What is Your Estate Plan Missing? The Importance of the Proper Forms and Documents

Many people believe that a will and a trust or two is an estate plan. Others think that a living trust or joint title with a spouse is all they need. That is why most estate plans are woefully incomplete. There is much more to an estate plan. Heirs and loved ones often suffer from incomplete estate plans.

A full estate plan addresses more than how assets will be divided and taxes will be minimized. There are other goals and situations an estate plan must consider.

There is a component of the complete estate plan I like to call the Financial Emergency Kit. This kit is a group of documents and other tools that difficult times from becoming much worse or help avoid problems. A good estate planner focuses on these tools in the planning process, and the wise estate owner insists they be part of the plan. This part of the estate plan should be completed even when there is difficulty deciding on the rest of the plan.

Here are what I consider the essential contents of a financial emergency kit.

The beneficiary book is a three-ring loose-leaf notebook that contains all the items discussed in this article, plus any other items that might be helpful to the estate executor or loved ones. The book is designed primarily for the executor, but it also will be useful if the owner becomes incapacitated. The executor and key loved ones should know about the book and where it is stored.

Here is an example of the importance of the beneficiary book. Tom Carvel founded a chain of well-known ice cream stores, located primarily in the northeast. In 1990 he sold it for around $200 million. He died a few years later. He had very complicated finances, with numerous trusts and partnerships. He apparently knew and understood the structure and transactions. Unfortunately, he did not share even the big picture with anyone and did not leave very many records. As a result, his estate was rapidly depleted by legal fees and other costs of defining the estate and determining who received the assets.

Essential records that should be compiled in 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.

Records that are not in the notebook should be referenced. For example, it might be more convenient to keep financial account statements in a filing cabinet. The beneficiary book should have a section listing such documents and where they 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 heirs. It reduces both the cost and emotional burden of dealing with estate administration.

A financial power of attorney is essential. The focus of an estate plan is what happens after one’s demise, but the possibility of disability must be considered. Someone should have legal authority to manage the finances and assets during that time. If there is no power of attorney, loved ones must spend time and money to have a court appoint someone.

Most states recognize a durable POA, which takes effect when signed and stays in effect until revoked. Some states also recognize a springing POA that takes effect only when the principal becomes disabled.

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

It often is not enough to simply execute a POA. Most financial institutions accept only their own forms and want in their files before the owner becomes disabled. They might not accept other forms or might take time to review them before allowing transactions.

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 a 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 in it. Bankers, creditors, suppliers, and other important contacts should know about the plan and any role they would have in implementing it.

Beneficiary designations should be reviewed. Many assets are not transferred by a will and the probate process. The next owner is determined by the beneficiary designation form. These assets include IRAs, employer retirement plans, life insurance, and annuities. Always keep copies 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 so someone can make medical decisions in case of incapacity. There are several choices. The simplest is the Living Will. It gives general instructions about which medical procedures are and are not to be used. Studies show, however, that living wills have little effect. Often the doctors don’t see them until after decisions have been made, and the instructions are too vague to be useful in 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. For it to be effective, all the principal’s regular doctors must have the current document in the front of their charts along with information on how to reach the agents. Also, each agent should have a copy.

Funeral and burial instructions take a burden off heirs. In most states, these have limited legal effect, but heirs generally follow them.

Other letters of instruction also can be valuable, though they also have no legal effect. If the will places property in a trust for someone’s benefit, the owner 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 discretion over some items, a letter can provide some thoughts about their disposition. An instruction letter is particularly helpful when the estate has a business, real estate, or unusual items such as collections.

Insurance policies should be up-to-date and well-organized. 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 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 valuable. An estate might be valuable but have few liquid assets. Bills need to be paid while the estate is being settled. The executor and power of attorney agent should know where the liquid assets are and where to get cash to pay bills. Again, financial institutions are likely to insist on having their own POA completed before recognizing an agent’s authority over accounts.

Having a source of credit lined up 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. Good sources are no-fee credit cards with fairly large credit limits and a home equity line of credit that has no cost until it is used. Brokerage accounts often allow margin loans or lines of credit to qualified investors.

Eliminate non-essential assets. 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 a lifetime. July 2008.