STUPID MISTAKE #11
Financial Clutter
The long period of adjustment after a loved one’s death is often complicated by issues concerning money. Sometimes the person who has died has failed to plan ahead. Sometimes those left behind do not understand how to go forward financially.
—SUZE ORMAN, The Road to Wealth
We don’t have a financial file. We have a financial pile.”
Tim, a financial planning client, laughed as he said it, and I joined in. “I can use that,” I said, thinking of future writing and speaking projects. I assured Tim that he and his wife, Laurie, were not atypical—that many, if not most, adults have not taken the time to organize their financial records for easy access.
Keeping organized, up-to-date financial records is not exactly an exciting subject, I know. It’s about as enthralling as watching paint dry, and I realize that it is not the key reason you are reading this book. But stop for a moment to consider the amount of time you may be spending each month searching for various documents as you need them. What should take a few seconds may take hours. Perhaps you finally find that mortgage document . . . in the car-payment file. Or maybe you give up after not finding it at all.
Frustrating, isn’t it? Now imagine that it’s sometime in the future and you are no longer on the scene. Your spouse, adult child, or another loved one is urgently trying to locate a key financial record or a document with your final instructions or your will or trust documents. Imagine the unnecessary time, anxiety, uncertainty, and expense that person is experiencing at what is likely the most devastating time of his or her life . . . because of the financial clutter you may have left behind.
Make the Impossible a Little Easier
John was a robust man in his late thirties, a good husband and father, and a conscientious provider. He always paid his bills on time and made sure his family’s needs were met. But then the unthinkable happened. One cold, icy evening on the way home from work, John’s car hit a patch of black ice and spun out of control. He died instantly when the car crashed head-on into a pickup truck in the opposite lane.
In the surreal haze of shock and disbelief that accompanies sudden loss, John’s wife, Karen, began the painful process of settling his financial affairs. She quickly realized that, despite their best intentions, she and John had never taken the time to organize their personal and financial papers for easy accessibility. While John had a will, Karen was not sure where it was located or, since it had not been reviewed in several years, whether it reflected John’s most recent wishes. As a result, Karen experienced an additional burden that no grieving survivor should have to bear: the exhausting anxiety and frustration of searching for documents and instructions she needed in order to ensure that her own financial life could go on.
This is the key reason why reducing financial clutter and keeping your financial house in order are so important: If your records are scattered between drawer and closet and basement and crawlspace, can you imagine how tough it will be for your spouse or other family members to sort through your affairs if something happens to you? As you seek to avoid the common Stupid Mistakes of personal finance, let me suggest that one of the most responsible, loving things you can do for your family is to make sure that all of your key records and documents are organized, accessible, and up to date.
In case you don’t enjoy thinking about your own demise, there’s another compelling reason for getting your records in order: the simple fact that you need to refer to them often during your lifetime. The fact is, you may be around for decades to come. So why not make life a little easier for yourself as well as for your loved ones? Get those records in order, and you’ll be able to find documents in seconds instead of standing on your head as you search the bottoms of boxes in your basement. And as new paperwork flows into your life, as it does with nearly every day’s mail, you’ll be able to file it within seconds instead of tossing it in that precipitous pile of “things you’ll take care of Someday.”
Eliminating financial clutter and preparing to leave your house in order involve:
• turning your financial pile into a financial file;
• writing or updating your will;
• establishing a durable power of attorney, health-care proxy, and living will; and, in many cases,
• setting up a living trust.
Don’t be intimidated. I’ll help you set up your home financial file; then we’ll consider what you need to know about the other components of estate planning.
Your Home Financial File
Your first step is to hop into the family buggy and drive to Wal-Mart. Say “howdy” to the friendly greeter, go to the office-supplies aisle, and pick up a dozen or so blank file folders and file labels. Then proceed to the candy aisle and select a bag of your favorite M&M’s. (See, getting organized can be fun after all.)
The next stop is your neighborhood bank where, if you don’t already have one, you’re going to rent a safe-deposit box. It will run you $20 to $65 per year, depending on how big a box you want, but a safe-deposit box is a good investment. (Almost as good as the M&M’s.)
When you return home with folders, labels, and safe-deposit key in hand (I’m assuming that, if you’re like me, the M&M’s are now long gone), grab a pen and label each file folder. If you tend to write in tongues, you may want to type the labels to make your folders legible. Here’s how you’ll label each file tab:
1. Personal Information and Instructions
2. Personal Documents (copies)
3. Personal Insurance Policies
4. Property Insurance Policies
5. Household Inventory and Net Worth
6. Savings and Investment Records
7. Retirement Programs
8. Consumer-Debt Records
9. Car Ownership and Repair Records
10. Real Estate Purchases and Improvements
11. Tax Returns and Documentation
12. Wills and Trusts (copies)
It’s likely that you do not yet have everything listed above. For example, you may not yet own a home or other real estate. But you probably will someday, and if you maintain the file as suggested, the folder will be waiting for you when the time comes.
You’ll note that in several instances I recommend keeping copies of certain documents in your home financial file. That’s because the original documents are extremely valuable, and, unless you have your own fireproof safe at home, you’ll want to keep certain originals in your safedeposit box or with your attorney to protect them from loss, fire, or theft. It may mean two or three trips to a photocopier during the next few days, but they will be minutes and dimes well spent.
Now it’s time to root through your file drawers, under your mattress, in the trunk of your car, and wherever else you’ve been tossing financial records to begin gathering documents for the folders you’ve labeled.
Folder #1: Personal Information and Instructions
In the event of your death, this folder is likely the first one your surviving loved ones will see. It will provide two key items to get them started: (1) an up-to-date list of important personal information and (2) instructions from you.
Personal Information. Take out a couple of sheets of paper and invest a half-hour preparing a list detailing:
• your full legal name;
• your date and place of birth;
• your Social Security number;
• your military service number and dates of service;
• your date and place of marriage;
• the names, birth dates, addresses, and phone numbers of your children; and
• the names, addresses, and phone numbers of your former spouses and the children of previous marriages.
You’ll also want to list essential medical information such as the names and phone numbers of your doctors and what each physician treats you for. Also list the names, addresses, and phone numbers of your key advisers such as your attorney, accountant, financial planner, minister, insurance agents, and executor.
If you have given someone power of attorney (which authorizes that person to control your assets if you become incapacitated) or named a health-care proxy (someone you’ve authorized to make health-care decisions on your behalf), name those people here and list their phone numbers and addresses.
Provide phone numbers for the Social Security Administration (800-772-1213) and, if you served in the military, the Veterans Administration (800-827-1000). These numbers will help your survivors process requests for Social Security and veterans death benefits.
Write down the location of the original of your most recent will (most likely your attorney’s office) as well as the location of a copy (folder #12 in your home financial file).
Finally, write down the location of your safe-deposit box and keys.
Instructions. Your letter of instruction should be kept with your will, but a copy should be kept in this file as well. (Quite often, wills are not referred to until several days after a memorial service and burial.) Your attorney can assist you in drafting this letter, but it is not necessary for you to use an attorney. Here you will detail your final wishes and any prior arrangements you may have made regarding funeral or memorial services and burial or cremation. You can also include a special message of love and encouragement for family members, notes regarding whom to call to begin processing insurance claims, and even a note bequeathing your Guinness-record toothpick collection to your cousin Jimmy if your will has not already done so.
Folder #2: Personal Documents
Photocopies of your birth certificate, marriage certificate, and divorce papers (all essential in estate settlement), adoption papers, and military discharge papers should be stored here. Keep the originals in your safedeposit box. In the spirit of government efficiency, we all need our birth certificates to prove we were born. If you do not have your birth certificate, check with your parents. If they can’t prove you were born, check with the hospital and/or city government where you think you may have been born.
Folder #3: Personal Insurance Policies
Policies and payment records on life, health/medical, disability, and other personal (“people”) insurance policies go in this folder, along with employer-provided policy and benefits booklets.
Since your insurance coverage and/or policies could change frequently due to job changes or prudent rate shopping, be sure to keep this folder up-to-date, clearly indicating which policies are in force and which have expired or been canceled. Mark the expiration date clearly on the front of expired or canceled policies and keep them for a few years in case of a delayed claim; then discard them.
Keep payment records (premium-payment receipts with their canceled checks) in this file as well, attaching records to the appropriate policy. This will verify that policies were paid and kept in force.
Folder #4: Property Insurance Policies
This folder is for policies and payment records on your homeowners or renters insurance, auto insurance, umbrella liability insurance, and insurance on other properties. As with all insurance, keep these policies updated as your circumstances change. Follow the advice above regarding payment records and canceled or expired policies.
Folder #5: Household Inventory and Net Worth
Whether you’re renting or buying your home, you should always maintain an up-to-date inventory of major furnishings, appliances, jewelry, artwork—anything that would be costly or difficult to replace in the event of theft or fire. A copy of that inventory will go in this file; keep the original in your safe-deposit box.
A household inventory can take some time to complete, but doing it conscientiously can pay huge dividends in the long term. Plus, you have to do it only once; then you simply update your inventory as you acquire new items or dispose of old ones. The easiest way is to go from room to room, including your basement and garage, listing your major possessions complete with their brand names, serial numbers, purchase dates, and purchase prices. If you do not have receipts, or warranty registrations verifying prices and dates, look for canceled checks or credit card statements that provide this information. If you’re normal, you’ll have several items for which no records have been kept; estimate their prices and purchase dates as accurately as you can.
Many people back up their inventories with photos or home videos of each item. Photographs can be especially helpful to police or insurance adjusters should you need their help. Keep photos or videocassettes in your safe-deposit box along with the original inventory list.
Also in this folder, keep a copy of your current net worth statement.
Update your household inventory every time you acquire a major new possession or get rid of an old one. You’ll also want to update your net worth statement at least once a year.
Folder #6: Savings and Investment Records
This folder is for documents and statements regarding your savings programs and for any investments other than real estate or retirement plans—stocks, bonds, mutual funds, precious metals, rare coins, and so on. You’ll want to keep actual securities documents, as well as any precious metals, in your safe-deposit box; buy/sell records on stocks, bonds, mutual funds, rare coins, precious metals, or other investments can go in your home file.
Buy/sell records should include the date of purchase, quantity, item, purchase price and commission paid, selling price and commission paid, and profit or loss. These records are essential at income-tax time and in the thrilling event of an IRS audit.
Folder #7: Retirement Programs
Documents and statements from 401(k)s, 403(b)s, pension programs, Individual Retirement Accounts, SEP-IRAs, and Keogh plans go here.
Folder #8: Consumer-Debt Records
Keep account numbers, statements, and payment records for your consumer debts in this folder. (This will include credit cards, charge cards, and financing on anything—other than cars—that does not appreciate in value.) Also keep copies of correspondence you’ve sent and received regarding your accounts—especially letters in which (1) you’ve asked to have your account closed and (2) the credit issuer has confirmed that your account has been closed at your request. By ridding your life of Stupid Mistake #5, “Borrowing Trouble,” you’re going to render this entire file inactive as soon as possible.
Folder #9: Car Ownership and Repair Records
Folder #9 is for pink slips, registration receipts, purchase agreements, warranties, and other ownership documents for all your vehicles. It’s also wise to keep copies of all service and repair records in case the repair work done three weeks ago needs to be redone.
Folder #10: Real Estate Purchases and Improvements
When you went to the closing on your house, you were handed a forest of paper and told to “just sign here.” You took home a thick folder of documents along with a fresh case of carpal tunnel syndrome; you’ll want to keep photocopies of all those documents in this file. This is also where you’ll keep copies of deeds and improvement records on any rental properties, raw land, or other real-estate investments. Original deeds should be kept in your safe-deposit box.
You May Be Making Stupid Mistake #11 If . . .
• your loved ones would not know where to find your key accounts, records, and documents if you should become seriously injured by killed
• you frequently find yourself crawling among the dust bunnies under your bed in search of important legal and financial records
• you have not completed a home inventory or updated it within the past two years
• you do not have a written will or have not had your will reviewed and updated recently by an estateplanning attorney
• you have not designated a durable power of attorney and health-care proxy
Also in this folder, start a list of improvements you make to your property. Record the date, type, and cost of all improvements and attach receipts verifying this information. This will come in handy whenever your house is appraised for sale or refinancing, and in some cases it may be needed when you file tax returns after selling the house.
Folder #11: Tax Returns and Documentation
A normal IRS audit (oxymoron) can dig into your past up to three years if your friendly tax person suspects a “good faith” error. However, he has six years to challenge your return if he thinks you underreported your income by 25 percent or more. If fraud is suspected, he can hound you as far back as your previous life and as far into the future as your next one. Moral: Keep your tax records indefinitely.
Keep the last two years’ returns and documentation (W-2 forms, 1099s, receipts, expense records) in this folder for easy access throughout the year. In a storage box in your closet or basement, keep a minimum of four more years’ tax records. Better yet, keep ’em forever.
If you should lose these returns, your tax-return preparer or the IRS and state tax agencies can provide you with copies. However, they have copies only of the actual tax forms you filled out and not the receipts you totaled to claim your deductions. So keep the originals of receipts in a safe place, clearly labeled so they are easy to find for a given claim in a given year.
Folder #12: Wills and Trusts
Keep photocopies here, along with the name, address, and phone number of the attorney who drew up the documents. Originals should be kept with your attorney, who most likely has a stationary, fireproof safe. It’s generally not wise to keep originals of wills and trusts in your safe-deposit box because, in some situations, banks can seal safe-deposit boxes until other estate matters have been addressed. Store originals of wills and trusts at home only if you have a stationary, fireproof safe. Keep in mind that laws change and your personal situation and wishes change; therefore, wills and trusts should be reviewed every few years by your attorney to ensure they are up-to-date.
Customize, Adapt to Your Needs
Of course, I want you to feel free to customize and adapt your home financial file as your situation changes. As the file grows, you may want to further classify your records by using twelve hanging files with multiple folders in each hanging file.
Keep your home financial file in a file cabinet that’s near where you process mail and pay bills. Whenever you need the information, it’ll be right there. More importantly, your home financial file will be readily accessible should something happen to you, making a difficult task much easier for your loved ones.
Now there are some additional steps to consider in the process of eliminating financial clutter from your life—some key planning tools that can help organize and protect your financial assets not only for today, but also for the benefit of your loved ones in the event of your incapacitation or death.
It’s true that you can’t take it with you when you die, which underscores the point that money is only a tool of life, not life itself, and that relationships with God, family, and friends deserve our highest priority. Once you’ve breathed your last, there are basically three places your financial assets can go: (1) to your heirs, (2) to a ministry or charity, or (3) to the government. Who gets what, and how much, will be determined largely by whether you have drafted a will spelling out how you want your assets divided.
Whether you realize it or not, you do have a will. If you’ve been proactive, you’ve drafted and signed a will detailing your final wishes for your property. If you have not drafted and signed a will, then your state will, in effect, “write” one for you after you die, using what it calls “intestate succession rules.” (Dying intestate simply means you’ve croaked without a will.) Typically, states give assets to the surviving spouse and children (in most cases a fifty-fifty split); if there is no surviving spouse or children, then dibs go to grandchildren, parents, siblings, nieces and nephews, and cousins, in that order. If there are no surviving relatives, your assets go to the state.
So why be proactive and draft a will? Because you care about your loved ones and your property, and you don’t want your state to determine who gets what. (Neither do you want to put your loved ones through the lengthy, expensive process in which the state divides and distributes your assets.) Most likely you have better ideas about where you want your money and property to go—especially if you’re a surviving spouse and you prefer to designate beneficiaries other than your children or relatives. Perhaps you’d prefer that your favorite charity receive a good portion of your estate instead of your cheesy cousin Louie.
When you draft your will, you’ll need to designate an executor who will serve as your personal representative and ensure that the will is probated (put through the legal system) and that your estate is distributed according to the terms of the will. You’ll want to select someone you trust, who has an eye for detail, and who has your survivors’ best interests at heart. The executor can and should be paid a fair fee from your estate for his or her time and effort on your behalf.
Depending on the complexity of your situation, a will can cost between $100 and $3,000 if done by a lawyer. The law does not require you to use an attorney, but most financial advisers strongly recommend that you do to be sure the essential bases are covered. You can also draft a will using one of several software programs or a form kit from a stationery store. In any case, you will need to have two witnesses (in some states, three) watch you sign the will and sign their own names attesting to that fact. If you do draft your will yourself, I strongly recommend that you hire an attorney to review it to be sure there are no loopholes that could cause trouble for your survivors.
A Durable Power of Attorney
It’s a situation none of us likes to think about: becoming incapacitated by an accident, illness, or old age and rendered incapable of handling our personal and financial affairs.
If this should happen to you, a court order may appoint a guardian to manage your affairs for you. Problem: The court-appointed guardian could be Lenny, your freeloader son who’s lived in your basement since dropping out of high school fifteen years ago and who would give his favorite nose ring to get his hands on your checkbook.
You can keep Lenny away from your assets by appointing your own guardian through a durable power of attorney. This document authorizes someone you trust to step in and handle your personal and financial affairs on your behalf should you become unable to carry out these responsibilities yourself. It’s another proactive step we can all take to help ensure good stewardship of our assets and to help reduce the stress on our loved ones.
You can also set up special powers of attorney, designating different people to handle different responsibilities. You could appoint one guardian to make decisions on your behalf regarding health care, another to handle housing and personal property situations, and another to manage your finances.
You can change or cancel a durable power of attorney at any time. Since it is set up to protect your assets while you’re alive but incapacitated, it terminates immediately after you die.
An alternative to a durable power of attorney is a living trust, which effectively accomplishes the same objective as a power of attorney but with a significant, additional benefit: It remains effective after you die and passes your assets directly to your beneficiaries without the time, hassle, and expense of probate.
A trust is a legal entity into which you can place the title to your property and nonretirement plan assets, yet you have full use and stewardship of those assets throughout your life. In most cases financial advisers recommend the revocable living trust, which allows you to change or cancel its provisions at any time. You can add new assets or pull assets out. If you become incapacitated, the trust is managed for you by a successor trustee of your choosing, much like the guardian in a durable power of attorney. In the event of your death, the trust and its assets go directly to your beneficiaries, steering clear of costly probate.
If you set up a revocable living trust, you will still need a will—although of a slightly different flavor. The pour-over (or backup) will addresses any assets that may have been left out of the revocable living trust (either by mistake or by passage of time as new assets are accumulated).
A Living Will
Another living nightmare we don’t like to contemplate is that of becoming terminal through illness or accident but being kept alive indefinitely by life-prolonging medical machinery. Setting up a living will can help guide medical personnel as well as your loved ones in the tough decisions they would face in such a situation.
Also known as a health-care power of attorney or an advance directive, a living will informs your doctors and family that if recovery appears impossible you do not want extraordinary life-extending procedures to be implemented. It is a document signed by yourself and by witnesses, and it also appoints a friend or loved one whom you trust to make sure your wishes are carried out.
Although wills, powers of attorney, and living wills can be set up using forms or software, I strongly recommend that you consult an attorney on all such matters. Do-it-yourself documents are sometimes the first to be thrown out of court, and with them can go all your good intentions and best wishes. Because estate planning is complex (let alone dull), a good attorney is well worth his or her fee in helping you determine the combination and design of wills, powers of attorney, and/or trusts that will prove best for your situation and needs.
Peace of Mind
Getting your home financial file, wills and trusts, powers of attorney, and health-care directives together and up-to-date will take some effort, but your investment of time and money will be well worth the newfound sense of order that comes to your financial life. Key documents will be readily available whenever you or your loved ones need them. Your family and your assets will be better protected from unthinkables such as premature death or incapacitation. Most importantly, you and your family will enjoy peace of mind in knowing that, because you love them, you’ve made provisions now that will help provide for the legal and financial contingencies in their future.