Although most people are reluctant to think about it, estate planning is a crucial part of end-of-life finances. While you may think of estate planning as a way to protect your assets for your heirs, it is also about financial management for yourself. As detailed in “Estate Planning”, it is very important to start financial planning early, preferably well before you get sick.
While the Estate Planning section covers management of your financial assets for yourself and your heirs, this section will focus on managing finances when you have a terminal illness. As with a lot of financial matters, this can be complicated and you should consult a professional financial advisor.
Once you have been diagnosed with a serious or terminal illness it is best to start by making a list of your current assets and debts, such as loans, credit card bills, leased cars, mortgages, monthly bills, estimated tax payments, and outstanding medical bills. What you should do next depends on whether or not you have an estate plan.
Your priorities will change dramatically when you have a terminal illness.
A terminal illness frequently increases your need for accessible funds, while simultaneously reducing your income. This could rapidly deplete your available funds and require you to seek other options.
There are three likely scenarios you could be facing, each of which may require different approaches to investments.
While a terminal illness has a significant impact on your life, it also affects your finances. You may experience financial hardships from increased expenses, both medical and non-medical, and loss of resources.
Medical care is expensive and you often can’t depend on health insurance to cover it all. Additionally, there are other financial burdens related to being terminally ill. Your total expenses will depend on many factors such your life expectancy, side effects of any treatment, the use of hospice or nursing homes, location of your death, and the amount of medical care delivered. Some of this you may have control over and you may be able to make choices that reduce your expenses.
The biggest expenses will likely be the medical cost of your treatment.
There are often overlooked expenses associated with serious or terminal illness and treatment that many forget to take into account.
In addition to these expenses, it is important to consider how you are going to spend your remaining time to make it more meaningful. This may include spending money on your ‘bucket list,’ or anything that makes your life more enjoyable.
Finally, it is best if there is enough left over to pay for expensive funeral and burial coststhem.
Your terminal illness will likely reduce your resources. This will be largely your income from work. It is not uncommon for you to be unable to work, especially toward the end of your illness.
Your household income may be reduced further if any family that is helping you has difficulty working full time or at all depending on the level of care you need.
Keeping up with expenses may become difficult and every situation is different. You will need to find ways to cut expenses, a ready source of funds, and a plan for your family once you are gone that are best for your situation.
If necessary, a good place to start is to reduce your personal expenses. It is the most common advice given by financial experts, but can be difficult to do. It’s hard to deny yourself some things when your remaining life is short.
Funeral and burial costs can be quite expensive, but there are ways to reduce them.
How you make investments has a lot to do with your financial needs and resources, inheritance plans, and how early you started your estate planning. When you have a terminal illness, they may be affected by the nature and prognosis of your illness.
When you have adequate resources to pay for your medical costs and there is enough to leave to your heirs, you should invest more aggressively with the aim of earning higher yields over a longer term.
On the other hand, if you have a terminal illness and don’t have adequate revenue available, you don’t want to tie all of your money up in investments or make high-risk investments that might lose money.
It is important to have enough money available to pay your medical and other costs. While you may have some savings or money in your checking account you can use, many of your investments are not easily converted. This makes it difficult to access funds for paying bills.
There are basically two types of investments that can be used when you need to pay bills, liquid investments that are easily accessed for cash and convertible assets that can only be accessed in specific ways or for specific reasons such as a terminal illness.
If you have a terminal illness or are elderly and need money for living expenses/medical care, you will need cash, cash equivalents, or liquid investments that can be readily accessed.
Stocks and marketable securities are considered liquid assets because they can be converted to cash in a relatively short period of time.
U.S. Treasuries and bonds can be sold on the secondary market if you need money for medical expenses, although you will not get the full maturity price of the bond.
Mutual funds are a managed portfolio of investments with money from various investors that is pooled and invested in a variety of different financial securities including stocks and bonds. They are considered liquid because you can sell your shares at any time and receive the money within days.
Money-market funds are a type of mutual fund that invests in low-risk, low-yielding investments like municipal bonds that you can sell your shares in at any time.
In addition to funds to pay bills, you may want to convert other investments into enough liquid investments to pay for the potential cost of a private facility. You should talk to your money manager to see which of your investments is best to use.
In the case of a terminal illness, another possible source of funds is money you have saved for retirement. Annuities and retirement accounts can be a source of money depending on your age and under certain circumstances.
If you have a terminal illness, you can use annuities without financial penalties if you planned ahead. You can add a rider to most annuities that allows for early withdrawals of necessary amounts if you experience certain qualifying life events, such as becoming disabled, developing terminal illness, or needing long-term care.
Even if you did not, you can still withdraw money. Although you will have to pay surrender fees, it could be worth it if you have no other resources and are not concerned about needing money for you and/or your spouse for retirement.
Most retirement accounts already have provisions that allow you to access funds if you have an urgent situation, often including terminal illness.
401(k), 403(b), 457(b), and profit-sharing plans
Some company sponsored retirement plans, 401(k), 403(b), 457(b), and profit-sharing plans allow you to borrow from your investments.
If you receive a loan from a 401(k), 403(b), or profit-sharing plan you should learn the details of the loan specific to your plan.
If your employer decides to allow hardship distributions when the plan is set up, you can use 401(k), 403(b), and 457(b) plans to pay for the cost of a terminal illness or other urgent situations.
401(k) and 403(b) plans have similar rules for hardship withdrawals. Refer to the “summary plan description” that is provided to you each year or ask your human resource department if hardship distributions are available and if a terminal illness is grounds to waive the early withdrawal penalty.
457(b) plans have a slightly stricter definition of when plans can be utilized for illness, although the diagnosis of a terminal illness would certainly qualify.
You cannot take loans from any of your IRA or Simplified Employee Pension plans. However, there are circumstances that allow you to use the money penalty and tax-free and be able to withdraw enough to pay expenses. Be sure to consult a tax attorney or the IRS to be sure that you qualify.
There are three ways to make qualified withdrawals from your IRA accounts to use for disability and illness.
If you’re younger than 59½ and have owned the IRA for at least 5 years you can:
If you’re younger than 59½ and have not owned the IRA for at least 5 years you can avoid the penalty, but not the income taxes, for all of the above reasons. The only difference from the above is that you don’t avoid income taxes if you use $10,000 or less to buy or rebuild your first home or the withdrawal is made to a beneficiary or your estate after your death.
Since the contributions are only tallied at the end of the year, if you remove any contribution and earnings on that contribution in the same calendar year it was added before your tax filing due date, there will be no tax or penalty.
You will need to have the manager of your account specify in the paperwork that the withdrawal is for hardship purposes, either for medical expenses or for permanent disability, otherwise you will pay a penalty.
The more you withdraw from retirement accounts, the higher your adjusted gross income will be on your tax return that year.
If you and/or your family caretaker cannot work, you may qualify for support from the federal government or other sources.
Your reduced income may quality you for:
Your diagnosis may allow you to get:
If you are a parent and need to hire caretakers you may be able to qualify for child and dependent care tax credit.
You may have other resources you can use to pay bills, such as a health savings account, disability benefits from an employer long-term disability insurance, long-term care insurance, critical illness insurance, cancer insurance, mortgage protection insurance, or group disability benefits or worker’s compensation from your employer.
Some life insurance policies are structured so that the death benefit can be partially paid out to you if certain health-related issues arise, including terminal illness. Typically the policy will include a rider offering a lifetime payout if you have a life expectancy of less than 24 months as certified by a physician. Life insurance can be used in other ways to withdraw money, such as:
You can consider using some of your home equity in the form of a reverse mortgage.
Using life insurance and home equity will reduce inheritance for your beneficiaries, but it is there if you need it.
You and your family may need to make sacrifices that increase income, such as overtime if you can work. You may need to sell possessions like a car or valuables such as art or jewelry.
After your death your family may qualify for Social Security Survivors Benefits.
When widows and widowers can qualify for benefits depends on their situation. Even divorced spouses qualify if your marriage lasted at least 10 years, less if they are still taking care of any of your children who are under age 16 or disabled.
Your unmarried children can receive Social Security Survivors Benefits if they are:
The payout of survivor benefits is based on your earnings while you were alive and their age and disability status.
There are many ways that having a terminal illness can affect your income tax. The most obvious is that if you cannot work, you might be in a lower tax bracket.
Another way of reducing income tax is keeping track of all your and your families medical expenses that could be tax-deductible, including the date, description of the service, and your out-of-pocket cost.
◆ Find an efficient way to do this.
◆ Items that will apply to most people with advanced illness include:
◆ Medical expenses qualify as a non-refundable tax credit. In the year of death, medical expenses may be claimed for any 24 month period including the date of your death, which were not claimed in a prior year.
The Internal Revenue Service may be able to make suggestions and help in other ways.