What Should I Do when Spouse Dies? – Annapolis and Towson Estate Planning

Mourning the loss of a spouse can be one of the hardest experiences one can face. The emotional aspects of grief can also be difficult enough without having to concern yourself whether you are financially unprepared.

Nj.com’s recent article entitled “Financial planning considerations after the loss of a spouse” says that when a spouse passes away, there can be many impacts to the financial picture. These can include changes in income, estate planning and dealing with IRA and insurance distributions. The first step, however, is understanding and quantifying the financial changes that may happen when your spouse dies.

Income Changes – Social Security. A drop in income is frequently an unforeseen reality for many surviving spouses, especially those who are on Social Security benefits. For retirees without dependents that have reached full retirement age, the surviving spouse will typically get the greater of their social security or their deceased spouse’s benefits – but not both. For example, let’s assume Dirk and Melinda are receiving $2,000 and $1,500 per month in Social Security benefits, respectively. In the event Dirk dies, Melinda will no longer receive her benefit and will only receive Dirk’s $2,000 benefit. That is a 42% reduction in total social security income received.

Social Security benefits typically start at 62, but a widow’s benefit can be available at age 60 for the survivor or at 50 if the survivor is disabled within seven years of the spouse’s death. Moreover, unmarried children under 18 (up to age 19 if attending elementary or secondary school full time) of a worker who passes away may also be eligible to get Social Security survivor benefits.

Income Changes – Pension Benefits. This is another type of income that may be decreased because of a spouse’s death. Those eligible to receive a pension often choose little or no survivorship benefits, which results in a sudden drop in income. Therefore, a single life annuity pension payment will end at the worker’s death leaving the survivor with no additional benefits. However, a 50% survivor option will pay 50% of the worker’s benefit to the surviving spouse at their death. A surviving spouse needs to understand what, if any pension benefits will continue and the financial effect of these changes.

Spousal IRA Benefits. Spouses must understand their options for inherited retirement accounts. A spousal beneficiary can roll the funds to their own IRA account, which lets the spousal beneficiary delay Required Minimum Distributions (RMDs) until age 72. In this case, the spousal beneficiary’s life expectancy is used to calculate future RMDs. This may be appropriate for those over 59½, but spousal beneficiaries under that age that require retirement account distributions may subject themselves to early withdrawal penalties, including a tax and a 10% early withdrawal penalty, even on inherited funds. Spouses younger than 59½ may consider rolling the account to a beneficial or inherited IRA for more flexibility. In this case, RMDs will be taken annually based upon the life expectancy of the beneficiary, with distributions avoiding the 10% penalty. Distributions greater than the RMD may also be taken, while still avoiding early withdrawal penalties. Inherited IRAs can be a great tool for spousal beneficiaries who need income now to help support their lifestyle but have not reached 59½.

Updating the Estate Plan of the Surviving Spouse. It is easy to forget to review your estate plan drafted before your spouse passed away. Check on this with an experienced estate planning attorney.

Updating Financial Planning Projections. You do not want to make any major decisions after the loss of a loved one, you can still review the numbers. Create a new financial plan to help provide clarity.

Reference: nj.com (Jan. 9, 2021) “Financial planning considerations after the loss of a spouse”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

I’ve Inherited an IRA – Now, What about Taxes? – Annapolis and Towson Estate Planning

Inheriting an IRA comes with several constraints. As a result, it can be tricky to navigate. You are at an intersection of tax planning, financial planning and estate planning, says Bankrate’s article “7 inherited IRA rules all beneficiaries must know.” There are a number of choices for you to make, depending upon your situation. How can you figure out what to do?

Whatever your situation, do NOT cash out the IRA, or roll it into a non-IRA account. Doing this could make the entire IRA taxable as regular income. Do nothing until you have the right advisors in place. For most people, the best step is to find an estate planning attorney who is experienced with inherited IRAs.

Here’s what you need to know:

The rules are different for spouses. A spouse heir of an IRA can do one of three things:

  • Name himself as the owner and treat the IRA as if it was theirs;
  • Treat the IRA as if it was his, by rolling it into another IRA or a qualified employer plan, including 403(b) plans;
  • Treat himself as the beneficiary of the plan.

Each of these actions may create additional choices for the spousal heir. For example, if a spouse inherits the IRA and treats it as his own, he may have to start taking required minimum distributions, depending on his age.

“Stretch” or choose the 5-year rule. Non-spouse heirs have two options:

  • Take distributions over their life expectancy, known as the “stretch” option, which leaves the funds in the IRA for as long as possible, or
  • Liquidate the entire account within five years of the original owner’s death. That comes with a hefty tax burden.

Congress is considering legislation that may eliminate the stretch option, but the proposed law has not been passed as of this writing. The stretch option is the golden ticket for heirs, letting the IRA grow for years without being liquidated and having to pay taxes. If the IRA is a Roth IRA, taxes were paid before the money went into the account.

Non-spouse beneficiaries need to act promptly, if they want to take the stretch option. There is a cutoff date for taking the first withdrawal, depending upon whether the original account owner was over or under 70 ½ years old.

There are year-of-death distribution requirements. If the original owner has taken his or her RMD in the year that they died, the beneficiary needs to make sure the minimum distribution has been taken.

There might be a tax break. For estates subject to the federal estate tax, inheritors of an IRA may get an income-tax deduction for the estate taxes paid on the account. The taxable income earned (but not received by the deceased individual) is “income in respect of a decedent.”

Make sure the beneficiary forms are properly filled out. This is for the IRA owners. If a form is incomplete, doesn’t name a beneficiary or is not on record with the custodian, the beneficiary may be stuck with no option but the five-year distribution of the IRA.

A poorly drafted trust can sink the IRA. If a trust is listed as a primary beneficiary of an IRA, it must be done correctly. If not, some custodians won’t be able to determine who the qualified beneficiaries are, in which case the IRS’s accelerated distribution rules for IRAs will be required. Work with an estate planning attorney who is experienced with the rules for leaving IRAs to trusts.

Reference: Bankrate (Nov. 19, 2019) “7 inherited IRA rules all beneficiaries must know.”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How to Prevent The Top Six Retirement Planning Mistakes – Annapolis and Towson Estate Planning

One of the biggest mistakes people make with their retirement, is not realizing what they don’t know, says the Chicago Sun-Times in the article “The 6 biggest retirement mistakes—and how you can avoid them.” By misunderstanding how Social Security works, underestimating life expectancies or failing to plan for big expenses, like long-term care or taxes, people put themselves and their families in financial binds.

These are not the people who make an effort to educate themselves. They are sure they know what’s what—until they realize they don’t. Most people don’t seek out objective advice before they retire. They wing it, hoping things will work out. Often, they don’t.

Retirement is complicated. Here are the top six most common mistakes:

Expecting to die young. If you die young, you have fewer worries about retirement funds. Live a long life and you could easily outlive your retirement savings. One smart move is to wait to collect Social Security as long as possible. Each year you put it off from age 62 to 70, increases your benefit by 7-8 percent.

Ignoring your spouse’s needs. One of you will die first. When that happens, one of your Social Security checks goes away. The survivor will need to get by on only one check. This is why it is vital to maximize the survivor benefit by having the higher earner delay filing for Social Security as long as possible.  Married people who receive a pension, should consider a “joint and survivor” option that lets payments continue for both lives.

Bringing debt into retirement If you’re rich, debt may not be a big deal. You have plenty of income to make payments. Your investments may be earning more than you are paying in interest payments. However, if you are not rich, are you pulling too much from your savings to pay down the debt? This would increase the chances you’ll run out of money. If you take big withdrawals from retirement accounts, it could push you into a higher tax bracket and increase your Medicare premium. Try to get rid of your debt before retiring. However, be careful about tapping retirement accounts to pay off big debts, like a home mortgage.

Neglecting to plan for long-term care. Someone turning 65 today has a 70 percent chance of needing help with daily living tasks, like bathing, eating or dressing. Family and friends may be willing to help, but about half will need long-term care at a cost of $250,000 a year or more. Long-term care insurance is the most obvious solution. However, if you didn’t purchase it when you were healthy, you may need to earmark certain investments, or consider tapping your home equity to pay for this cost.

Thinking you’ll just keep working. About half of retirees report leaving the workforce earlier than they had planned. Most retire because they lose their jobs and cannot find a replacement job or can’t find one at the same income level as their previous job. Others retire because of ill health or the need to stop working to care for a loved one. Working longer can help you make up for not saving enough, but don’t count on it.

Putting off retirement too long. Consider time, health and energy as finite resources. Spend the time and money to speak with professionals, including an estate planning attorney and a financial advisor to determine when you can retire, prepare an estate plan and enjoy retirement.

Reference: Chicago Sun-Times (September 23, 2019) “The 6 biggest retirement mistakes—and how you can avoid them.”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Your Spouse Just Died … Now What? – Annapolis and Towson Estate Planning

There are several steps to take while both spouses are alive and well, to help reduce the chance of the surviving spouse finding themselves in a “financial deadlock” situation, or worse. The preparations require the non-financially dominant partner to be involved as much as possible, says Barron’s in the article “How to Avoid Financial Deadlock—or Worse—After One Spouse Dies”

Step one is to prepare the financial equivalent of a “go-bag,” like the ones people are supposed to have when they must leave their home in a crisis. That means a list of all financial contacts, advisors, estate planning attorney, accountants, insurance professionals and copies of all beneficiary designations. There should also be a list or a spreadsheet of all the couple’s assets and liabilities, including digital assets and passwords to these accounts. The spouse should also note the location of financial records, including insurance policies, wills, trusts and any other critical legal documents.

Each partner must have access to checking and cash independently of the other and the spouses need to review together how assets and accounts are titled.

It is especially important for both spouses to be on the deed to their home with right of survivorship, so that the surviving spouse can easily prove that they are the sole owner of the home after the spouse dies. Otherwise, they may not be able to communicate with the mortgage company. If a surviving spouse must go to court and file probate in order to deal with the home, it can become costly and more stressful.

It’s not emotionally easy to go through all this information but it is critical for the surviving spouse’s financial security.

Any information that will be needed by the surviving spouse should be documented in a way that is easily accessible and understandable for the spouse. Even if someone is very organized and has a well-developed description of their assets and estate plan, it may not be as easily understood for someone whose mind works differently. This is especially true, if the couple has had years where the non-financial spouse was not involved with the family’s assets and is suddenly digesting a lot of new information.

It is wise for the non-financial spouse to meet with key advisors and take on some of the tasks like bill paying, reviewing insurance policies and reconciling accounts well before either spouse experiences any kind of cognitive decline. Ideally, the financially dominant partner takes the time to train the other spouse and then lets them take the lead, until they are both comfortable managing all the details.

Each spouse needs to understand how the death of the other will impact the household income. If one spouse has a pension without survivor benefits and that spouse is the first to die, the surviving spouse may find themselves struggling to replace that income. They also need to consider daily aspects of their lives, like if one spouse is highly dependent upon the other for caregiving.

Spouses are advised not to make any big financial or life decisions within a year or so of a spouse’s death. The surviving spouse is often not in a good emotional state to make smart decisions and this is the time that they are most at risk for senior financial abuse.

Both spouses should sit down with their estate planning attorney and discuss what will happen when they are widowed. It is a difficult topic but planning ahead will make the transition less traumatic from a financial and legal perspective.

Reference: Barron’s (Sep. 15, 2019) “How to Avoid Financial Deadlock—or Worse—After One Spouse Dies”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

The Secret to Spousal Benefits for Social Security – Annapolis and Towson Estate Planning

Whether you are married now or were married in the past, it’s likely that you are eligible for Social Security spousal benefits, as reported in the article “How to Maximize Social Security With Spousal Benefits” from U.S. News & World Report.

Spouses who devote their lives to raising families and performing other tasks that are of value to society are entitled to a spousal benefit based on their spouse’s primary insurance benefits. If you decide to take spousal benefits, the amount you receive will be determined by a few factors, including your spouse’s full benefit, when you begin payments, and your own work history.

Here’s what you can expect when applying for Social Security spousal benefits:

  • You may receive up to 50% of your spouse’s Social Security benefit,
  • You can apply for benefits if you have been married for at least one year.
  • If you have been divorced for at least two years, you can apply if the marriage lasted ten or more years.

You should be aware that if you start taking benefits early, it’s likely that your own benefits will be smaller than if you took them later. And if you have a work history of your own, you’ll either receive your own benefit or your spousal benefit, whichever is greater.

Want to maximize your spousal Social Security benefits? Start by learning what your benefit would be, and then look at the timing. When you decide to claim will have an impact on your benefits. You’ll need to have been married for at least one year before applying and you need to be at least 62 years old.

Also, your spouse must have started to apply for benefits for you to claim spousal benefits.

If you have been divorced, you must have been married to your ex for at least ten years to be eligible for a spousal benefit through your ex’s Social Security. What’s more, you will have to have been divorced for at least two years, and still be unmarried. If you are considering divorce, are near retirement and are planning on a spousal benefit, it’s a good idea to consider electing your spousal benefits before the divorce is finalized.

If there have been multiple marriages and divorces, you can choose to take the highest spousal benefit, if the other requirements have been met.  You will need your ex’s Social Security numbers and their dates of birth to make the enrollment process easier.

If you have a work history of your own, you may be eligible for a personal benefit. If this is the case, you can receive your own benefit if it is greater than the spousal benefit. Let’s say you are eligible for $1,000 as a personal benefit and $500 for a spousal benefit. The Social Security Administration will send you the higher amount of $1,000.

There’s plenty of information about spousal Social Security benefits at the Social Security Administration’s website or at your local SSA office.

Your spousal benefit will be 50% of your spouse’s benefit at their full retirement age. In 2019, the full retirement age is 66 and will rise soon to 67.

So, if you are married and your spouse is collecting $2,000 a month, your spousal benefit would be $1,000 if you wait to start payments at your own full retirement age.

Note that spousal benefits do not grow until age 70, like personal benefits. Instead, they max out at full retirement age. So, there’s no benefit to delaying a spousal benefit claim past your full retirement age.

Should you need to collect spousal benefits before your full retirement age, expect to receive a lower amount. Filing early for spousal benefits reduces your income forever, but many people file because they need the income.

Reference: U.S. News & World Report (July 10, 2019) “How to Maximize Social Security With Spousal Benefits”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Happens Next, When You’ve Become a Widow? – Annapolis and Towson Estate Planning

The loss of a spouse after decades of marriage is crushing enough, but then comes a tsunami of decisions about finances and tasks that demand attention when we are least able to manage it. Even highly successful business owners can find themselves overwhelmed, says The New York Times in the article “You’re a Widow, Now What?”

Most couples tend to divide up financial tasks, where one handles investments and the other pays the bills.  However, moving from a team effort to a solo one is not easy. For one widow, the task was made even harder by the fact that her husband opted to keep his portfolio in paper certificates, which he kept in his desk. His widow had to hire a financial advisor and a bookkeeper, and it took nearly a year to determine the value of the nearly 120 certificates. That was just one of many issues.

She had to settle the affairs of the estate, deal with insurance companies, and handle banks and credit cards that had to be cancelled. Her husband was also a partner in a business, which added another layer of complexity.

She decided to approach the chaos as if it were a business. She worked on it six to eight hours a day for many months, starting with organizing all the paperwork. That meant a filing system. A grief therapist advised her to get up, get dressed as if she was going to work and to make sure she ate regular meals. This often falls by the wayside when the structure of a life is gone.

This widow opened a consulting business to advise other widows on handling the practical aspects of settling an estate and also wrote a book about it.

A spouse’s death is one of the most emotionally wrenching events in a person’s life. Women live longer statistically, so they are more likely than men to lose a spouse and have to get their financial lives organized. The loss of a key breadwinner’s income can be a big blow for those who have never lived on their own. The tasks come fast and furious in a terribly emotional time.

Widows may not realize how vulnerable they are after the death of their long-time spouse. They should hold off on any big decisions and attack their to-do list in stages. The first tasks are to contact the Social Security administration, call the life insurance company and pay important bills, like utilities and property insurance premiums. If your husband was working, contact his employer for any unpaid salary, accrued vacation days and retirement plan benefits.

Next, name your adult children, trusted family members, or friends as agents for your financial and health care power of attorney.

How to take the proceeds from any life insurance policies depends upon your immediate cash needs and whether you can earn more from the payout by investing the lump sum. Make this decision part of your overall financial strategy, ideally after talking with a trusted financial advisor.

Determining a Social Security claiming strategy comes next. Depending on your age and income level, you may be able to increase your benefit. If you wait until your full retirement, you can claim the full survivor benefit, which is 100% of the spouse’s benefit. You could claim a survivor benefit at age 60, but it will be reduced for each month you claim before your full retirement age. If both spouses are at least 70 when the husband dies, a widow should switch to taking a survivor benefit if her benefit is smaller than her husband’s.

Expect it to be a while until you feel like you are on solid ground. If you were working when your spouse passed, consider continuing to work to keep yourself out and about in a familiar world. Anything that you can do to maintain your old life, like staying in the family home, if finances permit, will help as you go through the grief process.

Reference: The New York Times (April 11, 2019) “You’re a Widow, Now What?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys