No one ever expects to get fatally ill or end up in a car crash. But if the unthinkable happens, it will be devastating for those you leave behind. Not only are they grieving, but they may face a host of confusing legal and financial decisions about your property.
It’s important, then, to take time while you’re healthy and capable to put your finances in order and your wishes in writing.
The Basics on End of Life Financial Planning
To start out with, it’s important to have two types of wills and life insurance.
The first type of will is the one we all think of: it lets the executor of your estate (even if that estate is just one checking account) know who your heirs are and how your property should be divided. Different states and countries have their own rules about how your property is divided if you have no will, and sometimes the state is not obligated to notify your next-of-kin about all your accounts. For the benefit of your heirs, it is important to have this all spelled out.
You should also have a living will in place, which gives instructions should you be incapacitated. For example, if you are in a coma, do you want to be kept on life support? For how long? Who is responsible for making your medical decisions? Talk with a lawyer and make sure you have your wishes thoroughly outlined.
Finally, you should have life insurance. Rebecca Z., an insurance agent with State Farm, recommends thinking about three things in particular: medical and death expenses, dependants, and debt.
The average funeral in the United States costs around $15,000, so your life insurance should be enough to cover those costs, as well as have a cushion to pay for any end-of-life medical expenses. If you have anyone dependent on your income, such as a spouse or children, make sure you also have enough insurance to replace it for two years. Finally, if you have any debt, such as student loans, have enough life insurance to cover those costs, otherwise your next-of-kin will be stuck paying them out of pocket.
Prepping Your Online Accounts
Most email, social media, and online banking companies will not give out passwords to next-of-kin, so its important to have a list of accounts that you hold and their passwords. You should also include information on bills that are automatically paid from your accounts and airline accounts if you have frequent flyer miles.
Digital property has also complicated inheritance issues in recent years. Many people now have invested significant money in ebook, music, and video libraries, but most of these companies do not recognize your right to will your account to an heir. In these cases, it is better to pass on the actual device you use to access it, such as a computer or e-reader, as well as your passwords to a specific person.
If you share bank accounts and you pre-decease your partner, he or she may be left with a lot of red tape to navigate. Many banks will not simply remove one partner’s name – to ensure proper IRS reporting, they are often required to close the joint account and reopen a new one in the remaining partner’s name. This requires the identifying numbers of all the accounts, as well as confirming the username and password for your online banking, so make sure both of you have this information.
It’s important to discuss this process with your bank long before it becomes an issue so both account holders understand how it works. As your account rolls over to a new name, you may lose access to withdrawals or online banking, or you may lose all your information on bills that are paid from the original account. Make sure you are prepared with alternate access to the account and a list of all automatic payments.
Retirement accounts present different challenges than other bank accounts because of the way they are taxed. At age 59 ½, you can access the money in a standard IRA without paying a 10% penalty to the IRS. However, if your spouse or child inherits an account from you before that age and tries to roll it over into their name, this can be considered accessing the money and they will have to pay a penalty fee, in addition to taxes on it as income.
In this instance, have the account set up to become an “inherited IRA”; this will remain in your name until they reach the age of 59 ½, at which point it rolls over to their name and they can access it without penalty.
If you have a spouse that you intend to leave property, such as a house, stocks, or car, to, it’s always easiest to simply have the property in both names. This is much easier on the surviving partner; trying to prove inherited ownership of property requires showing the ownership documents, a marriage certificate, certificate of death, and working with a lawyer and notary to ensure that the transfer of property is legally recognized.
If you are leaving property to someone other than your spouse, have the details fully outlined in your will, along with any certificates of ownership that you have in your possession. Don’t rely on online accounts for this, as your heirs may have trouble accessing them: have the papers printed out and stored with your will.
When planning for your end-of-life, it can be difficult to think of every eventuality or to be sure that you have all the pieces in place that your heirs will need. It’s important to sit down with a lawyer and financial planner, as they will know what needs to be done and what information will be necessary. Many financial planners also have resources such as programs for safely storing your online and financial information that can prove invaluable.
For the sake of your family and loved ones, take advantage of the help they can offer before the unthinkable occurs. You’ll be glad that you did.