The views expressed in this article are those of the writer and should not be viewed as legal or financial advice.
It may be morbid to think about, but an important part of getting your financial life in order entails preparing for the worst: the day you or someone you love loses medical autonomy or dies.
We cannot entirely avoid tragedy, but we can do our best to prepare for it and ease what little burden we can during life’s most difficult moments. By organizing our personal and legal affairs ahead of time, we can ensure that we and our loved ones retain control over important decisions related to finances, health care, and estates, even in the face of incapacitation or death.
In this post, I will guide you through what I believe is the minimum amount of work everyone should do to be reasonably prepared for such incidents and emergencies. All of these actions are free and together they require at most a few hours to complete. Please note that laws vary by state, and that this post does not constitute legal advice.
Here are the five things everyone should understand and address to prepare for the worst:
- Durable power of attorney for finances (30 minutes)
- Advance healthcare directive (30 minutes)
- Last will and testament (30 minutes)
- Beneficiaries (30 minutes)
- Spreadsheet of important info (1-2 hours)
Durable power of attorney for finances
In the event that you become incapacitated, it’s important to ensure that someone you trust is able to take care of financial matters, such as paying bills, depositing or withdrawing cash from a bank, and managing your financial accounts such as your 401k or investment accounts. Even if your family members are willing to manage your finances, they will not be able to act on your behalf until they petition a court to be your financial conservator. This is a burdensome and costly process: $435 in California for filing fees, plus additional fees for legal representation. Requesting conservatorship can even be more costly and prolonged if someone files an objection to the petition or other unusual circumstances arise.
You can avoid this mess entirely by appointing a trusted person (usually your spouse, parent, or child) to be your durable power of attorney for financial matters. A durable power of attorney for finances is a person who is legally entitled to make financial decisions on someone else’s behalf.
Assigning a durable power of attorney for finances requires a simple legal document (which can be found online) to be signed by you, your agent (the person you’re granting the powers to), and a notary or two witnesses, depending on the state. As an example, California permits either a notary OR two witnesses. Once the document is signed, you should scan copies of the document and save them in a safe place that you and your agent have access to, preferably a digital vault like Google Drive or Dropbox. You do not need to file this document with the government. Your agent may then use this document to act on your behalf when dealing with third parties (like banks or other businesses).
Advance healthcare directive
Just as important as financial management is health care management. In the event that you are unconscious and in critical condition, do you want doctors to attempt to prolong your life, even if there is little hope for a comfortable existence? Would you want pain medication to be provided, even if it might have negative side effects? And lastly, in the event of death, would you want your organs to be donated, and if so, for what purpose?
These are difficult questions, but they are questions that you, or at least one of your loved ones, should have the right to answer. To give people greater control over their healthcare decisions, even if they cannot express their wishes due to physical or mental incapacitation, states provide a form called an advance healthcare directive. This document specifies how you should be treated in emergency medical situations, and it grants power of attorney for health care to someone of your choosing who will make medical decisions on your behalf if you are incapable of doing so. Instructions you specify for your own health care, such as “Do not resuscitate” orders, will override the decisions of your designated health care agent in the event they conflict. But you may choose not to specify any health care decisions ahead of time, and instead defer those decisions to your agent. In addition, you may specify whether your agent’s authority becomes active immediately, or only if your primary physician deems you incapable of making decisions on your own behalf.
Like the power of attorney for finances, this document must be signed by the principal and agent (person granted power of attorney for health care) and usually two independent witnesses (laws vary by state). Some states maintain an advance directive registry where you may optionally store your directive for easy access in the event of an emergency. But this step is not necessary, as long as you keep copies readily accessible. You can find free copies of each state’s advance medical directive here.
Most states allow close relatives to act as surrogates who can make medical decisions on another’s behalf in the event of incapacitation. Usually priority is given first to one’s spouse and then to one’s adult children, if any. Still, completing an advance health care directive is beneficial because it allows you to provide instructions about your own health care and designate an agent of your choosing who may not be your state’s default designee.
Last will and testament
A last will and testament is a document that expresses how you wish your property to be distributed upon your death. If you die without a will, then the state will decide how your property will be distributed. Usually communal property shared between you and your spouse will go to your spouse, and remaining non-communal property will be split among your spouse and other family members in some manner determined by your state’s laws.
Wills are legally binding documents that specify how your property should be distributed upon your death and who should be responsible for overseeing this distribution (the “executor”). You can choose to give all of your assets to one person, or apportion it however you like and even provide special instructions for specific assets to be given to particular individuals.
Wills can come in any format, ranging from written free-form letters to pre-prepared templates that cover most cases and can be found online. All states require two witnesses to sign the will, testifying that you the principal have the capacity and intent to make your will.
With or without a will, transferring your property will still require a court-supervised process called probate. Probate will cost time, money, and privacy (as probate files are public records), but it is unavoidable unless the value of your assets falls below a certain threshold ($150,000 in California) or they belong to a living trust (a legal entity you may optionally set up, but which is outside the scope of this post).
Designation of beneficiaries
Certain financial accounts allow you to name beneficiaries–people to whom the account will transfer to upon your death. The designation of beneficiaries on these accounts overrides anything your will says about how assets in those accounts should be distributed, so it’s important to ensure that your listed beneficiaries are up to date on all accounts that allow you to name them. Typically accounts that allow you to name beneficiaries include retirement plans (401k or IRA accounts), life insurance plans, and annuity contracts.
Spreadsheet of important info
Lastly, it’s useful to centralize your most important financial and personal information so that loved ones can easily access the information they need in the event of your prolonged incapacitation or death. Create a spreadsheet that lists personal information, including driver’s license number, passport number, SSN, and optionally photocopies of these documents. Add a sheet that comprehensively describes your financial affairs, including bank accounts, investment accounts, retirement plans, other assets, credit cards, and any debts you have such as auto loans, student loans, and mortgages. You should also link to digital copies of your will, advance healthcare directive, and durable power of attorney for finances. Lastly, consider adding login information to important online accounts. This will make others’ lives easier but also constitutes a security risk and is usually not necessary; Google Apps, for example, has a feature that will automatically grant someone you trust access to your data in the event that you are inactive for a significant period of time. Store this spreadsheet in a safe place that is easily accessible by one or more trusted loved ones, preferably a reputable cloud storage provider like Google, Dropbox, or Microsoft. As an extra precaution you may use an Excel file and password-protect the document for an additional layer of security.
|Purpose||Useful in event of incapacitation||Useful in event of death?|
|Durable power of attorney for finances||Allows agent to act on your behalf for financial matters||Y||N|
|Advance healthcare directive||Allows agent to act on your behalf for medical matters, and allows you to specify your medical wishes||Y||Y|
|Last will and testament||Allows you to specify how your assets should be distributed upon your death||N||Y|
|Account-specific designation of beneficiaries||Allows you to specify the beneficiary of a specific account (usually retirement plan or life insurance)||N||Y|
|Spreadsheet of important info||Allows loved ones to easily access your most important financial and personal information||Y||Y|
It might be unpleasant to think about, but having a financial plan in place for life’s toughest times allows you to focus on its best ones.