Important Steps to Take When Preparing Your Estate Plan

April 27, 2011

In my last blog I told you about my neighbors Mr. and Mrs. P.  Fortunately for Mrs. P, her next door neighbor is a financial planner, so I’m able to help her during this time of transition.  That being said, there are a few things Mr. P could have done to help make his wife’s situation a little easier.  Here are some things you can do to help your loved ones cope with your loss:

Prepare a basic estate plan

Some people freak out when they hear the words “estate planning” because it forces them to consider life when they’re gone, and who likes to think about that?  Here’s a reality check: we’re all going to be gone some day.  If we truly love those we leave behind, then we would want to do whatever we could to make their lives easier.

A basic estate plan consists of a will, a durable financial power of attorney, and a health care directive.

  • A will is a simple document that provides instructions on how you want your probated assets distributed, but it also names an executor of your estate, a guardian for minor children, and it allows you to establish a trust should you want to leave specific instructions on when and how you want your assets used.
  • A durable financial power of attorney allows you to designate someone to make financial decisions on your behalf should you ever become incapacitated.
  • A health care directive consists of a living will and a health care power of attorney.  Your living will provides information regarding what forms of end-of-life care and treatment you are willing to receive, and the health care power of attorney designates who can provide those instructions to your health care professional.

Involve your household in managing the finances

When it comes to managing the household finances, my wife leaves a lot of it up to me, and it bothers the heck out of me.  I understand why she does it, but I hate knowing that if anything ever happened to me she’d be completely lost.  I think watching what Mrs. P is going through has made Susan realize that it’s no longer okay to be financially illiterate, so she’s finally starting to take some interest it the household finances.  Here’s what every adult in the household should be able to do:

  • Balance a checkbook – it seems simple enough, but many spouses never feel the need to know the balance in the checking account.
  • Prepare a budget – similar to balancing a checkbook, if one spouse is a saver and one spouse is a spender, you can see how either of them on their own could get into trouble.
  • Access financial records – whether it’s online banking, 529 accounts, investments, or IRAs, if one person runs the show, then the show is over when they are gone.

Protect your family with adequate life insurance

I’m the breadwinner of the family.  If something happens to me I want to know Susan and the kids will be financially secure.  The same is true if something happens to Susan.  Even if it is only to cover funeral expenses, you don’t want to leave your loved ones with a large financial burden immediately following your death.  Consider what immediate and future expenses your family may incur when you pass away, and determine if life insurance can help to cover the cost.

Keep an emergency fund

Similar to having life insurance, your loved ones may incur some unexpected expenses following your death.  Having a well funded emergency fund (6 – 8 months expenses is recommended) will help them as they develop a working budget.

Keep good records of your financial picture

Just because YOU know where everything is, how it’s titled, and what it’s worth, doesn’t mean everyone else does (unless of course you are my wife in which case I’m supposed to be able to read your mind).  Write it down, tell them where it is written, and update it regularly.  My family uses a simple book called Making Things Easy For My Family.  In it I can list bank account information, retirement account information, life insurance policy numbers, assets, personal data, where my will is located, the name of professionals I work with, employment information, and a whole lot of other essential information my family will need to know if and when I pass away.

I’m sad to see Mr. P go, but it’s even harder to watch Mrs. P struggle through the financial maze she is facing.  Eventually she will make her way through it, but it sure would have been a lot easier had Mr. P left a map.