough.
Beneficiaries come in both primary and contingent. Primary is whom it goes to first and contingent is for people in the event the primary beneficiary has also passed.
Number 4: Update Your Bank Accounts or add a TOD
If you’re married or together with a life partner, the easiest way is to update your bank accounts so that they are joint accounts. This is one of the most natural things to do and provides each other with access without complications.
Now, I’m not going to get into how you run your banking set-up because every household is unique. Some couples like to have all deposits going into one household account and all expenses coming out. Some, on the other hand, prefer separate accounts because that’s how it has been through their single-years.
Regardless of how you want to structure your accounts, I strongly urge that you place a POD or a TOD designation. That stands for Payable on Death or Transfer on Death. Each bank uses them interchangeably, but they both stand for the same thing. A POD/TOD lets a bank know whom the bank accounts go to upon passing. Without a POD/TOD and if the assets exceed your state maximum allowance for probate, your beneficiaries will need to go through the court system to have assets transferred. Believe me when I tell you that probate is a pain in the ass! I’ve been there, and I’ve represented clients through that process, our legal system is torturous!
Save your family and loved ones the headache and take that simple step. The process is pretty straightforward and quickly done inside a physical branch. The bank simply asks for the name and majority of the known relevant information of your beneficiary. With a POD/TOD added onto your account, in the event of your passing, your beneficiary just needs a death certificate to establish access. It’s easy to remember the investment accounts and other items of high value, but I know of so many families who maintain a high level of cash in their checking or savings accounts. So take this simple process to protect access for your family.
Number 5: Create a will
I often get a lot of questions regarding the confusion of the will. Most people stand to think that the will is an instrument that acts as a catch-all. They assume that the will would automatically supersede all other documents. The will is critical, but a will would not override other implementations such as the beneficiary designation. Going back to Mark’s situation from above, even if Mark successfully named Maria as the beneficiary on his will, because his ex-wife was actually listed on the account itself, the will would have no power over that.
So I would like for you to think of the will as last and final wishes rather than using it as an instrument to detail how financial assets are transferred. By all means, use the will for the vintage car, for the valuable coin collection or jewelry but expect to use the other above tools for financial accounts.
The will is a legally binding document that you create (and there are templates for these by the way) that names an executor to close out your estate. Will’s generally don’t require notarization, but the creator typically needs to be witnessed upon signing to ensure the validity of the will. Upon your passing, the executor would take the will to the local courthouse so that they can be appointed as the executor. Only with the court-appointed documents and the death certificate can the executor establish access to the accounts. Please note that keyword, court-appointed documents, these things take time, which is why I recommend not using the will as the only instrument for financial matters.
Common items to include on the will are tangible assets like what I mentioned previously. It is not uncommon to list real estate on the will as well, but I much prefer individuals to use a beneficiary deed for real estate property instead. A beneficiary deed acts similarly to the POD/TOD, but it is for real estate and is generally filed with the county recorder’s office in which the property is located. The beneficiary deed is a straightforward way to ensure that your real estate property gets transferred to the right individuals upon your passing.
Alright, so I listed the five most important things you need to do to get your financial house in order, but I’m going to throw out one more, which is optional. And that is the trust. Nine out of the ten times I talk about this subject I get asked whether or not a trust is needed. And my answer always is the same: it depends. It depends on how complex your estate planning needs are and how much control you want from the grave.
If at the end of your life, you just want assets disbursed to the beneficiaries, and your only concern is that it goes to the right hands, then the answer is no. You do not need to spend thousands of dollars for a trust. If you correctly executed the above five items, then you are done. Congrats enjoy the rest of your life without worrying about unforeseen circumstances.
However, if you want to establish conditional procedures for access to the estate, then you’ll want to consider a trust. For example, I have a retired dentist who is married and has three boys, one of which is from a previous marriage. His estate planning is designed so that upon his passing, his wife will receive income from his investment portfolio. So, in this case, she does not inherit the assets outright and have access to the entire cash available, but instead she only receives the income the portfolio can generate for the remainder of her lifetime. After her passing, however, the three remaining boys will then equally share the remaining estate-the real estate property and the rest of the investment accounts.
I call this “control from the grave” because the limitations must be followed to a T. There is no bypassing of this legal instrument. In the case of the dentist, he created his trust in a way so that his wife gets taken care of financially but also of importance is ensuring that all three of his children equally received the remainder. If he did not create the trust and just utilized a beneficiary process, the entire proceeds would go directly to his wife, and at that point, it would be entirely at her discretion on how the remainder of the assets should be distributed upon her passing.
What’s important to note is that trusts come in two flavors: revocable or irrevocable. If you create a revocable trust, it means that you, as the creator, of the trust, can later amend the trust. You can change your mind about your wishes and make modifications as life goes on. Upon your passing, the revocable trust automatically becomes an irrevocable trust, meaning that the provisions cannot be modified after your passing.
The irrevocable trust does not allow for any changes once executed. That means, when you sign and execute the trust, that is it! There is nothing that can be done if you later change your mind. Technically speaking, assets transferred into an irrevocable trust no longer belongs to you, so it thereby falls from your estate. That is beneficial in the sense that any assets in that trust are protected in the event of lawsuits. If someone gets injured on your property and sues you, well, they won’t get access to any items you previously placed in the irrevocable trust. The irrevocable trust also reduces your estate tax if you have assets higher than the exclusion amount. This is important because if you are leaving behind an estate above the exclusion amount, that amount is subject to an eye-watering 40% upper tax rate. Finally, the irrevocable trust could allow you to become eligible for any government aid.
If you believe a trust is something you need, you’ll want to work with an estate planning attorney in helping you establish that document. A good trust attorney will also take care of all the other outstanding documents like the POAs, and living wills.
So, just to recap. The five things you need to do to protect your family are:
utilizing life insurance to cover outstanding debt,
naming your POAs,
updating your beneficiaries on all financial accounts,
adding a POD or TOD designation to your bank accounts,
creating a will and establishing a beneficiary deed for real estate assets, and lastly but optional, the creation of a trust.
Okay, there you have it! Whew! I know I threw a lot at you but remember, time is fleeting and tomorrow is never a guarantee. Until next time, I wish you all the best. Stay safe, stay healthy, and protect your house!