WSJ: The Finances of Serious Illness – now is the time for a will and estate plan

We hate to think about the possiblity of dying or serious illness – but it could happen in an instant.  Prepare now and give your loved ones the gift of a solid estate plan and will.

For people facing a grim diagnosis, finances are often the last thing they want to talk about. But they shouldn’t be.




It’s the news no one wants to hear: a diagnosis of a dire, possibly fatal, disease.

As questions about life and death naturally overshadow everything else, financial planners and advisers say, it’s common for people in this situation to let their finances fall to the wayside. Nevertheless, they say, coming up with a financial plan, which may involve making changes to your investment portfolio, is crucial to achieving the best possible outcome for patients and their families.

Here are some pointers from advisers on how to handle the financial impact of a serious illness.

Make time to talk about money.

Karin Risi, the head of Vanguard Group’s advice services unit, knows it is difficult to focus on finances when a medical crisis strikes. A 39-year-old mother of two young children, she has been there: A routine first mammogram led to a cancer diagnosis and ultimately a bilateral mastectomy that contained the cancer.

Ross Macdonald

“I acted like every other patient in the world,” she says, estimating she and her husband had 100 conversations about the illness before they talked about finances. “It’s not because I am so wealthy; that’s not the case. I was worried about being there for the children.”

One immediate focus should be on how much extra cash is needed to pay for living and medical expenses. Because the illness might prevent the patient from working for a long period, advisers say, it might be prudent to have on hand cash or readily available, low-risk investments equivalent to six months to two years of expenses, rather than the three to six months that many advisers suggest in ordinary circumstances. For many people, building that cushion will require liquidating some longer-term investments.

Be strategic in liquidating assets.

If you know you need to sell securities to pay for expenses, it’s important to think about which accounts to tap first.

Avoid liquidating a 401(k) or a traditional individual retirement account if at all possible. If your account was funded with pretax dollars or you deducted your contribution, you will owe tax at ordinary-income rates that can be more than 40% on every dollar withdrawn. You could also be subject to a 10% penalty if you’re under 59½, though you may be eligible for a hardship waiver. By contrast, gains on appreciated securities in a taxable account are taxed at lower capital-gains rates and are penalty-free.

Withdrawing money from Roth IRAs, which are funded with after-tax dollars, also can be more tax-efficient than taking money from a 401(k) or traditional IRA. People who have had their account for at least five years and are 59½ or older can withdraw money from a Roth IRA tax-free. Those who are younger can withdraw their contributions (but not earnings) without tax or penalty, says J.J. Montanaro, a certified financial planner at financial-services firm USAA.

Be conservative for the near term.

If you are redirecting long-term investment dollars to nearer-term spending, you’ll need to invest that money more conservatively. Advisers often split those dollars between cash and investments with a slightly better return, like short-term-bond index funds or relatively high-yield money-market accounts. They recommend selling equities first, since they are riskier than bond investments.

Depending on how much you have put away, you may need to move all your money into safe, short-term investments. Brad Stratton, an investment adviser in Overland Park, Kan., with Concert Wealth Management Inc., which is based in San Jose, Calif., reallocated a traditional IRA after his client, who was the family’s sole breadwinner, developed a brain tumor. The aim was to preserve capital and make money available for medical expenses, living expenses and two college tuitions as they came due. The portfolio went from 60% stocks to no equities. Mr. Stratton created a cash reserve and then invested the rest in exchange-traded bond funds including Vanguard Short-Term Bond ETFBSV +0.13% iShares Barclays TIPS Bond TIP +0.04% and .

Pursuing this strategy is tricky in today’s market, where interest rates are near historic lows but are expected to rise, which could drive down the value of bond investments.

“You need to think twice about pursuing yield,” says Ronald Weiner, president and chief executive of RDM Financial Group Inc. in Westport, Conn. He recommends keeping enough cash in money-market funds and liquid bank accounts to cover expenses for the first two years. To meet expenses three to five years out, he likes “unconstrained” bond funds, which can invest in almost any type of fixed-income security or derivative globally and aim to profit even if interest rates rise.

Invest for your family’s future.

If you have a terminal illness, you want to make sure that any money you have beyond what is needed for your care and other near-term expenses is invested appropriately for the benefit of your family.

“The portfolio needs to answer to two gods, simultaneously paying short-term expenses and growing to meet the long-term needs of the survivor,” says David Steadly, a certified investment-management analyst and certified financial planner with Morgan Stanley MS -0.85% . That long-term portfolio must include stocks, bonds and cash, he says.

Individuals with a terminal illness also should consider buying a deferred variable annuity that includes a death benefit—typically a guarantee that at the holder’s death the beneficiaries will receive at least the amount originally invested—says Mark Cortazzo, a senior partner and certified financial planner with financial-advisory firm Macro Consulting Group LLC in Parsippany, N.J.

The death benefit means the money can be invested aggressively for the long term without risking the survivors’ nest egg.

Take care of housekeeping.

Outside of your investment choices, there are several important details to take care of—what Joe Mitchell, a senior account manager with Ayco Co., a financial-planning unit of Goldman Sachs Group Inc., GS -1.03% describes as “basic administration.”

His checklist includes: Make sure beneficiaries are named correctly on financial accounts, keeping in mind that retirement accounts and the proceeds of life-insurance policies are distributed to named beneficiaries and typically aren’t governed by a will. Also, designate someone to have power of attorney and give that person a list of accounts and passwords.

Advisers also recommend talking with an estate attorney to ensure that your estate documents are in good order, and consulting an accountant and a financial planner to make sure that taxes have been minimized wherever possible.

Ms. Ward is a writer in Mendham, N.J. Email her at reports@wsj.com.

A version of this article appeared August 5, 2013, on page R4 in the U.S. edition of The Wall Street Journal, with the headline: Life, Death—and Money.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s