We consider ourselves to be pretty fun here at Madison Park. We don’t take ourselves too seriously, though we take our work very seriously. While we all like to focus on the fun and enjoyable topics like making money, growing our net worth, taking vacations, buying your dream home, giving to your favorite charity, etc. – sometimes we also have to take the time to have the hard conversations. Very few clients we know love it when we start talking about estate planning, as it is inherently involves talking about death (though it’s certainly about more than that!). However, these conversations need to happen, as when they are done right, they can help honor life – with the added benefit of saving significant amounts of money, time, and heartache for those you love.
While a deep dive into all-things estate planning is well beyond the scope of this month’s financial planning brief, we can start to scratch the surface. In doing so, we hope to invite your additional questions as you think about your own situation. We are not attorneys, nor do we play them on TV. However, we know more than most – and can help orient you to put together a holistic plan together with the right legal, tax, and philanthropic advisors that honors not only your life, but the lives of those you leave behind.
Today we’re just going to look at something you all can do – regardless of whether you have a formal estate plan in place. The reality is that there are generally three types of situations:
- Those that have a detailed plan and have communicated all elements of it to key stakeholders (rare).
- Those that have a detailed plan but have filed it away and haven’t updated it lately and/or discussed it with those that matter (common).
- Those who have no plan in place but have an idea of how they want things to shake out (common).
The beauty of what we’re talking about today is that it applies equally to all three groups. Today’s topic is sometimes referred to as the “Red File,” a convenient and catchy name to describe a simple system for organizing and communicating to your loved ones what needs to happen in the event of your incapacitation or death.
As a general rule, the “Red File” should cover three main subjects:
- A plan for future care (in the event of incapacitation).
- A clear expression of financial intentions.
- A comprehensive list of personal information.
Why is it called the “Red File”? This is a simple way to make something stand out in your file cabinet or safe or atop your desk. It’s like that light shining down on the perfect Christmas tree at the start of National Lampoon’s Christmas Vacation. It’s easy to find for those needing to find it. Of course, it can take on any form that you and your loved ones prefer. Just make sure it’s clear to your loved ones where to find it and how to access it (e.g., needed passwords if it’s on your computer, key or code if it’s in a locked drawer or safe).
It is important to note that the Red File in itself is not a legal document. Instead, it is a collection of both legal and informal documents and instructions that help guide those you love, increasing your level of control and their level of confidence in two key areas: 1) incapacity, and 2) estate administration upon death.
You might be thinking that a simple call to the estate attorney to get copies of the Power of Attorney, Trust, Health Care Directive, or Will is enough. Give that number to your loved ones and you’re good. The legal process will then play itself out and all is squared away. Unfortunately, that call to the attorney is just the starting point. For example, the Will may tell you who receives all of your assets – but what assets do you own? Your Power of Attorney will say who can execute financial decisions on your behalf, but “who” is different than “how.” The red file can give more color and clarity to your POA to help ensure their powers are used in a way that reflects your goals and values – the ways you desire to care for yourself and others in the midst of your incapacitation.
If you don’t have an estate plan in place or want to make sure the plan you have is complete, here’s an introduction we put together that looks at the basics of an estate plan, with an emphasis on those residing in the State of Washington. We’ll take a deeper dive into some of these subjects in future monthly briefings.
On a very practical level in this digital age, think about all the online accounts you have and just how important they have become to managing your financial and daily affairs. I know that I have over 250 online login credentials spread across sites of all sorts. Imagine trying to access all of those without a clue as to the passwords for each! Organize them, whether that is in a secure spreadsheet or (better yet) a password manager app so that your loved ones can quickly and easily access important sites to help manage your affairs – whether it’s something as important as paying your credit card or as trivial as shutting down that pesky $10/mo charge from Spotify!
On top of social media and online accounts, here are other things you will want to address in that “comprehensive list of personal information.”
- Assets - checking and investment accounts, private business interests, location of safety deposit boxes, annuities, individual retirement accounts and 401(k)s, trust agreements, real estate, vehicles, collectibles
- Liabilities - credit cards, mortgages, car payments, cell phone bills, other recurring bills
- subscriptions / memberships - airline rewards programs, wholesale club memberships, toll tag accounts, magazines, newspapers
- Insurance - life insurance, long-term care, disability, home, auto
- Home maintenance / utilities - water, gas, electricity, telephone, alarm, lawn care, cable television, Internet service
- Medical - medical conditions, medications, emergency contacts
- Personal - burial/cremation preferences, funeral plans, prepaid funeral expenses, birth certificates, marriage certificates, Social Security card
- Key contacts (you don’t have to do this alone!) – financial and legal advisors, doctors, family members, close friends
Creating this file may seem like an arduous task. On the surface it reminds me of that recommendation we regularly get to document all the items in our house in case an insurance claim is ever needed. Seems like a good idea, but it turns out to be tedious and never gets done. However, we would argue that this task needs to find its way onto your to-do list. While a major homeowner’s insurance claim is rare, we all know the old saying about death and taxes. Incapacitation and death are things we see all the time from our roles as advisors, and we know firsthand the value of an organized estate. Let us help you. In fact, for those who have engaged in our financial planning process, much of this work is already complete. Now let’s get it to the finish line (before you get to the finish line) and make sure that “red file” is known by those you love and ready for their use.
P.S. We think that you’ll find this process to not only be beneficial for those you love for use in the future, but it can be a great opportunity to take stock of your financial picture so that you can better organize and align it to your goals and values for the years ahead now.