One of the reasons why money creates stress in people is because they don’t know what will happen in the future. People don’t fully understand how different life changes would impact their finances and whether or not they should worry about it. The concept of an inheritance is older than the Bible, yet the planning around when you are no longer here is still a struggle for many people. Nearly every able adult should work through what could happen if they cannot take care of themselves and/or if they pass away suddenly. Creating a plan for many of the tragic “what if’s” in life can tremendously reduce your stress levels related to money. There is no right answer to correct estate planning, but having a plan is better than being unprepared.
Start with the Right Mindset
Estate planning is mainly about organizing your wishes and finances after (or shortly before) you or your family members pass away. Having the right mindset, documents, and insurance can go a long way to building more peace of mind with your money. The last thing you want is to be on your deathbed and everyone is scrambling around you. Imagine getting into a life-threatening accident, and your spouse is trying to support you in the hospital, communicate with the medical staff and extended family, continue working, and take care of the kids. End of life care can be brutal, but it could be a whole lot worse if people were not relatively prepared for it.
Take the time with someone you trust, (whether it’s a spouse, parent, or advisor) and think about what would happen if you suddenly passed away. Do your loved ones know what to do? Where would the kids go? Where do you want your money and possessions to go? What would happen to the business? What if you and your spouse died at the same time? Walk through questions like this and write down an answer. If you are married, it is important you do this process together and map out a plan for both partners.
This exercise is about focusing on those who love and depend on you. How do you want your family to care for you if you can’t care for yourself? Who do you want to handle the finances or healthcare decisions? Tragic or life-threatening events in life will never be an easy bridge to cross, but focusing on what could make those situations easier is the whole goal of estate planning.
Estate Documents to Have
After you write down as many answers as you can, find a local estate planning attorney and have them create an official Last Will and Testament. Most people know they should get a will, but you would be surprised how many people either don’t have one or have one too outdated. The goal of the will is to assign your possessions and your wishes after you pass, everything from your home to your kids and your pets. A will does not have to be complicated, and most are fairly simple. Get an attorney to make it official, and you will dramatically improve your preparation and estate plan.
Now there are generally a few other documents you will want to have. There is no set number of documents required, but helpful documents are Power of Attorney’s (both financial and healthcare), and a Living Will. Drafting a Financial Power of Attorney (POA) would give instructions and authority to someone you designate, to handle your finances if you cannot yourself. The healthcare POA has a similar purpose, but for health-related decisions. Many times, both POAs are the same person, but don’t have to be. Lastly, a Living Will is an instruction manual to help your healthcare POA decide on matters the way you would have wanted.
It is important to address the topic of trusts as well. Many families have trusts, but not everyone needs or wants a trust. A trust can be a great estate planning tool to better execute your wishes (more so than a will), and in certain cases can dramatically reduce estate taxes. The problem is a trust is like buying a car, it is great to use to get to where you are going, but you need to answer a lot of questions to buy the exact right car for you. Talk with your advisor and attorney and see if a trust is right for your family.
How Insurance can Help with Your Estate Plan
While you set up the will, POAs, trusts, etc., you will almost certainly be asked about life insurance. While insurance planning itself could be multiple articles alone, it is important that we focus on adequate life insurance for estate planning purposes. There is no exact amount of insurance that you need, but thinking about your dependents could get you started. Would you like your spouse to pay off the house? Will they be able to keep working? Can they afford to live without your income? Some advisors and insurance agents say it is smart to start with about 10 times your salary in life insurance. So, if you make $100,000 per year, then start with at least $1,000,000 in life insurance. The real answer can be much more nuanced, but it is a good start.
After you decide how much, focus on what type of insurance to buy. Like anything else, there are many options for life insurance. I am going to break it down into two choices: term and permanent. Term life insurance is as simple as it gets. You pay a relatively small annual amount, and the insurance company gives you life insurance coverage for a period of time (say 20 or 30 years). Permanent insurance is “timeless”, hence the permanent part. You pay an annual premium and for the rest of your life you can have coverage, usually with other benefits as well. Each permanent product is different, so you need to work through how complicated you need your insurance to be. For those wanting to keep it as simple as possible, term life insurance is likely good enough.
Insurance is also important outside of your family, especially if you own a business. Two major insurance policies you can look into are buy-sell agreements, and key person insurance. Buy-sell agreements help keep companies from closing if one partner dies. If you cannot currently buy out your partner, I’d recommend learning more about it. Key person insurance is related to important employees. If your best employee died today, could the company make it until they are replaced? It could be worth having a policy to make finding and training a replacement much less of a financial hit.
Don’t Delay
Estate planning is something you can do up until the day you pass away. Both financial planners and estate planning attorneys can help you create a more solid estate plan. Working with them, your spouse, can help your family rest better knowing you are prepared if something tragic happens. Steven Covey’s 7 Habits of Highly Effective People harps on beginning with the end in mind. It’s hard to work through, but every few years it can be beneficial to revisit your estate plan and focus on what the end would look like and how those around you can honor your wishes and your legacy.
TC Falkner 