Family Estate Planning For Your Disability
Here’s our capstone post for the year: our family’s estate plan.
I’ve spent the last 11 months writing about the ways that our Nords family financial independence is changing. Now we’re reaching far into the future to simplify not just our lives, but our legacy for the next few generations.
My spouse and I have had wills since college. We’ve been married for over 33 years and raised a family, yet this latest round of estate planning took us months of research (and some intense discussions) to craft our update.
Nobody enjoys planning for our elder years and our deaths. Our talks caused a few tears, and there were times when she wasn’t very happy either.
It turns out that we need more than an estate plan for our deaths. Death is surprisingly straightforward.
What we really wanted was a financial plan for our disability— not just for mobility & medical issues but for dementia.
In the 1980s my grandfather’s failing health (and his failure to plan) caused a over a decade of financial problems for my father. It cost thousands of dollars in legal bills, too.
In 2008 my father’s failing health (and his failure to plan) caused a decade of financial problems for my brother and me. It also cost him tens of thousands of dollars in legal & insurance bills.
Now my spouse and I want to avoid doing to our daughter what my father did to me (through Alzheimer’s), and what his father did to him (through dementia). The multi-generational bag jobs will stop with my generation.
First I’ll discuss our concerns (to help you decide your concerns), and then I’ll describe the typical solutions. I’ll conclude with what we’re doing.
I’ll disclose up front that the lawyer was not very happy about our plan, but they agreed with our reasoning. Lawyers want to protect us (and our assets), while we also wanted to make life simpler for our family.
I’m not a lawyer, but I’ve spent a lot of time with them. We discussed a bunch of good ideas with them. Please discuss yours with your lawyer before you craft your plans.
Follow along with your own assets as we discuss what we’re doing with ours.
“Nords, what assets are we talking about?”
Here’s the “To Do” list for our estate plan:
- Our home. (Mortgaged for another 28 years.)
- A rental property. (Poor financial performance, yet optimized for aging in place.)
- A joint taxable Fidelity investment account. (My spouse and me.)
- My individual taxable Fidelity investment account. (Our self-insured long-term care fund.)
- Small angel investments in seven startups. (Exits or shutdowns within 10 years. *)
- Two Fidelity Roth IRA accounts. (My spouse and me.)
- Four savings accounts, four checking accounts. (Yeah. Convenience.)
- Personal property: two used cars, our second-hand furniture, and old surfboards.
(The total value of our personal property is roughly
$50K about $30K maybe $15K.)
I’m receiving a military active-duty pension and a little VA disability compensation. My spouse starts her Reserve pension in 2022. We tentatively plan to start our Social Security disbursements at age 70.
[* Within the next decade, all of those angel investments should cash out or die out. I’m trying to live long enough to deal with that, but if not then my heirs can hold the shares or give them away.]
Your first question: who’s going to run your family finances?
If you’re the typical American military family, then you know that the spouse (not the servicemember) does most of the financial management. They’re the one who has some time, some mental bandwidth, the Internet bandwidth, and most of the family responsibilities.
What about dual-military families like me and my spouse? Welp, those finances are run by whoever’s home at the time (or at least on shore duty). Sometimes it’s nobody.
Being a dual-military couple meant that my spouse and I have managed our money as a team. I tend to focus on the details (writing the checks and doing the income-tax returns) while she supervises the big picture. When I bring in a multi-tab spreadsheet of our financial plan, she’s the one who asks a couple of perceptive questions which send us back to the
drawing board keyboard for another week of number-crunching.
Our system works great. It helped us maintain a high savings rate and reach financial independence while we were still on active duty. I’ve been retired for over 17 years, and our life is very good.
Demographically and personally, though, our dream-team partnership will end someday. Women tend to live longer than men, and my spouse has exceptionally long-lived ancestors. (My ancestors… not so much.) I’m attempting to overcome my genome with my lifestyle, yet the smart bet would be on her longevity.
I’ve dedicated 30 years to paying the bills and handling the investments. As we say in the Navy, “I am ready to be relieved.” Fortunately, those financial chores are nearly totally automated. Only our rental’s property taxes are paid manually, and otherwise we just make sure our checking account has enough money for everyone to pull out what we owe them.
During the last year, my spouse has taken over nearly all of the automatic payments. Transferring them was harder than it should be (our water company actually stopped billing us for four months) but it’s finally done. When she starts her Reserve pension then she’ll take over all of the Ohana Nords payments (including our mortgage and home/liability insurance). I’ll just be responsible for my credit cards.
She’s also managing our rental property. We’re
about to turn it over to considering a property manager, so hopefully she’ll minimize that hassle. That rental property is age-in-place friendly, and after I live out my years in our current home then she might decide to move back into the rental.
Between her pension and the rental-property income, her checking account balance should more than handle the bills. I think she’s going to take a hands-off approach for a year or two and see what happens. If she has to intervene for a glitch then we’ll figure out a way to automate everything, whether we’re watching it or not.
I’m still managing our investments, but there’s very little to do. We’re moving our asset allocation to a total stock-market index fund, and I’m winding down my angel investments. My spouse will soon take over our investment chores, too, which means she’ll only have to sweep out a semi-annual dividend.
Your next question: who’s going to run your family finances later?
My spouse has an even better plan for her relief: our daughter. When my spouse has had enough of the financial chores (probably by her 83rd birthday!) then she’s going to ask our daughter to take over. (Our daughter will be in her 50s… a bit younger than we parents are now.) At that point my spouse and I will blissfully continue our spending habits while our daughter will watch our accounts for indications of elder fraud… or dementia.
Notice that this part of our plan doesn’t require a trust or even a complicated will. Our daughter just needs our account logins & passwords. When we die then she’ll check a LastPass account and the ICE folder in my desk drawer.
Your third question: what happens after we die?
“Dead” is the easy part. We’ve already learned what to do for that.
My father set up nearly all of his beneficiary designations as “Payable On Death” or “Transfer On Death”. We filed Dad’s will with the state probate court, but no probate was required. All I had to do was contact the financial institutions and insurance companies, forward copies of death certificates, and sign affidavits.
My spouse and I have set up POD/TOD beneficiaries on all of our accounts. (Even our checking and savings accounts.) When we’re dead, our financial accounts will pass by POD/TOD under Hawaii state law. The laws are different in every state, so check the rules and work with a lawyer when you draft your will and beneficiary designations.
Our personal property will pass via pour-over will without probate. Its value is too small to require probate, and we’ll keep its value as low as we can.
I’ve stopped making new angel investments specifically so that we can wind them down during my 60s. (Before 2030.) There’s no market for our shares (yet), so those will pass under the will without probate. If their value rises and there’s a market for them, then I’ll cash them out. If my body washes up in the surfing shorebreak the week after one of the startups is acquired for $750M, then my spouse & daughter will happily deal with the gigantic step-up on cost basis and the new cost of probate
A few states offer “Transfer On Death Deeds” for real estate. (My father didn’t own any real estate at his death, so we haven’t dealt with this.) The TODD laws are different in every state, so again— check the rules and work with a lawyer when you draft your will & beneficiary designations.
We have a better solution for our real estate, and we’ll describe that after the next section.
Your final question: what happens when we’re disabled?
“Disabled” is the tough part. We learned that the hard way with my father. And his father.
My paternal grandparents rented for years in an independent-living apartment in a large 1980s continuing-care retirement community. In retrospect Grandpa developed dementia in his early 80s, but Grandma covered for him for a couple years… until she suddenly died of a stroke.
After Grandma’s funeral, Grandpa gradually stopped taking care of his personal business. He didn’t pay any bills, file any income-tax returns, or even go shopping. As near as we could tell he ate three meals per day at the local Friendly’s restaurant, occasionally drove his car, and watched a lot of TV.
Grandpa hadn’t done any estate planning since long before Grandma died. There was no power of attorney or trust. There wasn’t a recent will, let alone a medical directive.
During the next four years Grandpa hoarded all mail, magazines, and newspapers in a 10’x12’ guest bedroom until it was filled with head-high piles. This included uncashed dividend checks, late notices on all utilities, warning letters from the IRS and the state income-tax agency… you get the idea.
At each Friendly’s visit he ate the exact same $5.99 meal (three times per day!), and each time he paid with a $20 bill. The wait staff was never going to ask questions. They probably took turns serving him.
One day Grandpa emptied out his bank safe-deposit box, filled his briefcase, and left it in the trunk of his Olds 88. The briefcase contained over $30K of bonds, valuable stamps, gold coins, and jewelry. It stayed in the trunk of that car for over a year.
After four years my father finally got “the call” from Grandpa’s landlord. The handyman noticed the hoarding during a repair visit for a problem at the adjacent apartment.
Grandpa lived happily in the facility’s full-care wing for another 14 years. (His short-term memory was gone but I never learned his diagnosis.) He was physically mobile and mostly verbal until he passed away at age 97 from elder influenza.
Dad had to figure out all of Grandpa’s finances with the help of the state courts and a legal team.
Dad spent five of those 14 years filing petitions for a conservatorship, paying lawyers to negotiate with the IRS and state tax agencies, and… sorting the mail. (He solved the mystery of the safe-deposit box when he sold the car. He only remembered to check the trunk as he handed the keys to the new owner. The briefcase still held everything that was missing from the bank box.) It took more years to straighten out the uncashed dividend checks, the paper stock certificates, and various forgotten financial accounts. Dad must’ve spent hundreds of hours bringing order out of Grandpa’s chaos. It cost thousands of dollars in interest, penalties, and legal bills.
I visited Grandpa a few times between 1988 and 2002, but I was also busy with sea duty and family. I offered my help but Dad always politely declined. I eventually stopped offering.
At Grandpa’s funeral, Dad swore (yet again) that he’d never put “his boys” through that experience…
… until mid-2008 when his Alzheimer’s symptoms began taking over. (We figured that out from his medical records.) My brother and I started offering our help in late 2009, but when Alzheimer’s takes over then the easiest vocabulary word for impaired cognition is “No”.
At least Dad had a will and a medical directive and beneficiary designations on his financial accounts, but nothing else. No powers of attorney, no trusts, nothing else to allow my brother and me to help manage his finances. It cost us over $10K in legal fees just to be appointed his guardian and conservator.
You can read about the rest of our experiences at those links, and in the related articles at the bottom of this post.
Summary: disabled is far harder to plan for than dead, yet far more important.
“Right, Nords, got it. What’s the plan?”
Our first estate-planning tool is the durable power of attorney. This is signed on the financial institution’s form, not a generic legal form. Financial institutions prefer their form, which has already been blessed by their legal battalion.
Remember that individual taxable Fidelity investment account up there, for our self-insured long-term care fund? After extensively discussing the options with our daughter, we set up a DPOA over that.
It was a colossal pain. Fidelity wanted our notarized signatures, our daughter’s notarized signature, a witness, and a separate liability release form. We were staying with our daughter and son-in-law at the time, which was very convenient for the 10 business days it took to finish everything according to Fidelity’s “just one more form” policy.
I naively thought that a Fidelity DPOA would sit in a vault (or on a secure server) for decades until our daughter contacted them for an account login and password. It turned out to be even easier than that!
One day after our final round of DPOA paperwork had been mailed in, she logged into her Fidelity account to check a recent deposit. Then she blurted: “Holy sh— shnikes, who put all this money in my account?!?”
That’s when we realized that the DPOA was in place. She had total control of that account for our long-term care bills… or for her awesome Las Vegas vacation.
You have to know your adult children, and then you have to trust them.
It was a valuable teachable moment for all of us.
She suddenly internalized what I’d meant by saying “The financial bag job ends here.” She saw that we’d trusted her with a life-changing sum of money right then, in her 20s, in case Mom and I were disabled. She doesn’t need doctor’s notes or lawyer’s permissions or insurance company claim forms. She could simply sign us into a care facility and start paying the bills with our money.
Or she could join a cult and give it all to charity.
This DPOA works for us because I’d still have my military pension and (eventually) Social Security income. (A long-term care facility will accept that along with Medicaid.) I’m confident that our daughter will handle her fiduciary duties with professional pride… but if she doesn’t then we’ll still have enough income to be cared for by the courts. Either way we achieved our goal to make it as easy for her as we wish it had been for us.
Our second estate-planning tool is a revocable living trust. This time we’re paying for the lawyer battalion. Not only do we need the RLT for our goals of our estate plan, but it’s probably cheaper than probate.
RLTs have a reputation for being oversold when people don’t need them, and they’re routinely neglected by their grantors. If you decide to create one then seek professional help and pay for quality. Drafting one is straightforward, but funding it and maintaining it can be complicated. See the video in the “Related articles” section at the bottom of this post.
In our case, our RLT holds our home and our rental property. My spouse and I are the grantors, and if one of the trustees needs to sell the real estate then the title company (and the title insurance company) won’t have to worry about a clear title. In fact, when we set up the RLT we also asked our lawyer to retitle our real estate and add it to the trust. This cost more in legal fees, but they found (and fixed) a minor flaw with one of the old deeds.
RLTs offer protection to the grantors, who are typically the only co-trustees. The trust documents can appoint successor trustees and set up contingency trustees. More importantly, they can add gatekeepers and other experts. They can require doctor’s exams to declare a trustee mentally incompetent, or appoint committees for choosing new trustees, or hire professional lawyers & trust companies.
My spouse and I don’t want gatekeepers. Instead we set up the RLT with us parents and our daughter as co-trustees. Our daughter has a fiduciary duty to the trust (for the benefit of us grantors) but again, she could abscond with the titles and sell the properties out from under us. This is another example of trusting your adult children while giving them the tools that they’ll need to take care of you when you’re disabled.
My spouse and I are RLT rookies, and we’ve already encountered our first glitch. Our property manager’s lawyer wants all three of us to sign the manager’s contract, although
we’re pretty sure we’ve verified that the trust only requires one trustee’s signature. The manager lawyer also wants to send the rent to a checking account titled with the name of the trust, and we’re pretty sure that’s not required by the trust either. It’s still a good idea if the contingency trustees need convenient access to the checking account which handles the rent checks.
To avoid this problem,
we’re going to huddle with our lawyer to add reminded us of the right words in our RLT. Or maybe we won’t want a property manager.
The trust (including legal services for retitling its assets) cost just under $6000. That’s cheaper than filing for conservancy, and it might be cheaper than your estate probate.
Our third estate-planning tool is adding durable powers of attorney to our other financial accounts. We’ll do this directly with Fidelity (as we did with my individual taxable account) to allow our daughter to handle all of our assets.
Fourth, we’ve added our daughter to our checking & savings accounts. Our banks and credit unions do that as either “signature authority” on the accounts, or with joint ownership. This could hypothetically risk our account assets if she’s sued, but again we want her to be able to use those assets for our benefit. We move money through those accounts into our Fidelity investments, so we don’t risk large sums in the accounts.
By now you can guess who’s the personal representative (executrix) and beneficiary of our pour-over will. And in charge our medical directive. And handling the rest of our personal affairs.
I sure hope we’re done with building estate plans, but we’ll still have to do the maintenance.
Our plan includes successor trustees, contingency trustees, and all the usual legal boilerplate. The law office also offers lifetime advice on the trust.
We’ll also have to keep the trust in mind if we acquire more assets or dispose of our existing ones. We have no plans to complicate (or further simplify) our lives in the foreseeable future, but now we’re ready for the unexpected future.
We can’t predict what’s going to happen during our next decade (let alone the rest of our lives) but we have the best succession plan we could find.
What will your estate plan look like?
The Military Guide to Financial Independence and Retirement Price: By Doug Nordman: This book provides servicemembers, veterans, and their families with a critical roadmap for becoming financially independent.
“I Inherited Money And Now I Can’t Blog About Financial Independence Anymore”
Our Retirement: The Spending Smile Of Financial Independence
Will Your Retirement Plan Handle Long-Term Care Needs?
The 1980s-2000s: How I Wish I’d Invested Back Then
Good News! How Our Nords Family Financial Independence Life Will Change In 2019
Sample Hawaii revocable living trust form (For your info only. Use a lawyer.)
Sample Hawaii real estate power of attorney (Our family didn’t use this)
Hawaii law for the Transfer On Death Deed (We almost used this.)
CFP Michael Kitces’ blog: Options For Allowing Family Members To Help Manage Accounts In The Event Of Diminished (or In)Capacity
Lee Phillips lawyer videos about flaws of revocable living trusts
(Thanks to my shipmate Ricky McCrite for recommending them!)