The following is adapted from Inheriting Chaos with Compassion.
The death of a loved one creates chaos in our lives. There are so many decisions to be made, and our fear of making the wrong choices can be paralyzing. We find ourselves asking, What’s the next step? How will I do it? Will I do it right? When we’re drowning in big emotions, managing the financial aftermath becomes a part-time job we don’t want.
To avoid leaving your loved ones in this kind of situation, you have to take measured and meaningful steps to organize your finances and get your estate in order.
That said, the first step in this process doesn’t involve financials at all. It begins with defining the roles and responsibilities for each person who will manage your estate. To do that, there are three terms to know: power of attorney, executor, and beneficiary.
Let’s look at each of these terms to see how they affect your estate planning.
Power of Attorney
Power of attorney is given to a person who has the legal authority to act on someone else’s behalf while that person (called the “principal”) is still alive. This role primarily refers to financial decisions, but as you’ll see, power of attorney can be established for medical decision-making as well. In some cases, power of attorney is granted if someone is declared incapacitated through legal and medical means.
A person with power of attorney over someone’s financial matters can open and close accounts, write checks, sell assets, plan the estate, and otherwise operate in place of that person for all financial matters. There are a few types of power of attorney worth noting: durable, nondurable, medical, and springing. Let’s explore each one.
Durable Power of Attorney
A durable power of attorney is effective immediately, and it only expires on the principal’s death. The person you give this power to doesn’t have to go to court to establish the authority to make decisions on your behalf.
For example, I have durable power of attorney for my brother-in-law, Stan, now that my sister has passed. Since Stan is incapacitated, my role as power of attorney allows me to set up Stan’s care for as long as he needs. In fact, I simultaneously settled her estate while organizing their finances to provide for his care.
Nondurable Power of Attorney
Nondurable power of attorney is for a set period of time. This structure can be used to give someone legal decision-making power in place of the principal for a single transaction, and it can be set to expire after the event is over.
This power of attorney is especially useful if one has a spouse who travels a lot. For example, if a couple are buying a house, nondurable power of attorney would allow one spouse to sign for the other, but it could be set to end after that transaction.
Medical Power of Attorney
A medical power of attorney is set up to grant another person the power to make healthcare decisions for the principal, particularly when they are incapacitated.
Springing Power of Attorney
This structure “springs into action” at a future date when a specific event occurs. It can be set up to give someone authority after the principal has had an accident, becomes incapacitated, or had another triggering event that has been decided in advance.
The role of the executor is to make sure an estate is divided and distributed properly in accordance with how the will states things should be. When someone leaves money to a person or organization in their will, the executor is responsible for making sure that money is distributed to the appropriate parties. The executor drives the process of proving the will (known as “probate”) and distributing assets.
In the first step, the executor takes the will to a court to prove that it is the valid last testament of the deceased. Once the will is verified, the executor is responsible for making sure that assets are distributed according to the will.
The executor contacts companies (such as investment or retirement accounts) that hold assets to let them know a triggering event has happened and they are to transfer assets to the appropriate beneficiary (we’ll get to exactly what a beneficiary is next).
The executor is accountable to the county or municipality where the deceased person lived, and they report how the assets were distributed to the commissioner of accounts.
Executors can draw a fee for the work of distributing the estate, and they must show that the fees they’re taking are reasonable. Family members and survivors are not the only people who can serve as executors; an attorney can be hired for this role.
A paid executor can be beneficial if there’s a lack of trust between siblings or if the task seems too large for the person that was named the executor. Part of the process of being an executor is recognizing how many responsibilities you can tackle effectively and how many might be necessary to hire out. An attorney or paralegal can help you understand your responsibilities and reporting requirements.
In financial terms, the word “beneficiary” is used to describe recipients of assets from a will, trust, retirement account, or insurance policy. Upon a person’s death, beneficiaries named on their accounts become the automatic owners of those assets.
The transfer of those assets skips the estate process and goes directly to the beneficiary. Typically, the beneficiary would need to open an account with the brokerage firm that owns the asset, and from there, the brokerage firm would transfer the inherited funds to the beneficiary’s new account.
Being a beneficiary comes with a few responsibilities. They usually have to open an account in their name as the inheritor to receive their assets. The executor will usually drive the process of getting assets moved by reporting the triggering event.
For example, if there is a Vanguard account that is to be transferred to a beneficiary, the executor presents the death certificate and Vanguard contacts the beneficiary to get the ball rolling. The beneficiary then calls or come in to open the appropriate accounts. A beneficiary can also go directly to Vanguard and present the death certificate to get started, but this responsibility usually falls on the executor.
Beneficiary designations trump any contradicting plans stated in the will. This means that if a retirement account has one beneficiary listed, but the will states the retirement money should go to a different person, the beneficiary designation on the account will be honored over the wishes in the will.
In a notable example, there was a case of a woman in New York City who set up her retirement accounts when she was fresh out of college and named her sister as her beneficiary. She later married, but never revisited her beneficiary designation.
After fifty years of marriage, she passed away. All of the money that she intended to go to her husband went to her sister instead. The beneficiary designation trumped the will, and legally, the money became her sister’s, even though it wasn’t the woman’s intention. This decision was upheld in court, and the husband was out of luck.
It’s good practice to review your accounts once a year to make sure your beneficiary designations are current and correct. It’s incredibly important to keep these designations current, and they take only a few minutes to update.
Don’t Skip Ahead
With clear guidelines for the responsibilities of each role in the process, you can begin the first steps to organize the various pieces of your estate.
The financial details might seem more important, but don’t skip this important step!
For more advice on getting started with your estate planning, you can find Inheriting Chaos with Compassion on Amazon.
Jennifer Luzzatto is a Chartered Financial Analyst®, a Certified Financial Planner®, and a NAPFA registered financial advisor. She began her career in financial services thirty years ago as a fixed-income trader in a regional brokerage firm and went on to manage personal trust accounts, institutional portfolios, and a municipal bond mutual fund at a commercial bank. In 1999, she founded Summit Financial Partners, transitioning from banking to financial planning and investment advisory services. Jennifer holds a BA in Psychology and an MBA from the University of Richmond. She lives in Richmond, Virginia, with her daughter and their dog.
Inheriting Chaos with Compassion
Written by Jennifer Luzzatto, President of Summit Financial Partners
Inheriting Chaos with Compassion is an invaluable and compassionate handbook that covers power-of-attorney, executor responsibilities, and all aspects of settling an estate, while providing essential information about bank accounts, investments, and any professional service you might require.
Inspired by Jennifer’s personal experience and informed by her three decades in the financial services industry, Inheriting Chaos with Compassion will get you through the tangled financial legacy your loved one left behind.