Preparing Your Finances for Death and Disaster

You never know if you might inadvertently step into the path of a truck.

I recently attended the funeral services of a young man who died differently, though unexpectedly. Ten years before, at age 29, he had suffered an accident that left him with short-term memory problems. After the funeral service, his mother confided that she discovered two bureau drawers in his home filled with bills and account statements going back a couple years. On the envelopes her son had attached sticky notes with reminders addressed to himself. It was impossible for her to immediately determine the current status of the accounts.

“He left behind a mess. I’m the one who’s supposed to leave behind a mess,” she said, voice heavy with grief and irony.

Dealing with a close family member’s death ranks way up there among emotionally traumatic experiences. Those left behind must deal with pain and loss, and in this disoriented state, must also put right the financial affairs of the deceased.

We can do much to alleviate at least some of the suffering our survivors will go through when our day comes if we take steps to put our finances in order now.

Take inventory of your assets

Creating a system for your finances accomplishes a couple of goals. It facilitates processing an insurance claim in the event of a disaster, and it makes it easier for loved ones to put their hands on important information in the event of your death or sudden incapacity.

You can organize your finances any number of ways, but here’s one method:

Purchase a fireproof box. The box should be large enough to hold documents, precious jewelry, and important photos, tapes or DVDs of family members — the stuff of family history that will be treasured for generations. I found a fire-safe security file that’s about 10 inches high, 12 inches wide and 8.5 inches deep for $65 at an office-supply store. It has a one-half hour UL fire rating, which I hope will never be tested. Set up a file system with appropriate subject categories. Reserve one file folder that you might label “household possessions” for photos of your belongings: furniture, electronic and computer equipment (with serial numbers inscribed on the reverse side), artwork, books, collectible items, etc. It would be useful to provide an estimate of their value, too. You can use other mediums — videotapes, computer disks or DVDs — on which to record this data if you prefer. This will speed along an insurance claim in the event that you suffer a loss due to burglary, fire or some other disaster. You might want to make duplicates of this information and store the duplicates outside your home — in your office or a safe-deposit box, for example (just in case your fire-safe security file melts, succumbs to a flood or is stolen). Reserve another file folder for “important documents.” It should contain birth, death and marriage certificates, military discharge papers, divorce decrees, Social Security cards, passports, property deeds, auto titles, etc. Another file folder might be labeled “investments” with information about pensions, brokerage and retirement accounts such as IRAs or Keoghs. Obviously you won’t be able to store all your statements in one folder, but include copies of a recent statement for each account, and update once a year. Set aside a folder each for insurance, medical records and bank records. The insurance folder can hold policies and correspondence regarding your auto, life, disability and health policies; another might contain important medical records, and yet another, photocopies of credit and debit cards, along with a copy of recent bank and credit card statements. Originals of wills and trusts can also be placed here if space allows, or you may be more comfortable keeping a copy in the box and the originals with your attorney. Create a road map. I suggest that the very first file folder, placed in front of the others, should be called “road map” and contain a summary of all your property and financial holdings. On it, list your assets, account numbers where applicable and approximate fair market values as of a particular date. It should list real estate holdings, business interests, current accounts (bank and brokerage), cars owned, cash or face values of life insurance policies, retirement benefits, and any personal property of significant value. The road map should also list your liabilities as of a particular date.

Phone numbers of the institutions that you do business with would be a useful addition to the road map file. If you deal with an accountant, financial planner or attorney who is familiar with your financial situation, be sure to include his or her phone number and address. If additional papers pertaining to your finances exist outside the security file, indicate their whereabouts on the road map. When you’ve assembled everything, let your family members know that your road map exists and where you keep it.

Oh — and if you have any specific preferences about your funeral or burial, you might want to include a file folder called “Last wishes for my funeral.” Maybe you don’t want sonatas by Beethoven and Bach to be piped in during the wake, but would rather have Steppenwolf’s “Magic Carpet Ride” or Led Zeppelin’s “Stairway to Heaven” playing. This is a good opportunity to let your wishes be known.

The pieces of an estate plan

A road map gives your progeny some direction of how much you owe and own, but your job isn’t finished yet. Have you created or updated your will? If you have not yet created one, you are leaving the vitally important task of asset distribution to the state in which you live. It may turn out differently from what you have in mind. If you have a will but haven’t updated it in years, it may be time to do so — especially if your circumstances have changed.

Some 50 percent to 70 percent of Americans die without a will, according to Stephen Maple, author of “The Complete Idiot’s Guide to Wills & Estates,” which is an excellent resource on the subject. Do-it-yourself will kits may do the job if your estate plan is relatively simple, but for more complicated family situations, hire an estate planning attorney. On its Web site, the AARP can help you find a lawyer that will do the job for reasonable fees.

Don’t forget that the beneficiary information that you designate on certain financial documents supersede whatever you might state in your will. So be sure to update the beneficiary information for your life insurance policies, annuities, 401(k) plans, IRAs and other accounts so that your assets go to the right folks. You don’t want your retirement money going to your ex, right?

In addition to creating a will, you might want to set up a trust for one of any number of reasons. Maybe you want to include a pour-over provision in your will to specify that some of your assets be placed in a trust for your spendthrift son at the time of your death. That way they could be disbursed, say, three times over a period of 15 years so that he doesn’t squander his inheritance all at once.

Or maybe you want to set up a trust with income going to your current spouse and the remainder going to the children from your first marriage — to ensure that it doesn’t end up in the hands of your spouse’s next husband or wife. Or maybe you have substantial assets and want to make sure that you and your spouse avail yourselves of the estate-tax exemption to which you are both entitled by creating a bypass trust.

Estate planning is a complicated topic, mainly because the laws have become extremely complex. For example, over the next five years, tax rates and exemption amounts will change radically. This year you can bequeath $2 million without triggering federal estate tax, and that number goes up to $3.5 million in 2009, then to an unlimited amount the following year. At the same time, estate-tax rates drop incrementally and disappear altogether in 2010. But then in 2011, the exemption amount reverts to $1 million and the tax rates go back up, unless Congress acts between now and then.

Talk over your situation with an estate tax attorney to see what might be appropriate for you.

But wait — you’re not finished yet. While you’re at the attorney’s office, take care of other important legal documents. What if you’re unable to make decisions about your own medical care down the road? A medical power of attorney assigns a designated friend or family member to make these decisions for you. Separately, consider creating a living will that states whether you want medical intervention to keep you alive in the event of a terminal illness. Think Terri Schiavo.

Finally, you might consider assigning power of attorney to a trusted friend or family member who can manage your finances if one day you are unable to do so yourself. A “springing” power of attorney goes into effect under particular circumstances, such as if you become incapacitated. A “durable” power of attorney goes into effect immediately. If you assign durable power of attorney to someone outside of the family — a bank, attorney or daily money manager — you’ll have to pay for the service.

What about your folks?

Have you talked to your parents about their plans? If they’ve been lucky enough to enjoy good health and still do — fantastic. But what if something happens down the road? It’s important to find out what their intentions are, and to inform them of their options if they’re not aware of them.

If you make financial organization a priority for yourself, you can use that as a basis to broach the topic with them. Say, “Hey, the road map to my finances is in this box in case you ever need to know. Do you have a road map?” If they haven’t created one, maybe you can help them do so.

While you’re at it, ask them if they would leave you a legacy that’s priceless — namely an account of their lives and the values that they’d like to pass on. So-called ethical wills have become popular recently as ways for family members to share values, beliefs, opinions and important life events. Ask them to draw one up for you. Or they may be willing to reflect on their lives in a less formal way, by talking to you on tape, perhaps even on camera, so that you can have a keepsake of them that you can pass on to future generations.

Last summer, a survey conducted by the insurance company Allianz revealed that “nonfinancial leave-behinds, like ethics, morality, faith and religion, are 10 times more important to both boomers and elders with children than the financial aspects of a legacy transfer.”

While leaving money behind to heirs may be intended as an expression of love, a personal account of one’s life story holds immeasurable value for those who are left behind.