Small business owners know that maintaining an organized system of retrieving key documents can save time and money. What they might forget, however, is how to properly draft and retain important documents outside of their business. Such documents can be business-related, (e.g. self-employed retirement deferrals) or may be entirely personal (e.g. wills, medical documents, etc.).
Keep Accurate Papers and Check Them Often
The law relies on written documents, so important papers (e.g 401(k) account and retirement papers, tax filings, beneficiaries named in your employer’s retirement plan) must be kept current. While it’s a chore to keep accurate files, spending the time to set up a system is much better than scrambling through boxes when the need arises. It’s also critical to regularly review important papers, as you can account for changes in roles or circumstances as time goes by.
How Long to Save Documents
To keep document management reasonable, some papers should be kept longer than others.
For the Short Term
In certain circumstances, the law says these documents should be saved for a specific period of time.
- Investment Purchase and Sale Confirmations. These records are needed to establish the cost basis and holding period when selling the investments. Sometimes this information appears on annual statements, so those can be kept instead. When the investment is sold, you can transfer these back-up records into the file for that year’s tax return.
- Loan Documents. Closing documents for mortgages, vehicle purchases and leases, and loans of any type belong in a safe deposit box. These can be discarded when the loan is paid off.
Tax Documents Should Be Kept for Seven Years
These include personal federal and state tax returns with all supporting documents. The IRS has the authority to randomly audit returns for up to three years after they have been filed. The IRS has six years to audit your records if you fail to declare over 25% of your gross income. If the IRS suspects that fraud is involved in your tax filings, they can audit you at any time. Once the seven-year period has expired, these records can be discarded.
Documents That Should Not Be Discarded
These include important records, such as birth and death certificates, marriage licenses, divorce decrees, Social Security cards, and military discharge papers. These documents should be kept in a safe deposit box.
- Defined Benefit Plan Documents. Pension plan documents from current and former employers.
- Estate Planning Documents. Copies of wills, trusts, and powers of attorney should be given to your relatives and attorney in the event they are needed. Healthcare documents, including directives, should be given to your primary care physician and any other designated individual who has the power to make decisions on your behalf.
- Life Insurance Policies. Policies that have a cash value or investment component should be kept in a safe deposit box. This also includes term insurance policies, but they can be discarded once the policy is expired.
Where Should I Store My Documents?
Safe Deposit Box Inventory
Since the safe deposit box plays such a key role in document retention, it’s essential that trusted individuals know where the box is located and how to access it. Make sure these trusted individuals know the location of the safe deposit box and its keys, and are familiar with the inventory of box’s contents. It’s also important to have copies of these documents in a separate location for easier access.
Saving Documents Electronically
For faster access and safety reasons, scanning documents is a good alternative to maintaining bulky file cabinets. Although this does not apply to all documents, some documents can be scanned and saved to your computer, stored on a CD, external hard drive and even on a smartphone.
While the traditional scanning is on a flatbed scanner, smartphones offer an alternative for important single pages. On Android, one of the best ways to scan documents is with Google Drive. To scan your items with Google Drive, open the app and tap the “+”, then tap “Scan.”
Aside from your financial concerns, it’s also a good idea to review your healthcare instructions to make sure these are current. In some states, this includes preparing an advance healthcare directive, which tells others about your healthcare wishes if you cannot speak for yourself.
There are two types of directives: a power of attorney for healthcare that appoints an agent on your behalf to tell others what you want, and an instruction for healthcare that is your instructions about how you want to be treated. This can include information about accepting or rejecting life-sustaining treatments, receiving pain medication or making organ donations.
Since family members are often involved in discussions about serious medical emergencies, it’s best to appoint an agent to make sure your instructions are accurately conveyed. Your agent can make decisions on your behalf, including what types of treatment you would want to receive and where. If you name an agent, you should discuss your decisions with him or her beforehand.
Beneficiary Forms, Wills and Other Estate Planning
This is especially important for papers that include beneficiaries, trustees or other key people that will be legally entitled to your assets in the event of your death or incapacity.
To be legal, any beneficiary must be a living person. Names also have to be correct, so keep that in mind if a beneficiary was married or divorced. These are important changes, which can become very difficult to correct after they are called into question following a life change event.
Accuracy Is Critical for Estate Planning
When it comes to estate planning, make sure you know the relative legal weight of each document relative to others, and be mindful of who is specified in said documents. In one frequently cited instance, a woman wanted to leave $1 million to her husband as part of a pension benefit account she had established 40 years earlier. But when she died, her heirs discovered that the pension beneficiary form named her sister as the sole beneficiary. The husband contested the account, but the money went to her sister, whose name was on the beneficiary form. In this case, the beneficiary form superseded the will, which made all the difference on who collected the benefit.
If you’re interested in further information on investments, read financial expert Chuck Epstein’s article on retirement planning for business owners.