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When Clients Need To See Red

Encourage clients to create a "red file" to cover issues beyond traditional planning.

One of the most formidable obstacles to the planning process is the general reluctance of clients to discuss their own mortality. There’s one significant motivating factor, however, that drives clients to plan for their incapacity and death: control. Clients want to ensure that they’re cared for as they wish and their assets pass exactly how they would like.

By adding a “red file” to the traditional batch of estate-planning documents, clients increase their level of control in two key areas: (1) incapacity, and (2) administration of the estate at death.

Essentially, a red file is a notebook or other centralized source of information that will not only aid an executor in navigating the waters of estate administration, but also will make very clear the wishes of a client in the event he becomes incapacitated. 

Control Over Future Incapacity

The term “incapacitated” often invokes images of nursing homes, hospital beds and beeping medical machines. The truth is, however, that incapacitation most frequently comes in the form of cognitive deterioration.

Unfortunately, cognitive deterioration generally occurs slowly and, in its early stages, can often be overlooked or ignored by family members. Parents may appear on the surface to be in full control of their lives, while behind the scenes, the tasks they used to complete seamlessly, like balancing a checkbook or keeping up with their finances, are becoming increasingly challenging. Also, because it’s more common in today’s world for families to live in different cities or states, the danger of loved ones missing the early signs of dementia has grown.

Many individuals assume a family member will take care of them in the event of incapacitation, but few appreciate the number of decisions a guardian or caretaker must make on behalf of an incapacitated person. From housing situations to medical treatment to simple living and eating preferences, without a plan in place, a family member is left to simply guess at what their loved one would have wanted. As author Debbie Pearson states in Age Your Way, those who fail to “make a conscious decision for control will inevitably default to no control.”

Control of Estate Administration

From a legal perspective, estate administration is a straightforward process. Documents are filed with the court, proper procedures are followed and the deceased’s wishes are carried out in accordance with his estate plan. From a practical perspective, however, the day-to-day tasks of wrapping up the affairs of someone else’s life can be daunting.  

Typically a spouse, child or other loved one takes on the role as executor with only half of the instructions he needs. He may know who’s to receive mom’s assets, but what exactly did mom own? How many bank accounts did she use? It quickly becomes clear that there’s a mountain of information to which only the deceased was privy. Just as in any well-run business, there must be a succession plan in place.

The Red File

As a general rule, a red file should cover three main subjects: (1) a plan for future care; (2) a clear expression of financial intentions; and (3) a comprehensive list of personal information. 

Plan for future care. Planning for future care necessitates a big picture outlook, as well as a detailed outlook. Big picture items include medical and living preferences. Does the client prefer to live at home with home health care attendants or with a family member? If these options are physically or financially unavailable, which living facilities does the client prefer?

The more detailed the plan is, the more likely the client can ensure an enriched, comfortable life, despite the setting in which he’ll find himself living. A list of favorite foods, music, colors, books, activities, sports and movies can communicate to future caretakers an idea of who the client is long after the client’s lost the ability to voice an opinion. 

Financial intentions. Although the final disposition of a client’s assets will be documented in his formal estate-planning documents, it’s important for clients to express their wishes for how their money is to be spent prior to their deaths. A client should complete a power of attorney (POA) as part of his traditional planning documents. A POA, however, only authorizes someone to act financially for the client. It doesn’t provide any guidelines for how the client would have wanted his designated agent to allocate funds. For example, if the client prefers to live with a family member in the event of incapacitation, should a portion of the client’s assets be used to remodel the family member’s home or to purchase a larger home? Should a family member or close friend serving as caregiver receive financial support? Not answering these questions could lead not only to conflict among the client’s family, but also to financial abuse of the client.

Centralized information. A well-compiled list of information in a red file can prevent such a weighty responsibility from becoming a nightmare. The number of online accounts and subscriptions an individual maintains can increase from day to day.

Unfortunately, laws haven’t kept up with technological advancements when it comes to legally accessing another individual’s online accounts. Due to company privacy policies and rarely read user agreements, trying to shut down a social media page or an email account can be nearly impossible without having the necessary passwords.

List of Categories

The best way for planners to aid clients in gathering all the pertinent information for the red file is to provide them with a list of categories they need to review. Below is an abbreviated list of classifications of information that clients should consider when compiling their red file:

Assets: checking and investment accounts, private business interests, location of safety deposit boxes, annuities, individual retirement accounts and 401(k)s, trust agreements, real estate, vehicles, collectibles 

Liabilities: credit cards, mortgages, car payments, cell phone bills, other recurring bills

Social media/online accounts: passwords and login information for Facebook, Twitter, Instagram, Pinterest, LinkedIn, Amazon, PayPal, eBay, Netflix, Hulu, iCloud or other cloud storage accounts, online photo storage accounts 

Miscellaneous subscriptions/memberships: airline rewards programs, Sam’s, BJ’s or Costco memberships, toll tag accounts, magazines, newspapers 

Insurance: life insurance, long-term care, disability, home, auto 

Home maintenance: water, gas, electricity, telephone, alarm, lawn care, cable television, Internet service 

Medical: medical conditions, medications, emergency contacts 

Personal: burial/cremation preferences, funeral plans, pre-paid funeral expenses, birth certificates, marriage certificates, Social Security card 

Key contacts: financial and legal advisors, doctors, family members, close friends

Each client’s red file will require different information, but as clients review this checklist, they’ll begin to appreciate the vast amount of information their loved ones may not know.

Creating a red file may seem like an arduous task, but it’s important to remind clients of the peace of mind that will come from knowing their wishes will be fulfilled exactly as planned. Children and loved ones will be relieved from much of the stress that comes with the care of an incapacitated person or the probate of an estate, and clients will likely feel that they’ve retained a sense of control over personal decisions that must ultimately be carried out by someone else.                                  

This is an adapted and abbreviated version of the author’s original article in the February issue of Trusts & Estates.

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