Life transitions, such as the loss of a spouse, divorce or the sale of a home or business, often bring significant financial and estate planning implications. The following recommendations are for individuals and families preparing for or facing these transitions.
1. Build a strong support system.
The first step to take when facing a major life transition involves assembling a team of experts who will best serve your specific needs. The team may differ depending on the situation, but it almost always includes an estate planning attorney, a tax professional and an investment adviser. It may also include attorneys or experts specializing in divorce, the sale of a business or other situations.
Although you may feel that you are equipped to handle these issues without professional guidance, the lack of such guidance can lead to costly mistakes. Having your own independent attorney or financial adviser is the best way to ensure that your interests are protected.
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2. Dial back your stress with advanced preparation.
The stress that comes with significant transitions can make tasks like managing financial obligations seem almost impossible. This is especially true when someone loses a spouse or parent.
Too many people react in response to major life changes rather than preparing ahead of time with their loved ones to establish a good understanding of their family’s financial picture. Sharing information about your financial circumstances with your family in advance can help alleviate pain points during already stressful and emotional times. There are always exceptions, but the more information your spouse or children have, the better equipped they will be.
Also, from a practical perspective, you want to make sure funds are available for immediate needs. Funds can get locked up if you’re waiting for probate or if there’s a change of trustee. For couples, having a joint banking account with enough funds to support a surviving spouse for at least a year can help alleviate the financial stress from unforeseen delays.
Regardless of the transition you may face, it is important to gain control over your financial picture as soon as possible. This means cataloging your finances — do an inventory of your assets and know how much you have and spend. And, although it may be tempting to do, try to avoid making significant financial decisions in the middle of a transition. Most experts suggest waiting about a year before making any such decisions. Thus, don’t sell your home, move to a new city or change jobs. You need time to live in and assess your new reality before you can make decisions clearly.
3. Review and re-establish financial goals.
Making informed decisions starts with identifying your goals. Working with a financial adviser or wealth manager can help you identify your priorities and determine what assets you want to keep and assess the financial and emotional value placed on those assets.
As with any financial matter, it’s important to understand that all dollar amounts are not created equal. For example, receiving a house in a divorce settlement with significant ongoing expenses and a built-in capital gain may be less financially beneficial than receiving the equivalent value in cash. If you sell the house, your after-tax proceeds will be far less than the sale price.
The same is true in the case of selling a business. You need to understand the significance of the sale in the context of your own personal goals. Ask yourself:
- Does it make sense to sell now or later, based on where the business is headed or your own needs?
- If you sell now, could you afford to live on the proceeds for the rest of your life?
- Would it allow you to carry out any legacy plans you might want to put in place?
Business owners are often surprised to realize how much their own personal cash flows are impacted after the sale of a business. Asking these questions and running projections of various scenarios can help you narrow in on the best course of action.
4. Keep an eye on your estate plan.
When life changes, you need to review and reconsider your estate plan. You also need to make sure your investment accounts, real estate holdings and insurance arrangements reflect any changes in ownership. Beneficiary designations for retirement assets and life insurance policies need to be reviewed and possibly updated.
We have seen some difficult scenarios where estate plans aren’t updated after a divorce or a death in the family, or additional children and grandchildren are born after a plan is put in place and the plan either didn’t take that possibility into account or was not updated. A significant change in financial position can also require you to change your plan. Following through on the details now can save your family from financial complications and maybe even legal battles in the future.
In the case of a liquidity event, such as the sale of a business, it’s common to overlook the need for pre-sale planning and the ripple effects of your new wealth. Make sure your sale plan is coordinated with your estate plan so that you do not miss out on tax savings opportunities. Consult your team of experts to ensure that your new wealth is adequately invested and insured.
Lastly, you need to keep track of changes in the lives of others you may rely on. This includes people you’ve named as guardians, agents, executors or trustees for your family. It also includes your team of professional advisers. At some point, everyone’s situation evolves, and what works today likely will not work or be the same at some future point in time.
You can achieve financial resilience and peace of mind by staying informed, being proactive on estate and financial matters and having open and honest communication with your family and advisers.
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