The “Financial Emergency Kit” and Documents Every Estate Planning Strategy Needs (Part 2)

In Part 1 of this article I talked about the importance of having an Estate Planning Financial Emergency Kit, along with a few of its essential elements.

So this week, let’s continue the discussion and review the other important elements that make up your Financial Emergency Kit, starting with:

A letter of instruction, which can be valuable in many areas, even though it may have no legal effect.

For instance, if the will places property in a trust for someone’s benefit, you might write a letter to the trustee stating the reasons for establishing the trust, suggestions for the investment policy, and the standards for making distributions.

If the will gives the executor of the estate planning strategy discretion, a letter can provide some guidelines for the executor.

An instruction letter is particularly helpful when the estate has a business, real estate, or special items such as collections.

Insurance policies should be up-to-date and well-organized. In addition to the usual property and casualty policies, in today’s litigious society a personal umbrella liability policy is essential low-cost protection against many possible claims.

Most people should consider $3 million to $5 million of liability coverage, costing a few hundred dollars per year.

Many people overlook disability insurance. The odds of being disabled from work depend on one’s occupation and health.

Most people should buy a policy that triggers coverage when they are unable to perform their current jobs.

Less expensive policies provide benefits only to those who are unable to perform any job. Those policies have a much lower probability of paying benefits.

A cash flow plan is a big help to your executor and also when developing your estate planning strategy.

An estate might be valuable but have few liquid assets. Bills need to be paid while the estate is being settled, and people might be dependent on you.

The executor and holder of a power of attorney should know where the liquid assets are, where income might flow from, life insurance that might pay benefits, and any other sources of cash.

Medical and other insurance is another source of cash flow, especially for late-in-life expenses.

Be sure your executor has the details of any medical insurance (including your Medicare information), long-term care insurance, and any other coverage you have.

Having a source of credit, such as home equity line or reverse mortgage line of credit arranged, also isn’t a bad idea.

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.

The fewer liquid assets you own, the more valuable this source of cash is. Other good sources of credit are no-fee credit cards with fairly large credit limits and brokerage accounts that allow margin loans or lines of credit.

Verify which of these sources of cash would survive you. Some automatically terminate on your passing.

Entrepreneurs need a business succession plan. The plan can involve either long-term successors or caretaker managers who run the operation until it is sold or there is another long-term solution.

Some business owners name key employees who can be trusted to keep the operation going. Others name a trusted outsider who knows the business generally but well enough to oversee it for a while.

The succession plan should be in writing and reviewed with everyone involved. Bankers, creditors, suppliers, and other important contacts should know about the plan and any role they would have in implementing it.

Preparing the plan might take longer than other parts of your estate planning. Don’t delay the other elements while waiting to develop the succession plan, but be sure you are working on the succession plan.

All of these documents and strategies should be brought together in what I call the beneficiary book.

It can take any form but it contains all the items discussed, plus any other items that might be helpful to the estate executor or loved ones.

It could be a three-ring loose-leaf notebook, a large file folder, or some other way of organizing these documents.

It also might be a letter or other short statement that identifies all the key elements and exactly where to find them.

The book is designed primarily for the executor, but it also will be useful to others if the owner becomes incapacitated.

Putting the book together and keeping it up to date also can help you better manage your finances. The executor and key loved ones should know about the book and where it is stored.

Essential records that should be added to the book include recent income tax returns (both personal and business), the latest will, any trusts, insurance policies (all types of insurance), financial account statements, personal financial statements, loan documents, deeds, property titles, and a list of advisors used. Be sure to list jointly-owned property, partnerships, and other shared property.

The organizational documents and other details of businesses should be included.

It might be more convenient to reference some records instead of including them in the notebook. For example, financial account statements could be kept in a filing cabinet. Then, the beneficiary book should have a section listing the accounts and where the documents can be found.

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