Developing the Complete Estate Planning Strategy

A will plus a trust or two simply do not make a complete Estate Planning Strategy. Most estate planning stratrgies are woefully incomplete. Heirs and loved ones often suffer as a consequence.

A complete estate plan does more than decide how your assets will be divided and how taxes will be reduced. A full estate plan meets a number of other goals and covers other situations.

An essential part of an estate plan is what I call the Financial Emergency Kit. This is a set of documents and other tools that will assist you and your loved ones through a range of difficult situations. Some of the tools will be helpful even in situations when your health is not affected. They keep the difficult times from becoming much worse. Some of these tools even help avoid problems. A good estate planning advisor will focus on these tools as parts of estate planning, and you would be wise to insist that they be part of your plan.

Here are the essential items of your financial emergency kit, which should be part of your estate planning.

Compile your beneficiary book. This is a three-ring loose-leaf notebook that contains all the items discussed in the rest of this article, plus any other items you think might be helpful. It is designed primarily for your executor. But it also will be useful if you become incapacitated. Your executor and key loved ones should know about the book and where it is.

For example, Tom Carvel used to own a chain of ice cream stores, primarily in the northeast. In 1990 he sold it for around $200 million. He died a few years later. It turned out that he had very complicated finances with numerous trusts and partnerships. He apparently understood the structure and transactions, but no one else did. There weren’t very many records. As a result, his estate was rapidly depleted by legal expenses and other costs.

Having organized records is the least you can do for your loved ones. The records you should compile include latest tax returns, will, trusts, insurance policies, financial accounts, personal financial statements, loans, deeds, property titles, and a list of advisors. Be sure to list jointly-owned property. If you own a business, the organizational documents and other details should be included.

Records not in the notebook should be referenced in it. For example, if your financial account statements are not included, have a section that lists your accounts and where you keep the records.

The notebook should be well-organized and kept up-to-date. I often refer to this as the best gift someone can leave heirs. It reduces both the cost and emotional burden of dealing with estate administration.

A financial power of attorney is essential. Most estate plans focus on one’s demise, but the possibility of disability also must be considered. Someone should have legal authority to manage your finances during that time. If you haven’t made plans, loved ones must go to court to have someone appointed. At that point, you will have no control over that choice.

All states provide for some kind of power of attorney. Most states recognize a durable POA, which takes effect right away and stays in effect unless you revoke it. Some states also recognize a springing POA that takes effect only when you become disabled.

The POA can be general or specific. Most estate planning advisors prefer a general power, because you really cannot anticipate all the issues that might arise. Some people, however, want to give a limited POA, restricting the duties only to financial transactions.

One reason to get started on the POA is that most financial institutions require that a copy of their own form be signed and on record. They might not accept the form drafted by your attorney or might delay its acceptance for some time.

Entrepreneurs need to set up a business succession. Line up successors or at least caretaker managers who can run the operation for a few months. These might be key employees who can be trusted to keep the operation going or a trusted outsider who knows business generally and knows your business well enough to manage it for a while.

Have the succession plan in writing, and go over it with everyone involved. Talk to bankers, creditors, suppliers, and other important contacts about what they would need to know to implement your estate planning strategy.

Review beneficiary designations. Many assets are not covered by your will. The next owner is determined by the beneficiary designation form you completed. These assets include IRAs, employer retirement plans, life insurance, and annuities. Always keep a copy of these forms (which usually are a part of the application) and review them periodically. It is a good idea to name contingent beneficiaries in addition to the primary beneficiary.

Health care documents are essential in case of incapacity. Someone needs to make medical decisions. The simplest health care document is the living will. It gives general instructions about which medical procedures are and are not to be used.  Studies show, however, that the document is of little effect. Often the doctors don’t see it until after decisions have been made, and the instructions are too vague for many situations.

A better document is the health care power of attorney. This gives an individual or group of individuals the right to make decisions when you are unable to. Be sure all your regular doctors have the current document in the front of your charts. Also, be sure each of the power holders has a copy of the document, and the doctors know how to reach them.

While you are at it, decide if you want to be a medical donor. This is another estate planning decision your loved ones shouldn’t have to be making.

Prepare your funeral and burial instructions. In most states, these have limited legal effect, but most heirs will try to follow them. Preparing these instructions ahead of time not only will prevent disputes but also is likely to reduce some of the burden on your loved ones.

Other letters of instruction also can be valuable, though they also have no legal effect. If your will creates a trust for someone’s benefit, you might want to write a letter telling the trustee your reasons for establishing the trust, how it should be invested, and what should be the standards for making distributions. If your executor has discretion over some items, provide some thoughts about the disposition. This could be helpful regarding a business, real estate, or unusual items such as collections. It also could be helpful for dispersing personal property.

Have your insurance policies up-to-date and well-organized. In today’s litigious society a personal umbrella liability policy is essential and low-cost protection against many possible claims. Most people should consider $3 million to $5 million of coverage, costing a few hundred dollars per year.

Many people also overlook disability insurance. The odds of being disabled from work depend on your occupation and health. Many people do not buy disability coverage, because they do not think disability is likely. If you buy coverage, be sure to buy a policy that triggers coverage when you are unable to perform your current job. Less expensive policies provide benefits only if you are unable to perform any job. Those policies have a much lower probability of paying benefits.

Ensure cash flow will be available. If something happens to you, bills still need to be paid in the short run. Try to manage your affairs so that there is adequate liquidity to pay three to six months’ expenses without much trouble. Just as important is to let your executor and power of attorney holder know where your liquid assets are and where you get cash to pay bills.  Again, the financial institution is likely to insist on having its own power of attorney completed before recognizing someone else’s signature authority over your accounts. Arrange this when completing your financial emergency kit.

Having a source of credit lined up also isn’t a bad idea, even if you personally have no intention of using it. Your loved ones might need it to pay emergency medical bills or other unexpected expenses. The alternative might be to sell valuable assets in a hurry and at an inopportune time.

These days it is relatively simple to get a few no-fee credit cards with fairly large credit limits or a home equity line of credit that doesn’t cost anything to set up and have in reserve. Another credit source is brokerage accounts, which often allow margin loans or lines of credit to qualified investors. It doesn’t matter what the source of credit is, but lining something up could make a difficult situation easier.

Business owners also should establish a line of credit or some other alternative to raise cash at a critical time.

Eliminate non-essential items. This isn’t strictly part of a financial emergency kit, but it is important to helping loved ones. Don’t leave them to spend weeks or months sorting through the accumulated items of your lifetime. Go through the items at your leisure. Let go of anything that doesn’t have significant sentimental or financial value. If you don’t do this, your heirs might not know the difference between the significant items and the rest of it. They might dispose of some memorable or valuable items.