Coping with the death of a spouse is a painful, difficult process. It can become even more overwhelming if the surviving partner was neither involved in, nor has much knowledge of, the family’s finances. Some don’t realize they have to roll-over their late spouses’ retirement plan distributions and then get socked with six-figure tax bills. What’s more, state treasuries have received millions in unclaimed assets because survivors weren’t aware of their partner’s stock and bond holdings.
To help protect your estate from costly losses and your spouse from further hardship, here are some important steps you can take to prepare for the future:
Have a Financial Heart-to-Heart
Provide your spouse with at least a working knowledge of what you have, where it is and what happens to your assets if one of you should die. Analyze your monthly sources of income and identify what income sources your dependents would need to tap to carry on their lives in the event of your disability or demise. Talk about monthly living expenses and what lifestyle changes you or your spouse might need to make to accommodate a lower income. For example, if you have $1 million in the bank or in your portfolio but need $50,000 a year to live on, at a nominal return rate of 3%, you’d still need to make up $20,000 per year, plus an inflation factor, from other sources in order to protect your principal. Seek the help of a financial advisor to determine what level of income your spouse would need in addition to Social Security, investment distributions and other income sources and insurance proceeds to provide sufficient income if you are no longer around.
Nothing Says “I Love You” Like an Insurance Policy – or Two
When deciding upon the amount of life insurance to buy, you should make sure it will be enough to supplement or fully fund your spouse’s monthly income needs, as well as pay off your mortgage and any other outstanding debt. A myriad of insurance policies exist, including life, mortgage, disability and long-term care. If you are your family’s sole or main provider, I generally recommend, at a minimum, an individually owned fixed term-life policy. While a group policy from your employer is normally the best deal financially, once you leave your place of employment, you may need to purchase life insurance on your own if your employer’s policy is not portable. Mortgage insurance is often over-priced, and we find it’s usually more cost-effective to take out a larger life insurance policy and segregate a portion of it to pay off the mortgage. Early on, consider having a trusted advisor conduct an insurance review and analysis.
Write That Will and Update It Regularly
The last thing your spouse needs to worry about if something unexpected happens to you is acrimony over settling your estate. State laws can vary regarding how a surviving spouse takes control of family finances. It's wise to have a living will and a durable power of attorney to cover extraordinary medical emergencies. Also, if you fear your survivors won't agree on who gets what when you're gone, you may want to list your valuables and heirlooms, and hold a family meeting to share your intentions. Be very specific in your will. Working with a trusted estate planner can help you ensure your wishes are carried out.
Round ‘Em Up
Round up all your important documents – such as insurance policies, deeds, bank and brokerage statements, stock and bond certificates as well as your will and put them in a safe place, along with the names and contact information for your lawyer and investment advisor. Online vaults (which back-up your data to secure servers that you can access through a set of passwords) are a popular option with my clients.
Understand how Social Security widow and widower benefits work and review this information with your partner. Keep a calendar of important financial dates, such as when certain bonds or CDs mature and when property taxes and other tax bills are due. Consider involving your grown children for additional support, especially as you age.
Have a “Plan W”
Talk with your partner about what would happen if he or she became widowed. Where would he live? What possessions would she want to keep? How much would he need to live on monthly? What activities would she want to pursue and what is the budget to support them? Who would serve as his support network? Who would provide physical care? If your spouse is elderly and would do best in a continuing care community, take a look around and do your research ahead of time, so that he doesn’t have to make such a vital decision under pressure.
Enlist a Trusted Advisor
With a confusing and ever-changing tax code as well as a sea of investment opportunities and insurance products, even the most financially savvy couple can use a little help. A registered investment advisor (RIA) can guide you through these issues, assist with the estate planning process, from planning and budgeting to setting up trusts and recommending the most advantageous method of taking possession of your spouse’s money or distributing assets to your off-spring. Life planning and financial planning go hand and hand, so find a knowledgeable and talented professional you trust to ensure that the decisions you make are in sync with your budget and life goals.
Taking these steps will not only protect your loved ones’ well-being, but will keep their heartache from being compounded by a massive headache.
This information in this article is general in nature and may not apply to your own financial situation. Please consult your own professional estate, tax, and/or financial advisor regarding this information and your own personal financial needs. For a complete disclosure statement, please see my biography.