I frequently field inquiries from people who know they ought to get a will. Others have wills but may need to revise them because they’ve moved to a new state, entered into a marriage or ended a relationship. Either way, most folks—in my experience—never get beyond that simple first step.
Even those who do often overlook an additional step that’s almost as necessary: drawing up a "letter of final instructions" that provides their heirs with an informal personal financial inventory. While it isn’t legally binding, like a will, a letter offers the chance to list exactly where you keep your important personal papers, what your assets are and who gets them.
Want to write one yourself? For starters, make sure the letter is current and accessible. It can include certain important details, like funeral arrangements or care of pets, which can change and thus are usually impractical to put into your will.
Who should get copies of your letter? Usually, the list would include your spouse, one or more of your adult children, your lawyer and your executor.
At minimum, the letter may alert your family to the existence of assets that otherwise might prove difficult or even impossible to find when death, a serious illness or another crisis leaves you unexpectedly unable to handle your financial affairs. Without the letter, it’s frequently a daunting task for heirs to track down assets, resulting in situations that can be nightmarish and trigger epic family conflicts that could’ve been prevented. Indeed, the absence of a letter could significantly increase the fees charged by me and other advice givers who bill by the hour.
Include where you keep copies of checks, credit card slips and other documents you rely on at tax time to justify the amounts shown as income, deductions and exemptions on your tax returns. You should keep records for the past 3 years or so.
What could happen if the IRS disputes those figures after your death and the necessary substantiating records are unavailable? The wealth that winds up with your heirs could be drastically diminished by assessments for additional taxes, interest charges and perhaps penalties. Ditto for any applicable state taxes.
Your letter of final instructions should also detail all your tax-deferred retirement accounts, such as 401(k)s and individual retirement plans. IRAs come in several flavors: traditional deductible, Roth and traditional nondeductible.
You might use your letter to remind your heirs of this difference: Like you, heirs have to pay income taxes on their withdrawals from traditional deductible accounts. Like you, they generally aren’t taxed on removals from Roth IRAs or the portions of withdrawals from traditional nondeductible accounts that are attributable to nondeductible contributions.
These distinctions may be misunderstood or overlooked—and could end up costing your heirs dearly.
A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting).
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.