How to prepare your finances for your death
In many families, one person manages the finances. In our case, I manage everything about our money, from budgeting to investing. My wife has no interest in taking over this responsibility. And that presents a potential problem.
What would my wife do if I got hit by a truck? How would she manage our investments? Would she even know what accounts and investments we have?
These and other questions led me to create what I call the money filing cabinet. This is a binder designed to give my wife everything she would need to manage our finances if I couldn’t.
The Money File
It’s a simple 3-ring notepad that contains everything someone would need to understand our investments, insurance, wills, trusts, and even passwords. It is intended to give my wife a full understanding of our finances and how to manage them in the future.
It’s more than just a list of assets and liabilities. The Money Binder outlines my investment philosophy and provides concrete steps on how my wife can step into my shoes should the need arise. I also wrote it so that my children or a trustee could do the same.
Let’s examine each section of the workbook:
The table of contents is more than just a list of workbook sections. Here I describe each section in detail. For example, here’s what you find in the Net Worth Statement section of Tab 2 (edited to remove some confidential information):
Tab 2 contains our net worth statement, which lists the assets we own and the debts we owe. Also included are supporting documents for our assets and liabilities.
The vast majority of our investments are held in two 401(k) accounts and multiple retirement and taxable (non-retirement) accounts. I have taken two approaches to investing. Along with our retirement accounts, our investments are in a handful of mostly low-cost index mutual funds. These are mutual funds that seek to mimic certain stock and bond indices, such as the S&P 500.
For our taxable account, I invested in a few high quality individual stocks.
Anyone reading this may feel overwhelmed right now. I offer you a simple solution—Hire Vanguard to manage all investments. Vanguard offers a very low cost investment management service (.30% of assets under management in January 2016). The service is called the Vanguard Personal Advisor Service. They will invest the assets in several well-diversified low-cost index funds at Vanguard. It’s the smart way to go.
One potential catch: Selling the individual stocks I owned can trigger taxes. It can also be a bad time to sell if the stock market is down. Here you might want to search [our accountant’s] advice on taxes and deadlines. But I wouldn’t lose too much sleep over it. Remember, the goal is financial security, not extracting every possible penny from every investment. If I did my job, you should be well taken care of financially.
A final thought: however you decide to manage our investments, remember one very important thing. There will come a time when the market crashes and you will be tempted to sell everything and go cash. These times usually involve much more than just a falling stock market. We may be at war, unemployment and inflation skyrocketing, or the banking system may be on the verge of collapse. Dark skies ahead.
Do not sell! Think about all the bad things we’ve been through in the past – World War I, the Great Depression, World War II, the Korean War, Vietnam, 9/11, the Great Recession, etc. The economy and markets move in cycles. The best investors know this and never panic during tough times. Just stay the course.
One thing that will help you stay on track is a simple rule: never invest the money you will need in the next 5 years in the stock market. It will help you sleep at night when the market is boiling.
As the above shows, this workbook is as much about education as it is about a list of accounts. I managed the investments in our family; my wife has no interest in doing so. But the day may come when she’s forced into that role, and I want to offer as much advice as I can.
The first tab lists contact details for key people my family should contact in case the worst happens. In our case, the list includes our trusts and estates lawyer, our accountant, our benefits plan administrator (for our business), our life insurance company and our main bank.
For each I have included a contact address and phone number. I also include some explanation if necessary. For example, life insurance contact information includes my policy number.
net worth statement
It’s important to track your net worth. For this workbook, I am including footnotes that provide helpful information for my wife. Here, I focus on financial assets, our business and real estate. What you won’t find are personal belongings, cars, or other low-value items. The goal here is not to document every last thing we own down to the dishes. Rather, it is to give the reader a clear overview of our major assets and all of our liabilities.
Behind the net worth statement are recent statements of all bank accounts, retirement accounts, and taxable accounts.
>> Personal capital tracks your investments and updates your net worth automatically.
Here I keep a copy of my life insurance policy along with information on how and where to submit a claim.
Wills and trusts
In this tab, we keep copies of our wills, trusts, enduring powers of attorney and advance medical directives. The originals are kept in a safe.
It’s one thing to prepare your own finances for your eventual death. It’s an entirely different process to prepare a business. In my case, my wife and I are the only employees of the company. Plus, I know a lot more about running the business than she does. As a result, I spent a lot of time preparing material for my wife and children about the business.
Specifically, I prepared documentation that would allow anyone to run the business and understand the finances. In this regard, I was inspired by the excellent book, The electronic myth revisited by Michael Gerber. I also used SweetProcess, an online tool that helps companies create repeatable procedures and processes.
Finally, the last section deals with passwords. Here, I take an unconventional approach. What you won’t find are the passwords for our financial accounts. In fact, I would say these passwords are the least important. Why?
Upon the death of an account holder, the estate will notify the financial institution. For retirement accounts like a 401(k) or an IRA, the financial institution will transfer the account based on the designated beneficiary. Many taxable accounts are jointly owned and transferred to the joint account holder. The thing is, online account passwords won’t be needed to manage those accounts.
On the other hand, try to get the password of a relative on Facebook or Google. Good luck.
Of course, simply listing these or other passwords in a filing cabinet is not secure. Although it is unlikely that someone will break into our house, find the filing cabinet and take the passwords, it is still a risk. Plus, there’s always the risk of a friend or family member finding the binder.
So what is the solution ? In our case, the password tab provides details on how my wife or relatives can access my passwords. I use a password manager called Dashlane. With Dashlane, I can provide emergency access to any or all of my passwords to anyone I want. If that person requests emergency access, I will have a specified period of time of my choosing to reject that request. Of course, if I am dead or incapacitated, my loved one will have access at the end of this period (in my case 2 days).
The above is how I have structured our Money Binder. There may be other sections or information required by your particular situation. The key is to provide your loved ones with the information they need to manage finances in the event of an untimely death.
Finally, my wife and I go through the binder together once or twice a year. It’s essential. This allows my wife to ask questions. He keeps her informed of our investments. And it reassures me that she is able to manage our finances if necessary.