My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog do not reflect the position of Cunningham LLP. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, March 18, 2013

Stress Testing Your Finances and Your Death - The Comprehensive Test


Bloggers constantly strive for a unique idea or concept that gets people thinking, talking and even taking action. While I am not sure if my blog post on stress testing your death was unique or not (it was certainly morbid), it definitely seemed to strike a chord with many readers. I am honoured that in the weeks and months following that post a number of writers and bloggers decided to join the bandwagon to tackle this issue, adding different perspectives and expanding the concept from postmortem, to include antemortem (before death) issues.

Those articles and blogs included:

Roma Luciw of the Globe and Mail (Why you should stress-test your finances for a sudden death)
Ellen Roseman of the Toronto Star (Time to stress test your crisis readiness)
Mark from the blog My Own Advisor (Personal Finance Stress Test)
Michael James on Money (Stress-Testing your Personal Finances)

Ellen commented in her article that “Goodfield talks about the need to take precautions against sudden death. But you may be unable to take care of your finances while still alive because of illness, injury or advancing age.” The financial stress test, created by Mark, the writer behind the blog - My Own Advisor, deals with your financial well-being while alive. After considering both articles, I concluded my initial post was too limited in scope. A comprehensive financial stress test must take into account significant events that can occur while you are alive (loss of job, health and disability issues, financial loss) together with whether you have prepared your spouse postmortem to move forward financially with the least amount of stress and disruption to his/her life.

As I embarked on today’s post, I was startled by a simple yet seemingly evident revelation; antemortem and postmortem issues are so intertwined, that if you complete the specific set of tasks and summaries in my antemortem test, you will have almost everything in place to ensure your spouse is equipped to move forward financially in an almost seamless manner in the event of your death. Essentially, all that will remain is for you to discuss the preparations you have made with your spouse. The comprehensive stress test outlined below, ties this all together.


Antemortem Issues


The questions below make-up a relevant stress test for someone who is currently healthy, but also should be considered as Ellen noted, in the context of if you took ill, became temporarily or permanently disabled or were forced to slow down because of age. I have “borrowed” some of Mark’s stress test questions for the financial and administrative section. As noted above, many of the questions and tasks require you to put your finances in order while alive; so that you ease the burden on your spouse should you pass away.

Legal Documents


1. Do you have a will? If you have a will, is it up to date? If you own a private corporation, do you live in a province that provides for a secondary will?

2. Do you have power of attorneys for both your financial affairs and your health care?

3. Have you checked to ensure the beneficiaries of your RRSP, insurance policies etc. have been updated and are not a former spouse or someone you no longer wish to benefit from your death?

Insurance


1. Do you have sufficient life insurance to pay-off your debts, pay for your children’s education and allow for your spouse and children to live in the style, or close to the style, they are accustomed to?

2. Do you have disability insurance? Is the policy definition of disability narrow and you are paid if you can’t continue with your own occupation or is the definition wide ranging and you are only paid if you cannot work at any occupation?

3. Have you considered critical illness insurance? This is popular with many professionals.

4. Do you have shareholder buy/sell insurance if you own shares in a company?

5. Have you considered covering any capital gains your estate may incur upon your death through insurance? For example: if you have a cottage with a large capital gain and wish to keep it in the family, you may want to buy an insurance policy that is equal to or greater than the expected tax liability on the cottage.

Financial


1. Are you spending more than you earn today?

2. If your income dropped by 50% for 6 months what would you do?

3. If you needed more income what would you do?

4. Do you have access to money if you need it in an emergency (line of credit, savings account)?

5. If you had to retire today because of illness, could you financially adapt?

6. What portion of your monthly living costs are fixed such as car leases, mortgage payment, loan payments and what portion are variable/discretionary and could be eliminated or cut on short notice?

Taxes


1. Do you own U.S. property? Have you considered your potential U.S. estate liability and/or planned for it?


2. If you have a business, have you considered an estate freeze and/or how you will transition your family business?

3. Will you have a large income tax liability upon the later of your death and your spouse's death; because of unrealized capital gains on a rental property, cottage or shares in private companies? If yes and you do not buy insurance as discussed above, how will this liability be funded without a fire sale on the above noted properties?

Retirement


1. Do you have a retirement plan, even if just an excel spreadsheet? Do you have any idea of what you expect your monthly expenses to be upon retirement?

2. If you are near retirement, have you considered the various options in regard to taking CPP early or delaying it?

3. Have you considered how to smooth your income between the time you retire and you are forced to withdraw money from your RRIF?

Administrative


1. Have you prepared an information checklist for your executor(s)/spouse? Does it list all assets (bank accounts, investments, real estate, other) you own? Is the list up to date? It is essential that the list be complete, you do not want an after death game of Where are the Assets? This list can be paper, but I also suggest a back-up PDF be scanned into a secure computer directory.

2. As I discussed in my blog on Memory Overload, the use of multiple passwords is so prevalent that you should consider making a list of your key passwords for your spouse that is put into a secure, but accessible location. The objective of this exercise is to ensure your spouse will not be locked out of your various financial accounts because he/she does not know all the passwords.

3. Consider any accounts, safety deposit boxes, safes, etc. your spouse is or is not aware of. There are various reasons why one spouse does not make another spouse aware of some of these items. However, the reason for their existence is not relevant; what is important is that you somehow ensure that someone will become aware of the existence of these accounts or safety deposit boxes if you die be it your spouse, friend, family member or business partner.

4. A digital asset many people forget to deal with are loyalty points for travel ("Heir Miles") and retail specific loyalty programs. You should ensure you have a list of all loyalty programs you are enrolled in and the number you have been assigned. Most travel programs and some retail programs allow a transfer of some kind, upon a spouse/family member death. 

5. Do you have a list of emergency contact information for your doctor, lawyer, accountant, investment advisor, banker, etc.?

6. Have you prepared a summary of all insurance policies you have? This summary should be in an excel spreadsheet and list: the policy number, the insurance company, the type of insurance as well as the value of the insurance and staple it to the front of your insurance folder. Again, you may also want to create a special password protected file on your spouse’s computer that contains this summary information.

7. Have you informed your executors they have been appointed?

Postmortem Checklist


I wrote the initial stress test post because of my first-hand experience watching my mother cope financially with my father’s sudden and early death. In my mom’s case, she was able to lean on me to help sort out many of the applicable financial issues. Luckily, my father had at least dealt with the two most important post-mortem issues: (1) having a will and (2) having life insurance. But there was no discussion between my parents about their financial affairs before his untimely death and no lists for my mother to rely upon.

The checklist below is most relevant if you were to pass away. However, if you were to be disabled or lose capacity, some of the items in the checklist would be just as relevant. Though post mortem based, I suggest you deal with the tasks and issues below while alive. Dare I say, to do otherwise is selfish. For those of you that think this is a harsh statement, check out this New York Times article detailing the financial aftermath on Chanel Reynolds after her husband was killed riding his bicycle (Thanks to the Canadian Capitalist for this timely link).

Furthermore, I suggest that you actually stress test the checklist below by physically showing your spouse the locations of lists, computer files, insurance policies, password accounts etc. You will probably want to do a bi-annual walk through. As my wife was still asking me “where did you say you put this again”, we created a safety deposit back-up.

For those keen of eye, you will note the list of questions which in my original post were "do you have", changed to "do you know where". This tweak is based on the assumption you will undertake the antemortem test and follow through with the associated tasks and summaries. Thus, heaven-forbid you pass away; your spouse will have all the information at his/her fingertips and will not need to play a game of lost and found with your important financial documents.

The List:


1. If you have prepaid your funeral or have certain wishes, your spouse must know these wishes and where any related legal documents or invoices are located.

2. Your spouse must know where to find a copy of your will and power of attorneys and the contact information for your lawyer.

3. Your spouse must know the location of the paper or computer file containing all your insurance policies and a summary of the insurance details as discussed above.

4. Your spouse must know the location of the paper or computer file containing a summary of all your assets.

5. Your spouse must have a summary of your key passwords; these must be secure, but easily accessible.

6. Your spouse must know where you have an emergency contact list.

7. Your spouse, family member or friend must know where to find the key(s) to your safety deposit box(es) or any safe you utilize.

I promise; this is the last I have to say on this topic. I strongly urge you to take this comprehensive test for the sake of your loved ones.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

16 comments:

  1. Mark, what are you getting at with your comments about disability insurance? Are there hidden terms in policies?

    ReplyDelete
    Replies
    1. Hey Anon, not hidden. But you have to be very careful when u buy a policy to have a strict definition of own professions/job disability. If not, you can be a surgeon who can still cut fish and your not disabled :)

      Delete
  2. Just wanted to say that a great way to deal with the lost password issue, as well as to generally increase your online security, is to use a secure password manager such as LastPass or 1password. The basic idea of these managers is that you "keep all your eggs in one... impenetrable safe". You have one secure password to remember, which gets you into your password vault. Then you generate random passwords that you don't have to remember (along the lines of iE5bH^jQEupN) for every service. You don't duplicate passwords, so don't expose yourself to risk that way, but you also don't have to remember a million passwords. And as a side benefit, should something happen to you, your spouse only needs access to one password as well. (You can also store digital documents and other info in your virtual safe, which can obviously be very helpful as well.)

    If it sounds onerous, it's really not. Took me less than an hour to get everything set up, and now it's easier than not using it. There are extensions for all major browsers and mobile devices, so it's very rare that you even have to manually copy and paste a password (although you can if necessary). Anyway, check 'em out.

    ReplyDelete
    Replies
    1. Thx Nathan:

      Some great info, I will look into it myself after tax season.

      Delete
  3. Excellent list! Thankfully, I pass on most.

    The one thing I have been delinquent on for many years is the password/procedures thing. Given the amount of systems that I run that are central to my business, routine tasks that I do every month for clients, etc. I don't just need a password list, I need a hardcopy business process list. It's a lot of work to put one together but I really need to have something so my spouse could hire a tech and just hand them a book with everything they need to know about what I do.

    Along those lines, it used to be common (I don't see it so much anymore) for clients to want to have a backup plan when they deal with small businesses such as myself. For example, I know an American insurance broker with a very valuable website address. The one man show running his domain and hosting died and his website was locked up for a year or so while he attempted to regain access.

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  4. Oh, and I refuse to put my passwords online in the cloud anywhere other than my head or a hardcopy locally. So what I've created over time is not a password, but a password system that generates passwords.

    The easy one would be your kids names and dates of births, but don't use that :). Find something unique to you that produces unique combinations of letters and numbers, then structure it with a system that capitalizes some letters.

    ReplyDelete
    Replies
    1. Glenn, great point in your first post about relying on a one man show with no back up plan. In respect of your second post, many people are not comfortable putting their passwords on the cloud or an a site such as Nathan noted above. No right or wrong on that one, just comfort level with web and/or cloud

      Thx for the excellent comments.

      Delete
  5. Wow Mark, some books don't cover this much detail. Well done.

    At some point, I will go through every single question and answer them, especially the postmortem list.

    So far...

    1. no to prepaid funeral expenses but my wishes are known; my wife knows where our legal documents are.
    2. she knows our lawyers and POAs, as well as Power of Personal Care.
    3. she knows where our policies are and coverage.
    4. don't have all our assets accounted for yet.
    5. she knows some passwords - including my email!

    We're doing OK on this but could be better. I'm a work in progress, just like my golf game.

    Thanks for the mention of my posts and site, and being such a great supporter of it Mark :)

    MOA

    ReplyDelete
    Replies
    1. Thx MOA, your post and Ellen's article made me realize I was only half way there. I know #4 must be hard to complete, that's ok, when you have that many assets it takes time :)

      Delete
  6. There's certainly lots to consider and the wife and I have talked about knowing everything we need to know in case something were to happen. I think I will sit with her and read through this post to answer the questions so we can sort something out. I don't know everything I would need to should something would happen. These are things many people don't tend to think of until it's too late but should be discussed as part of life. Excellent post.

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    Replies
    1. CBB, thx. My intention is to get people to sit down with their spouse and go over this. Hopefully, never has to be used, but unfortunately, you never know.

      Delete
  7. Thanks for the list Blunt Bean, it's a difficult topic to approach but one that's absolutely necessary. I applaud you for bringing it to light.

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  8. It's tough to have a talk like this one, but so necessary! There is so much more to providing for your loved ones than just a life insurance policy.

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  9. I'm wondering if it should be baker rather than banker in the emergency contact list.
    I have a favorite patisserie and I would want my spouse to continue to have fresh croissants if anything ever happened to me.

    ReplyDelete
  10. @ Jason and Lyndsay

    I cant tell if your comments are valid or just for links, but I give you the benefit of doubt

    Anon, as long as he/she knows where the money and assets are, the baker should be top of the list. U may want to add the butcher and candlestick maker :)

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  11. Thanks for the benefit bean. I genuinely did want to stress the importance of this topic with my comment though. Sometimes when I see articles that are quite long, such as this one, I'll scroll down to the comments first to see if it's well received. I wanted to make sure if anyone's doing that then they know that this article is well worth reading!

    ReplyDelete