Putting Your Financial House in Order

If you’re diagnosed with a life-threatening illness, what kinds of steps should you take to put your financial affairs in order and avoid headaches for your heirs?

Do the same things everyone should do to prepare for their eventual death — it’s just more urgent. Some steps need to be taken by everyone, but others depend on whether you’re married or single, have dependents or not. However, same-sex couples who aren’t married need to take extra steps.

Anyone who has a serious disease should make sure that all wills, life insurance policies and trusts are up to date and that the documents will be accessible to beneficiaries. Make sure you have current beneficiaries on your life insurance policies, IRA and 401(k) plan.

Also crucial is a health care proxy that designates someone else to make medical decisions for you when you no longer can. With a living will, also called an advance health care directive, you can specify what kind of treatment you want and do not want.

However, don’t put your funeral arrangements in your will as the will is usually not opened until a week or two after death. Instead, write a separate document specifying what you want, or even better, make the arrangements yourself, including perhaps prepaying for the funeral. By getting as much done while you’re alive, you lessen the burden on your survivors.

Giving a relative or a trusted friend financial power of attorney is also crucial. This document gives that person the right to manage your financial affairs and pay your bills if you become incapacitated.

Married couples

There are some special needs and opportunities for married couples. If the ill person is the financial driver, he or she needs to get the spouse up to speed. This may be as simple as making an introduction to the couple’s financial advisor.

The healthy spouse also will need to know what accounts and assets exist, computer passwords for all online accounts and where all key documents are stored.

Shifting low-basis assets to the ill spouse can be a smart tax move. For instance, let’s say the wife owns some stocks that have appreciated greatly over the years. She can give those stocks to her husband tax-free. When he dies, the stocks will get a step-up in basis. Then, if she likes, she can sell them immediately and not pay any capital gains tax.

If you have adult children, bringing them into the planning process can be helpful for the surviving spouse. Also consider making it clear who gets what possessions to avert fights.

Same-sex couples

Same-sex couples who are both married and live in one of the 10 jurisdictions (nine states plus the District of Columbia) that recognize their marriage have precisely the same rights as traditional couples in those states.

However, if the couple lives in a state that doesn’t recognize or allow same-sex marriage — even if they were legally married elsewhere — then they need to take extra precautions.

You want to make sure there’s no question that the person with the terminal illness was of sound mind if the will is contested.

One way to help ensure an ironclad will is to prepare multiple identical wills and execute them periodically. That counters the argument that the will was coerced under stress.

Make sure your partner is not there when the wills are executed. Do it on a different day, with a different lawyer.

Having a health care proxy is particularly crucial. Without it, you might not be allowed to visit your partner in the hospital or make health care decisions on his or her behalf.

Anna Pfaehler is a certified financial planner with Palisades Hudson Financial Group in Scarsdale, N.Y., a fee-only financial planning firm and investment advisor headquartered that has branch offices are in Atlanta, Fort Lauderdale, Fla., and Portland, Oregon. She can be reached at anna@palisadeshudson.com.