If you’re wondering what a side letter of instruction is, you’re not alone. To help you understand what this term really means, I want you to consider the following story:
Imagine a husband and wife who have been married several years. Like many couples, only one spouse has taken a big interest in the household finances. In this example, let’s assume that the wife is the household Chief Financial Officer and that the husband trusts her judgment completely.
Because of this, the couple’s mortgage is linked up to the wife’s checking account, and the couple’s credit cards are under the wife’s name with the husband listed as an authorized user. The wife keeps an eye on the couple’s insurance policies, and she is also responsible for paying the cable bill. She manages the household Roth IRA investment accounts and makes sure that taxes are filed every year. With few exceptions, any household chore that involves money is the wife’s responsibility.
But, what happens when the wife is no longer able to manage the responsibilities? This can easily happen, perhaps as the result of illness, injury or even death. Regardless of the reason, the ball is now in the husband’s court to manage everything for the family. Where does the husband even start? With the side letter of instruction.
What is a Side Letter of Instruction?
Now that you have a general idea of how this works, let’s define what a side letter of instruction is – also referred to as “letter of instruction.” In short, a letter of instruction is a list of all relevant financial information that your partner, attorney, or executor needs to have. This list should include information on all your banking accounts including checking and savings and investment accounts. It should also list all relevant details on your individual retirement accounts, your taxable investment accounts, and your employer-provided retirement account, such as a 401(k), 403(b), etc.
Account login information can be included on this list, along with a list of all people that have an important role in your finances such as your attorney, CPA, financial planner, and insurance agent.
The side letter of instruction can exist as a physical document, but it’s important to keep it in a safe place, such as a household safe. Since your side letter of instruction may list login information (including a username and password) for various financial accounts, you don’t want to leave it out where it can be found by anyone other than your partner, attorney, executor, etc.
Al, o keep in mind that you don’t have to list password information on this document. One alternative may be to list accounts, but not passwords. Instead, password information be shared securely via a password management application. Two common managers that offer this service are LastPass and Dashlane. Both of these password managers run on the “freemium” business model, meaning they offer a free base service, as well as an upgraded paid version. For most people, the free version works just fine. (Side letter of instruction aside, you want to use a password manager anyway. It’s part of cybersecurity 101.)
Create Your Side Letter of Instruction Today
Do you need a side letter of instruction? Absolutely. Even if both you and your spouse are involved in your finances, having all your important financial information in one place can make it easier to pick up new responsibilities when one spouse becomes unable to continue their role of household Cheif Financial Officer. Creating this document should only take a few minutes, but it could save you (or your partner) hours of hassle if something unplanned were to happen.
Not sure where all your accounts are? Consider using account aggregation software such as Mint, Personal Capital, or even a financial advisor client portal if your advisor provides one for you. (Just know and expect to be advertised to if using free products like Mint and Personal Capital.)
So, get started. You can even use this template. Create your letter of instruction for your spouse or heirs today!