If you’re reading this blog, you’re likely interested in personal finance, investing, and building a great family. And if your family is like my family, then you are probably the one that does the heavy lifting when managing your family’s money. Your spouse might be involved, but as with any other organization, family members tend to specialize.
So what happens if you die suddenly? Would your partner or spouse be able to pick up and take over where you left off? Both spouses should be able to handle the day to day and month to month cash flow related issues. However, will your spouse have the same level of comfort that you do with regards to long term money issues? Saving for college, managing your retirement funds, investing your family’s F-You and Get Rich funds? Are they comfortable with those plans and could they execute them without you?
In most cases, the answer to those questions will be no, at least not without a great deal of angst. That would be the answer for my family. My wife is heavily involved in all major decisions, and can handle the normal cash flow related tasks. However, she would probably become overwhelmed if she was suddenly forced to make all major decisions on all financial matters.
That is why it is crucial to write what we call a Family Financial Blueprint for when I die. Much like a master craftsman uses a blueprint to build a great building, this document provides the blueprint to build a great financial structure. Since we have young kids, this document is written in such a way that, in the event both my spouse and I die suddenly, the children’s legal guardian can manage the money as well. All of our assets go to our children, and since they are minors, the money must be managed by an adult through a trust. Since we trust our guardian both with our children and with our money, they will be the one managing the trust and will have access to the money to help raise the children.
Life is Logistics
The Family Financial Blueprint is not a document to be used during the grieving process. It is not meant to help with funeral planning. Really, it should not even be looked at for several weeks to several months, with the exception of getting started on life insurance proceeds and filing for social security survivor benefits. Having a close friend or family member who you can trust during this time and who can help get these things started can be very important and helpful.
The idea of the Family Financial Blueprint is to provide a step by step guide for how to settle your affairs, where to find all accounts and appropriate documentation, and what to do with all the insurance proceeds and other related cash inflows. It provides a path forward on the logistics of building a new financial life without you. Settling a loved one’s affairs and managing large inflows of money can be a daunting challenge.
Overall though, the most important part of this document is to put it together and share it with both your spouse and the potential guardian of your children before anything happens. Underlying all of this is the assumption that you trust the individuals that you’re sharing this information with. If you do not trust your spouse or the potential guardian for your children with these financial matters, then focus on those issues first. It’s better to have a difficult conversation now than to leave your family in a lurch after you pass. Putting the document together will also help point out any holes in your family financial planning. If you cannot easily explain your financial life in a few pages, then you may have unintentionally complicated things. Simplify now and get things in order. If you die, your loved ones will be grateful, and if not, then it’s much simpler for you to have a clearly articulated plan in the long run.
The three key parts to any Family Financial Blueprint are:
- Logistics: where to find everything, a list of accounts, and who to contact
- Working the System: social security death benefits, life insurance proceeds, transferring retirement accounts
- Moving on Financially: what debts to pay off, where to invest for both income and growth, and where to look for help
Before we go any further though, there is one very important point to make. Ensure that your family has a proper amount of liquidity, and specify what those liquidity sources are. At the very least, working the social security and life insurance systems take time. Add onto that the grieving process and planning a funeral and things likely will not go as quickly as they otherwise could. Make sure that your family is not in a financial pinch immediately after you die.
For example, our family has a generous emergency savings account, has money put aside for future planned and unplanned expenses, has a generous F-You Fund balance in a taxable brokerage account, and has access to lines of credit available on our personal real estate. Part of the Family Financial Blueprint should include a cash flow “waterfall”, a list of what cash to use in what order.
Accounting and Key Documentation
Logistical needs are an often overlooked part of estate planning. However, without this basic information, a surviving spouse or guardian will struggle to find everything needed and make sense of your financial life. Put together an outline of your financial life as it stands now.
Included in the logistical information should be:
- Personal information: At a minimum, the birthdates and social security numbers for all the members of your family should be in this document. Better yet, add anything major that a third party may use to help identify you, such as maiden name or previous addresses.
- Passwords and User IDs: We live in an online world. As such, you should have some place that you keep your user IDs, passwords, and security questions for your online life. Do you have a password management program? Great, share that information and how to use the program. Do you have a word document that you put all this information in? Great, share the location of that document. Is there a piece of paper you use that’s hidden in your desk? Perfect, share that location. Having the ability to access these accounts will make things much easier.
- Location of Important Documents: I’m making the assumption that you’ve already created at least a will. Better yet, start working on medical directives, financial power of attorneys, and the like. Just remember to let your spouse and possible guardian know where those original documents are! It could be a safe or strongbox, filed in a file cabinet, or held at your attorney’s office. Just let them know where!
- Key contacts: Any professional that you may use to help manage a part of your financial life can be very helpful in the event of a death. Include in this list any of the following: lawyer, accountant, personal money manager/wealth advisor, bankers, insurance agents, HR representatives from your job, property managers, or anyone else that you have regular contact with regarding your finances.
- Listing of Accounts: Put together a listing of your accounts, what institution they’re held at, account numbers, ownership structure (joint tenancy, sole, etc.), approximate value, and any beneficiary information. Our looks something like this:
- Real Estate information: Include a listing of real estate and how it’s titled, even if you think everyone already knows the specifics. Better to be certain than not.
- Debts/Credit Cards/Lines of Credit: Include a list of all mortgages, student loans, lines of credit and credit cards. In most cases, these will be paid off after your death. Knowing where all these possible debts are will make them easier to settle after your death.
Working the System
Working the system after you die will probably feel like the most amount of work your surviving spouse or children’s guardian will have to do. In my opinion, setting up the systems to manage this wealth is more difficult, but this to some extent can be put on autopilot after you get it up and running. There are two places to start, and they should be started shortly after death. Having someone your spouse or guardian can trust is crucial during this time, as these can be difficult things to do, especially during the grieving process.
Social Security Survivor Benefits
Social security survivor benefits are one of the better entitlements available from the federal government. Assuming you’ve paid into the social security system, your family will receive a monthly support payment when you die. For example, my wife and each of my two children are due to receive survivor benefits (the benefit is technically the child’s, but would obviously go the surviving parent or guardian). In my family’s case, my wife would receive $2,200 per month, and each of my children would receive the same through their high school years. There is a maximum family benefit of $5,133 per month, so they would hit that maximum. Even better, this $5,100 monthly payment has beneficial tax treatment.
Social security survivor benefits cannot be applied for online. Use the online Social Security office locator to find your nearest office (www.ssa.gov/locator) or call the local Social Security office and begin the process over the phone. Documents that will likely be needed include:
- For Spousal benefits: Death certificate and birth certificate for the one who passed, marriage certificate, W-2 or tax forms
- For Child benefits: All of the above plus child’s birth certificate
Even if you do not have all the documents, begin the process within the first month of death. You’ll be able to work with the Social Security Administration over several weeks or months. Contrary to popular opinion, most people, including federal civil servants, are good people and will likely be more than willing to help given the circumstances. Survivor benefits can take a few weeks to begin, but if you get them started within the first month of death, the first check will include any retroactive amount.
Life Insurance Proceeds
Term life insurance is one of the most reasonably priced insurance products for young(ish) and healthy adults. For example, I have several $1 million, 20-year term policies from a few different insurers, and none of them cost much more than $500 per year. For claiming a policy, the best place to start is often the insurance agent that you used to buy the policy, if you used one. Include their name and contact information in the contacts list. Otherwise, include in the Family Financial Blueprint the insurer, the insurer’s website, and the insurer’s contact information to help get the process started.
Much like Social Security, you’ll need the name of the insured, date of birth, date of death, policy number, social security number, and marital status. Assuming all documents are in order, life insurance proceeds can be received within two weeks of application. Rarely does it take longer than 60 days.
As part of the logistics section above, you should include a good contact for your employer that your spouse or guardian can contact. There may be a number of reasons to do so, including:
- Many companies have a life insurance policy for their employers as part of their standard benefits package. It likely is a small policy, possibly up to two times salary or a few hundred thousand dollars. Like everything else though, these amounts add up and can be a comfort to your family. This policy may be the difference between paying for your kid’s college or not.
- Your former employer may also still owe any unpaid salary or bonus that is due to you. There are legal requirements to do so, but most companies are staffed by good people and will likely be more than willing to send that to your family.
- Your former employer may also still owe any unreimbursed expenses. Again, your spouse or guardian should check with the contact that you listed in the logistics section.
Moving on Financially
Once your spouse or children’s guardian has contacted social security and your life insurance company, the difficult work of ensuring that the money lasts begins. Your spouse should be intimately familiar with the day to day and month to month management of cash flow. However, the Moving on Financially part of the Family Financial Blueprint is about how to invest money for the future and still ensure adequate cash flow today.
Depending on your spouse’s or guardian’s level of interest and expertise in investments, it’s often best to keep things as simple as possible. My wife tends to defer to me on most investing matters, as she does not have much interest or expertise. However, we go through the basics regularly and she’s getting more comfortable through time.
A step by step guide is often the most intuitive way of illustrating a solid financial management plan. The financial management plan for our Family Financial Blueprint consists of the following steps:
- Contact social security and ensure that social security benefits are paid. This will result in a monthly income of $5,133 taxed at favorable rates.
- Contact life insurance companies to process term life insurance payments. My advice is $1 million per kid and $500,000 for the spouse. Since I have two kids, I have life insurance proceeds that total ~$2.5 million.
- Contact our brokers (a phone call is convenient for those not familiar with trading using the online system) and go to cash in all accounts. Our investments consist mainly of ETFs and option positions, so going to all cash will help with the below steps. There may be tax consequences, but you do not want your surviving spouse worrying about whether the market will fall or whether the amount you thought you had in the accounts is still correct. I think it’s better to pay a little in taxes and possibly forego some increase in value than to have a substantial decline in the market correspond to your death.
- Pay off all debts, including the debt that we have through our LLC that holds a real estate investment.
- Bulk up the emergency fund and checking account to maintain adequate liquidity. Since my wife does not work, and I hope will not have to work in at least the first few years following my death, liquidity is key. $50,000 for an emergency fund and a $10,000 balance in the checking account as a floor should ensure a proper amount of comfort for the family.
- We own a small apartment building, which with the mortgage paid off, should generate a nice income stream. I have contact information for our property manager, as well as a step by step process to help manage the reserves balance for things like maintenance and legal fees that inevitably get spent in the management of a real estate investment.
- Combined with the balance of any money already in the F-You fund, take life insurance proceeds and invest in a good income based mutual fund that many retirees would use. This is what you’ll use to help replicate your paycheck. Assuming a 4% annual distribution rate, a little over $1 million would generate around $3,500 per month. I’d like my wife to have around $10,000-$12,000 per month in after tax income, which would afford a very generous lifestyle, especially with no debt. This extra income would also help pay for things that I normally do now, such as lawn care, snow removal, and general maintenance around the house. It would also provide for the extra expense of health care that would normally be provided by my job. Combined with social security survivor benefits and the apartment building income, investing between $500,000 to $1 million would provide that level of income.
There are many solid income funds to choose from. Two that I like are the Vanguard Managed Payout Fund and the Franklin Income Fund. The Franklin Income Fund still has an upfront sales fee (in my opinion, that’s nearly criminal in today’s day and age!), but if you invest $1 million or more, that fee is waived.
- Take any remaining funds in a taxable account and invest them in a moderate to aggressive manner. The Vanguard LifeStrategy funds are a good option, but there are many others out there. These funds are used for growth in family wealth, or future expenses such as college for the children.
- Ensure that retirement accounts are properly transferred. Invest these funds in a manner similar to the above.
- Finally, put it all together and illustrate how it would work on a month to month basis. I use examples of how cash would flow from different sources monthly, how to manage distributions from mutual funds, and how to set money aside for taxes. This realistic example will likely be the most useful part of this step by step process.
None of this is easy, and for someone dealing with grief, expecting them to make big financial decisions can be overwhelming. Getting help is one thing that I count on my wife or children’s guardian doing. There are two major places that help will be required: taxes and investment management.
Our family has a good CPA that we use and trust. I’m a fan of doing my own taxes, but have used a CPA in the past. If you do not use one currently, ask around to people you know and trust (and who have more money than you do!) for referrals. After the first few months of sorting things out, having my wife or children’s guardian meet with him would be high on the list. These new sources of income do not lend themselves to an automatic payroll deduction for taxes, so the tax bill must be planned throughout the year. Furthermore, a good CPA can provide guidance on the proper way to structure certain events to minimize the tax burden.
Finally, getting help from a money manager or investment manager can be a perfectly reasonable thing to do. Most high-quality wealth managers have a minimum size of several million in investable assets. If you are following some of my guidelines on things like an F-You Fund and life insurance, then your spouse will have the level of assets required to use these firms. Do some basic research up front. I’ve given my wife a list of four high-quality firms that I would feel comfortable having her use. Part of our Family Financial Blueprint is to take the blueprint to a firm and have them help execute it. Having multiple firms available is beneficial because your spouse should feel comfortable with whomever they’re going to hire.
Make it Easy
You’re dead, and your spouse has lost their life partner and potentially, their family’s breadwinner. Make it easy on them to manage and lead a financially prosperous life after you’re gone. Put together a financial blueprint that spells out where your money is, how to work the system to ensure all the money they’re due comes their way, and how to invest it for both current income and future growth. Give them a well thought out path forward, and take some of the burden off their plate.
Keep building my friends.