Preparing your finances for your death is a topic many don't want to talk about. Death is inevitable, however, and if you don't take the time to plan, your wishes (and your family's financial security) could be at risk.
Everyone should make a few preparations to ensure that decisions are made with the right frame of mind and not out of emotion or grief. Creating a will, naming an executor, and considering your estate are all extremely important. In addition, talk to your family about the following four topics:
1. Prepare beneficiary forms. There are some people that falsely believe that if they have a will and testament it will supersede all other documents when it comes to their estate. Depending on the account, there are state and federal laws that bind who can receive a balance after your death unless you formalize an alternative correctly. And in the case of a 401(k) plan, the person listed on the beneficiary form has a right to that money, regardless of what your will calls for at your death. With a 401(k) plan, you will need to name your spouse as beneficiary, or have your spouse waive their rights in writing. With an IRA, you have more flexibility. Whatever your wishes, you will want to make sure you have completed the proper beneficiary paperwork for each retirement account you hold, plus any additional insurance policies that may payout at your death. If you have any changes in circumstance (i.e., divorce), update your forms immediately. Check on the paperwork once a year to make sure you have everything in order and no changes are necessary.
2. Select a financial professional. Your spouse or partner may be left with a lump-sum balance from an insurance settlement and/or retirement account. After your death is not the time for your loved one to start searching for a reputable investment adviser. Start interviewing potential candidates for the job, first by talking to friends and family for referrals. You can use referral sites, like NAPFA.org, for a listing of financial advisers in your area. Look for a fee-only, unbiased adviser that will not receive compensation from selling your family on a particular investment product.
3. Make your accounts accessible. A durable power of attorney for finances with a "springing" clause allows your designated "agent" access to your finances after a doctor certifies you incapacitated. This option, however, automatically ends at your death. Another option is to add a name to your bank accounts, especially if you are single, or if your primary bank account is listed in your name only. When you are gone it will be much easier for your family if there is someone with access to your cash assets. Adding someone that you trust to your accounts will allow your outstanding bills to be paid and funeral arrangements to be made with your funds, if that is your desire. Check with a legal professional before moving forward with any plan to ensure you are following all state and local regulations.
4. Create a spending plan. In all likelihood, you will have some debt in the form of a mortgage or some other expense accumulated. Talk to your family about how you would like to take care of your debt. Would it make the surviving family's life easier if the house was paid off or a family business was sold? Talk through these topics to make sure everyone is on the same page. Along the same lines, keep notes on the location of important papers, lists of assets, and important contact information. This information should include the contact information for your attorney and your financial planner, information on where to find your will, any insurance policies, information on bank accounts and investments as well as any outstanding debt in your name.
While the topic may be grim, having a conversation with the people that will be left behind about the plans you would like to see carried forward after you're gone could be easier than you think. These topics are a starting point, so make sure to keep the conversation going.
The author of this article is not an attorney and nothing in herein should be construed as legal advice. Contact a qualified attorney to discuss the laws in your state relating to inheritance, asset transfers, and any other matters discussed in this article.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost effective 401(k) advice and solutions for the every-day investor. His advice has been featured on various news outlets including FOX Business, USA Today and The Wall Street Journal. Keep tabs on Scott on Twitter and Facebook.