Estate Planning, Part II: You’re Dead. Now What?
This is the second post in a two-post series on estate planning. In the first post I nearly covered the entire topic by cheating: I reviewed Plan Your Estate by Denis Clifford (Nolo, 2008). In this post I cover an important problem not addressed by Clifford: How would your survivors know where your assets are held, why they’re organized as they are, and how to handle them? This is a topic about which I’ve given a great deal of thought, as have others (for instance, on the blogs Bible Money Maters and Gather Little by Little). Below I describe my approach, some of which is of my own creation (though, no doubt, contemplated by others too). Some details were suggested to me by contributors to the Bogleheads Investment Forum.
For several years I’ve maintained a financial information list of every account or institution that has anything to do with my household’s finances. There is an entry in the list for all financial benefits associated with my employment (including retirement accounts and pension benefits), our attorneys (real estate and estate planning), all credit cards, utilities (phone, internet, water, gas, and electric), loans (mortgage and auto), all types of insurance, bank and investment accounts, and anything else that has to do with money.
Each entry in the financial information list includes details so my survivors can easily learn more about the institution or investment: institution name, account numbers, phone number, and web site. I also indicate how the organization communicates with me (whether by mail with paper statements or electronically). If the account draws on or deposits into some other account I also indicate the amount (or approximation thereof) and frequency of the transactions. For accounts with online access I list my user ID, but not my password (that’s the only bit of information I communicate only verbally).
Apart from a source of information for my survivors, this list is very handy for me. Every so often I need to look up an account number or contact information. Instead of digging through my files I can just pull out the financial information list.
With such a list, any of my survivors could see the structure of my household’s finances and find our assets. But that alone is not enough. Would my wife or children know what to do with the assets they inherit? Since I’m the only member of my nuclear family interested in personal finance nobody else knows very much how to manage the portfolio. Therefore, the second component of the information I leave for my survivors is a letter.
The letter explains how my survivors might go about educating themselves about our finances. It indicates where to find all important documents. It also explains that the way I manage things may not be suitable for them. I make a few suggestions as to how to simplify the portfolio. I recommend certain people they might talk to. I suggest they ask questions on the Bogleheads Investment Forum. I have not yet gone so far as to line up a financial adviser of some sort but one day I may do that. Without this letter as guidance I am not confident my survivors would know how to begin to deal with our investments. That’s why I wrote it. (Your situation may be different. If your spouse and/or children are investment savvy then you don’t have this problem.)
The final step is to put all this information in a place where my survivors will find it. That’s easy (for me). Our estate planning attorney keeps our original wills in his fire-proof filing cabinet/safe. I’ve given him a sealed envelope that includes the financial information list and the letter. I wrote on the envelop that it is to be opened by the executor of my will. The letter also indicates where else to look for a more recent version, just in case I pass before providing an update to our attorney.
I know first (well, really, second) hand how challenging it is to unwind a deceased family member’s estate. My maternal grandfather had an exceedingly simple estate. Yet it was still quite a headache for my mother to find all the pieces and to dispose of them properly. Had my grandfather made a list and written a letter of the type I just described it would have been simpler for my mother. It is so easy to do and, as I said, the master list of financial information can be of use in life, if not in death.
Estate Planning, Part I: Plan Your Estate by Denis Clifford
This is the first of two posts on estate planning. Can I really cover the topic of estate planning in two posts? No, but I can cheat by using this first post to review an estate planning book: Plan Your Estate by Denis Clifford (Nolo, 2008). In the second post I will discuss how to organize information so your survivors can manage your finances, a topic about which I’ve given a great deal of thought.
Plan Your Estate is the second Nolo book I’ve read; the other is Home Business Tax Deductions by Stephen Fishman (Nolo, 2008). Since I found both books well written, insightful, well organized, and helpful, I’m willing to go out on a limb and recommend Nolo books in general. Nolo is clearly doing something right.
Plan Your Estate covers some of the fundamental estate planning goals: leaving property, providing for children, planning for incapacity, avoiding probate, and reducing estate taxes. The book is divided into twelve parts, each of which has several roughly 10-page chapters. Not everyone will be interested in all parts. The first part, “Setting Your Goals” is applicable to all readers since it helps the reader figure out which other parts of the book are relevant. Unless you are a high-net worth individual and/or have complex inheritance issues, it is unlikely you will need to read the entire book. The second part also deals with necessary preliminary issues like assessing your net worth, how to determine ownership within a marriage, and considerations relevant to deciding what to leave to whom.
Part three is relevant to individuals with children. There are special considerations for minors: who will care for them? Who will manage property you leave them until they reach the age at which you wish to give them control?
Parts four through six are likely relevant to everyone. They cover wills, probate, and gift and estate taxes. While it is theoretically possible to transfer most or all of one’s property without a will, it is likely something will be overlooked. A will serves as a backup device that transfers anything not handled by other means. Also, in most states a will is the only way to name a personal guardian for minor children. Unfortunately, property transferred by will must go through probate, which can take more time and cost more money than you would think necessary (since instructions are written in the will, after all).
Discussing probate, and how to avoid it, is where Plan Your Estate really shines. Clifford, an estate planning lawyer, detests the costly and complex probate process. He essentially thinks it still exists in the U.S. because of the income it provides to probate attorneys. Clifford writes
Lawyers’ assurances that probate is necessary sound increasingly hollow. Even the British eliminated tedious, expensive probate proceedings over half a century ago…In most countries in Western Europe probate is even simpler…Upon death, the deceased person’s successor named in the will performs the probate functions without any judicial supervision. If there are disputes…they are handled like any other legal conflict.
Not so in the U.S. That is why Clifford goes to great lengths to describe how to keep one’s assets from going through probate. He carefully explains the various legal methods to implement what most people think a will does (or should do), but actually does not: transfer property as designated without delays, red tape, and unnecessary legal fees.
Clifford also gnashes his teeth over planning to deal with estate taxes, which Congress has turned into a headache: in 2009 the personal exemption is $3.5 million, in 2010 it is infinite, in 2011 and beyond it drops to $1 million (under current law). Congress is likely to revisit the issue so no one really knows what the future exemption values will be. This uncertainty and the fact that the exemption varies by year of death dramatically over the next few years makes estate planning more difficult.
The remainder of the book goes into methods of varying complexity to handle the issues raised in the first six parts, as summarized above. I won’t review them here as they require more space than a blog post allows. Suffice it to say that one or more of these subsequent parts should be read by anyone with young children, or having high net-worth (at or near the estate tax exemption level), or wishing to impose some control over property, or wishing to permit one set of individuals to benefit from property and its income while leaving that property to another set of individuals, or owning a family business, or any other unusual or special desire for disposition of property.
I recommend Plan Your Estate to those who have not yet thoroughly completed an estate plan. Even if you employ a lawyer to implement an estate plan, you will benefit tremendously from reading this book before implementation (best), during the process (second best), or even after establishing a plan (not ideal but still worthwhile). It will help you understand your lawyer’s recommendations and how the various legal instruments work. Most of us will be revising our estate plan as we age and Plan Your Estate can help us see what’s ahead and decide when to make adjustments. For instance, an estate plan for a young, low-net worth couple with no children should differ from one for a couple with young children or from one for a high-net worth couple with grown children.
What Plan Your Estate does not cover is how one might communicate to one’s survivors the state and structure of family finances. If you are the sole financial planner and manager for your family (as I am), think for a moment what your spouse, partner, or children will encounter upon your death. Do they have any map or guidance to figure out where assets are held, how they relate, and what should be done with them? The next post on estate planning will address this issue.
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