PERSONAL FINANCE: Organize and protect your important documents, for your family’s sake

A few weeks ago, my column focused on my recommendation that as parents, we should consider sharing our financial lives with our adult children: “Discuss your finances and your estate with your kids.”  A continuation of this discussion leads to the importance of organizing our personal files — paper and electronic — for the sake of our children, and ourselves as well.  I can promise you, based on my years of experience assisting clients with the administration of their loved one’s estates, that by organizing your files now you will be making life much easier for whoever is tasked with figuring out your financial life following your death.  Your current efforts ultimately will be viewed as an act of extreme consideration!

My guess is that personal organization (i.e., clearing out old files) isn’t one of your top priorities.  It hits everyone’s “To Do” list, and is rolled forward to future To Do lists, and only rarely does it get crossed out.  Since one of the priorities of the financial planning process is to create as smooth a transition as possible upon one’s passing, the present is a good time to start.  Not sorting through your personal files will cause unnecessary angst and stress on whoever ultimately will be tasked with figuring out your personal filing system.

Although (hopefully) falling short of an episode of “Hoarders,” most of us have accumulated copious amounts of paper and digital documents, often physically stored in various locations, and on multiple digital sites.  Some documents should be retained indefinitely and periodically updated as necessary.  This category includes: wills and ancillary estate documents, trust agreements, property deeds and details of capital improvements, documents of family events such as births, deaths and marriage; the list goes on.  A “final letter of instruction” containing funeral and burial arrangements and other instructions that will be of immediate importance should be created and easily accessible.

Then there are documents that should be retained for a reasonable period, such as investment and brokerage statements, mortgage and loan documents, and prior year’s tax returns and supporting documents.  My experience is that most other papers, such as household bills, and bank and brokerage statements, especially when they are available online, should be tossed after a year.

As an aside, I’m frequently asked how long past tax returns should be retained.  Although the IRS recommends three years, there may be tax reasons to retain them for up to seven years.  Personally, and without any clear justification, I tend to retain past tax returns for at least ten years, longer than most of my fellow CPAs typically recommend.

When embarking on a paper clean-up project, here are some guidelines that you might find helpful:

  • Establish the project framework upfront. There are many books and online checklists that can help you create a filing structure (such as an index) and provide recommendations for how long to retain various types of documents.
  • When sorting through papers, ask yourself questions such as:
    • Are your records self-explanatory to others?
    • If not, how can you best provide helpful descriptions? (Post-it notes can fall off!)
    • Are your records in one place and in a consistent format?
    • Should you cancel paper statements that otherwise can be viewed online?

You will want to archive documents in a way that allows for easy access and updating.  Although there are loose-leaf book formats, where possible I find that digital archiving is the best approach.  A further advantage to going digital is to protect your files from fire, theft, and natural disasters such as wild fires and hurricanes.  You may want to explore online “digital vaults” that are easy to navigate and update, while offering a high degree of cybersecurity.  Digital vaults also allow full or limited access for professionals or family members.

Even the best filing system is of little value if those whom you want to have access them don’t know they exist, or don’t know the passwords.  Make sure the appropriate people know how to access your files.  Now is a good time to consider whom to bring into your confidence.

By clearing out useless paper and creating an orderly filing system now, you will reduce the strain on your family down the road.

The author does not provide tax, legal, financial or investment advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, financial and investment advisors before engaging in any transaction.

Christopher Lewis

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