Take it from me, who lives in one – there’s nothing like a small house to discourage hoarding. Every day is a battle waged over a simple question: me or it, which stays? But cleaning out the house of a deceased love one is just as difficult. At some level, working through knick-knacks, record collections, closets, workbenches, and kitchen cupboards can be a cathartic trip down memory lane. Unavoidably, though, the question pops up: “Why would anyone keep this?” Case in point, from a client’s recent experience: dresser drawers filled with a decade of bank statements and checkbook registers and cabinets full of statements from long-canceled insurance policies and defunded mutual funds. Another client went through his dad’s financial records and found 40 years of tax returns sitting in boxes.
Apart from the space these records eat up, they can challenge a personal representative working to administer an estate. Every saved statement suggests that there’s an open account or active policy that needs to be closed. Every false lead takes time and runs up unnecessary expense.
Earlier this year I wrote about the importance of keeping a detailed record of financial accounts, insurance policies, account passwords and other information that can help your family or friends administer your estate. Just as important is what you don’t keep.
Throwing things away, particularly financial documents, can be scary. The threat of future payment disputes, and tax audits, is enough to convince even the most spartan among us to keep a lifetime of records at the ready. Where, then, is the compromise, the right balance between smart and counterproductive saving? If we’re going to save documents, where and how should we do it?
Most experts break record keeping into time periods; i.e., what records should we keep for a year or less, three years, seven years, or forever? Here’s the consensus:
Less than a year: ATM withdrawal slips, bank deposit slips, and credit card receipts should be kept just long enough to compare them against bank and credit card statements. Once the statements are verified as accurate, keep the statements and toss the receipts.
One year: For most of us, it’s fine to destroy paycheck stubs, bank and credit card statements, utility bills, and quarterly investment statements after a year. The point here is to keep them just long enough to compare them against W2 forms, annual Social Security statements, annual investment statements, and 1099 forms. Canceled checks are largely a thing of the past; if you keep your bank statement, you probably have the images of the canceled checks. Work with your bank to be sure you’re getting those. For people running a business, utility bills and canceled checks help prove deductible expenses, so keep those longer, with your tax returns.
Three years to seven years: Again, for most of us, three years is the longest you need to keep a copy of your tax returns; the IRS has three years after your filing deadline or the date on which you filed, whichever is later, to audit your return. However, that statute of limitation doubles if you under-report your income by 25% or more. While three years is the minimum you should keep your returns, then, the safest move is to keep them for seven years – especially if you have significant amounts of non-wage income, are self-employed, or prepare your own returns.
That includes your federal and state returns, and all forms typically submitted with your returns, like your W-2s. Also, keep the other documents you used in preparing your return: medical bills, closing documents from the sale of real estate, records of selling other investments, and any other document that supports reported income or deductions. Because they are closely associated to your taxes, keep real estate purchase records and bills related to property improvements for seven years after you file the tax return on which you report the sale of real estate.
Debt Satisfaction: Keep proof of debt satisfaction, like receipts or mortgage satisfactions for seven years; the statute of limitations for debt collection is six years after your last payment.
Leases and other contracts: Lawsuits arising out of contracts can be filed up to six years after the claim arises, so keep contracts six years after they terminate to be safe.
Forever: Marriage licenses (even if the marriage ends), Social Security cards, birth certificates, and adoption papers.
Other records should be kept only as long as necessary, rather than for a specific amount of time. For example, keep original contracts and leases while their terms are in effect, there’s little advantage in keeping them after the relationship is terminated. Keep product warranties and receipts showing date of purchase until the warranty or product expires, whichever occurs first. You can throw Insurance policies and related documents as soon as coverage expires, replacing them with the new or renewed policy papers. Keep stock certificates as long as you own the stock; shares have to be surrendered when sold or transferred, and they can be costly to replace. Keep any document governing your pension, or 401k and IRA accounts, as those can be helpful in determining beneficiary rights. Throw them, though, once you close the account or roll it over to another.
After divorce, keep judgments or settlement agreements, custody/placement orders, and qualified domestic relations orders, until all related circumstances resolve: custody and placement orders until the children reach adulthood, child support orders until support terminates and all arrearages have been repaid, QDROs until separate accounts have been established and verified, or until pension payments begin. If an order affects real estate ownership, keep the document until the real estate sells or transfers. Keep Wills, Powers of Attorney and other estate planning documents as long as the documents are in effect, potentially forever. Keeping an old and outdated Power of Attorney, can lead to unwanted confusion over who has authority to handle your affairs, so destroy the old one as soon as it is replaced.
How to Store Your Documents
The most reliable way to keep a document is to, well, keep the document. And since the point of this exercise is to keep the documents you save to a smart minimum, that shouldn’t be a tough thing to do. Small file cabinets or file boxes can help divide documents by category or by date. Make sure everything is in a centralized location and easy to find.
Your most important documents, like birth and wedding certificates, passports, and wills are best kept in a safety deposit box, which you can rent for a low annual fee at your bank. Check with the bank to be sure that your personal representative will be granted access to the box after you die, in order to retrieve the Will. If not, move the will to a fire-resistant safe in your home. A home safe is a good alternative for your other important documents if a safety deposit box isn’t available. Be sure that the key or combination is kept in a secure place, but one known to your children or designated personal representative.
Despite your best efforts, physical documents can be damaged or destroyed, so a smart backup is to scan and save your documents. Desktop scanners, particularly those that have automatic feeders and can handle double-sided scans, are best for scanning longer documents. For small jobs, inexpensive smart phone apps allow you scan with your phone’s camera and save the documents. To make it easier, scan documents when you receive them, so the job is never very big.
You should save scanned documents as PDF files, since that seems to be the format most likely to be accessible well into the future. Just in case, save a PDF reader program with your documents, so that even if the software becomes obsolete, you’ll have access to your files. If you save the files to a home computer, be sure to create a backup of your hard drive and, ideally, an extra copy of the backup that you keep outside the home, where it would survive a fire or flooding, or any other event that jeopardizes your home and its contents.
How to Destroy Your Documents
All this talk about storage, as important as it is, should not overshadow the broader point. The real purpose of identifying which documents to save is to identify which documents to destroy. The best way to handle that is by shredding. Personal home shredders are available online or at local office supply stores – most at a reasonable price. Some office supply stores provide direct shredding services, too. Avoid placing documents, especially those containing sensitive personal information, like account or Social Security numbers, in the trash or recycling. There, they sit vulnerable to rummagers and identity thieves. The need for care, though, shouldn’t discourage you from destroying unnecessary documents. In the end, keeping your records to a smart minimum will make things easier for anyone placed in charge of your estate, and simultaneously give you more space to move about the house.