King & Wood, P.A.

What Happens Financially when a Spouse Dies?

“When you lose your mate, you lose so much—your best friend, your equilibrium and your future together. Just when you’re at your lowest, it hits you: You could lose a lot of money, too.”

Losing a beloved spouse is one of the most stressful events in life, so it’s one we tend not to talk about. However, planning for life after the passing of a spouse needs to be done, as it is an eventuality. According to a recent article from AARP Magazine, “The Financial Penalty of Losing Your Spouse,” the best time to plan for this is before your spouse dies.

You’ll have the most options while your spouse is still living. Estate plans, wills, trusts, and beneficiary designations can still be updated, as long as your spouse has legal capacity. You can make sure you’ll still have access to savings, retirement, and investment accounts. Create a list of assets, including information needed to access digital accounts.

Make sure that your credit cards will be available. Many surviving spouses only learn after a death whether credit cards are in the spouse’s name or their own name.

Get help from professionals. Review your new status with your estate planning attorney, CPA and financial advisor. This includes which accounts need to be moved and which need to be renamed. Can you afford to maintain your home? An experienced professional who works regularly with widows or widowers can provide help, if you are open to asking.

A warning note: Be careful about new “friends.” Widows are key targets of scammers, and thieves are very good at scamming vulnerable people.

Be strategic about Social Security. If both partners were drawing benefits, the surviving spouse may elect the higher benefit going forward. If you haven’t claimed yet, you have options. You can take either a survivor’s benefit based on your spouse’s work history, or the retirement benefit based on your own work history. You will be able to switch to the higher benefit, if it ends up being higher, later on.

Be careful about your spouse’s 401(k) and IRA. If you’re in your 50s, you are allowed to roll your spouse’s 401(k) or IRA into your own account. However, don’t rush to move the 401(k). You can make a withdrawal from a late spouse’s 401(k) without penalty. However, it will be taxable as ordinary income. If you move the 401(k) to a rollover IRA, you’ll have to pay taxes plus a 10% penalty on any withdrawals taken from the IRA before you reach 59 ½. Your estate planning attorney can help with these accounts.

Use any advantages available to you. The IRS will still let you file jointly in the year of your spouse’s death. Tax rates are better for married filers than for singles. Any taxable withdrawals you’ll need to take from 401(k)s or IRAs may be taxed at a lower rate during this year. You may decide to use the money to create a rollover Roth IRA or to put some funds into a non-tax deferred account.

Don’t rush to do anything you don’t have to do. Selling your home, writing large checks to children, or moving are all things you should not do right now. Decisions made in the fog of grief are often regretted later on. Take your time to mourn, adjust to your admittedly unwanted new life and give yourself time for this major adjustment.

Reference: AARP Magazine (May 13, 2022) “The Financial Penalty of Losing Your Spouse”

What Does Portability Mean in Estate Planning?

“One of the most overlooked and misunderstood tax laws–available to married farming couples–is an opportunity called portability.”

When one spouse dies, the surviving spouse can choose to make a portability election. This means that any unused federal gift or estate tax exemption can be transferred from the deceased spouse to the surviving spouse. This does not happen automatically, says the recent article “It’s So Important to Elect ‘Portability’ For Your Farm Estate” from Ag Web Farm Journal, but it is worth doing.

Your estate planning attorney will explain how you can take advantage of this opportunity, which must be done at the latest within two years of death. In most cases, no taxes are due, but you must file a form to obtain the exemption.

Before portability was an option, spouses each owned about the same amount of assets, or the amount of assets which would use up each other’s exemptions. For many farm and ranch families, the family’s property is titled one-half to each spouse. Now, however, because of portability, the assets can flow through to the surviving spouse.

At the first spouses’ death, the survivor files for the portability election and then has two exemptions to cover assets.

Here’s an example. A family owns assets jointly and their net worth is about $11 million. They have one son, who also farms. When the husband dies, the wife owns everything. However, she neglects to speak with the family’s estate planning lawyer. No estate taxes are due at this time because of the unlimited marital deduction between the two spouses.

When the wife dies in 2026, when the current federal estate tax exemption is set to drop back to $6 million, their son has to pay $2 million in federal estate taxes. There was $11 million in original assets, but only $6 million for the wife’s exemption. Had she filed for portability when the higher estate tax exemption enacted into law under President Trump, then the $5 million taxable estate would have been reduced by the husband’s exemption by $6 million. No federal estate tax would be due.

Farmers, ranchers and any family business owners need to take into consideration the potential estate taxes in future years. In addition, 17 states still have state estate taxes, and usually the amounts taxed are higher than the federal amount.

An experienced estate planning attorney can work with the family to evaluate their tax liability and see if portability will be sufficient, or if a bypass trust or other tools are needed to protect their legacy.

Reference: Ag Web Farm Journal (April 18, 2022) “It’s So Important to Elect ‘Portability’ For Your Farm Estate”

Why Have a Joint Revocable Trust?

“Establishing a joint revocable trust can be an ideal estate planning tool for the benefit of your children, grandchildren and beyond.”

If you’re married, you are eligible to use a joint trust instead of having individual trusts. This recent article, “Joint Revocable Trust: Estate Planning” from aol.com, looks at the pros and cons to see if it makes sense for your estate plan.

A trust is a legal entity where a grantor, the person creating the trust, gives a trustee control over assets in the trust, usually to distribute them when the grantor has died. The person receiving the trust is the beneficiary. They have no control over the assets until they are distributed. In the case of a revocable living trust, the grantor and the trustee are often the same person.

A revocable trust, also known as a revocable living trust, can be changed many times, or even dissolved whenever the grantor wants. However, when the grantor dies or becomes incapacitated, the trust becomes irrevocable, meaning it cannot easily be changed. It also becomes inaccessible to creditors.

Why would you need a “joint” revocable trust? As its name implies, a joint trust has multiple co-trustees. This is a commonly used trust for spouses, especially when the wish is for the surviving spouse to receive 100% of the couple’s assets when the first spouse dies. The joint trust is revocable while both spouses are living and, depending on the trust terms, may continue to be revocable after the first spouse dies.

When one spouse dies, the surviving spouse becomes the sole trustee. On the death of the second spouse, the trust becomes an irrevocable trust. This is when an appointed successor trustee takes control of the trust, including distributing assets to beneficiaries as directed in the trust documents.

To decide whether you and your spouse need a joint revocable trust, you’ll want to discuss the pros and cons with an estate planning attorney.

The joint trust is practical and easy to fund and maintain. You and your spouse can both transfer assets into the same trust and you both own it. Assets in the joint trust don’t go through probate, which can get assets distributed faster and easier. The assets in the joint trust and the terms of the trust remain private, since the trust documents don’t become part of the public record. Your will does, through probate. Finally, a joint trust does not need to file a separate tax return, as long as one spouse is still living.

However, there are some disadvantages to a joint trust. It’s harder to leave any assets in the joint trust to non-spousal beneficiaries, like children from a prior marriage. The surviving spouse retains control over all assets in the trust. If there is no language in the trust concerning children, they will not inherit anything from the trust.

In a small number of states, there are state estate taxes with thresholds far lower than the current federal estate tax exemption of $12.06 million per individual. Your estate planning attorney will know what taxes will be due in your state of residence.

A joint trust may offer less protection from creditors than separate trusts, if one of the spouses has financial issues. If spouses combine their assets in a joint revocable trust, assets in both trusts would be vulnerable to creditors.

For couples whose finances are not overly complex, a joint revocable trust may be a great choice. Your estate planning attorney will be able to look at your entire estate and see what tools will serve you best.

Reference: aol.com (May 2, 2022) “Joint Revocable Trust: Estate Planning”

What If You Don’t have a Will?

“A recent survey estimated that 68% of people die without a will. The consequences of dying without a will (‘intestate’) can be disastrous.”

A will is a written document stating wishes and directions for dealing with the property you own after your death, also known as your “estate,” explains a recent article “Placing the puzzle pieces of long-term care and planning a will” from Pittsburgh Post-Gazette. The COVID pandemic has reinforced the importance of having an estate plan in place. With almost one million deaths attributed to COVID to date, many families have learned this lesson in the hardest possible way.

When someone dies without a will, property is distributed according to their state’s intestacy laws. If your next of kin is someone you loathe, or even just dislike, they may become an heir, whether you or the rest of your family likes it or not. If you are part of an unmarried couple, your partner has no legal rights, unless you’ve created a will and an estate plan to provide for them.

In general, intestacy laws distribute property to a surviving spouse or certain descendants. A much better solution: speak with an experienced estate planning attorney to have a will and other estate planning documents prepared to protect yourself and those you love.

Start by determining your goals and speaking with family members. You may be surprised to learn an adult child doesn’t need or want what you want to leave them. If you have a vacation home you want to leave to the next generation, ask to see if they want it.

A family meeting, attended by an objective person, like an estate planning attorney, may be helpful in clarifying your intentions and setting expectations for heirs. It may reveal new information about your family and change how you distribute your estate. A grandchild who has already picked out a Ferrari, for instance, might make you consider setting up a trust with distributions over time, so they can’t blow their inheritance in one purchase.

Determining who will be your executor is another important decision for your will. The executor is like the business manager of your estate after you have passed. They are a fiduciary, with a legal obligation to put the estate’s interest above their own. They need to be able to manage money, make sound decisions and equally important, stick to your wishes, even when your surviving loved ones have other opinions about “what you would have wanted.”

You’ll need to speak with this person to make sure they are willing to take on the task. If there is no one suitable or willing, your estate planning attorney will have some suggestions. Depending on the size of the estate, a bank or trust company may be able to serve as executor.

The will is just the first step. An estate plan includes planning for incapacity. With a Will, a Power of Attorney, Health Care Proxy, and Living Will (also known as an Advance Directive), you and your loved ones will be better positioned to address the inevitable events of life.

Reference: Pittsburgh Post-Gazette (April 24, 2022) “Placing the puzzle pieces of long-term care and planning a will”

When a Spouse Dies, Does Survivor Get Their Social Security Benefits?

“When you’re gone, your spouse’s income will take a major hit–one that can be worsened significantly, if you make the wrong decision about when to claim.”

Most people don’t understand how Social Security works for themselves or their loved ones. Here’s one major misconception: you can’t file early for Social Security and then get an increased level of benefits once you’ve reached Full Retirement Age, or FRA. This is one of many common errors, according to a recent article “When You Claim Social Security Can Have Huge Implications for Your Spouse” from Kiplinger. Once you’ve started taking benefits before your FRA, your lower level is set for life.

Another common error happens when married couples don’t understand how their benefits impact each other. If your spouse depends on your Social Security benefits to pay the bills, you both need to gain an accurate understanding of how surviving spouse benefits work.

Let’s that say a couple retires and both decide to take their Social Security benefits right away. One is 66 and the other is 62. The older, Pat, receives $3,000 monthly. The younger spouse, Penny, will receive $1,900. Their total household benefit from Social Security is $4,900. If Pat dies first, Penny will lose her own benefit and receive only Pat’s $3,000 monthly benefit. If this is the only income, Penny may face some serious financial challenges.

If Pat started taking benefits earlier than his FRA, at 64 instead of 66, his monthly benefit would be $2,625. If he were to start taking benefits at 62, his Social Security benefit will be even smaller. The reductions are permanent, and they also impact a surviving spouse’s monthly benefit.

What can you do to maximize your spouse’s survivor benefit? Wait for as long as you can to claim your Social Security benefits. For every year you wait, you earn an extra 8% in delayed benefits. These increases grow until age 70, at which point your Social Security benefit reaches the maximum.

Not everyone can afford to delay their benefits. However, when possible, it makes a big difference to the surviving spouse, who is statistically likely to be the female spouse. For couples who can afford to delay benefits, couples with significant age differences and couples where one of the two has exceptionally good health or comes from a family with longevity, this is a worthwhile approach.

Delaying benefits means the loss of benefits during the years until age 70. Forgoing several thousand dollars a month may not be possible for everyone.

If your surviving spouse won’t be able to make ends meet without both Social Security benefits, there needs to be a plan to somehow bridge the gap. How this is done depends upon the individuals and their families. Every situation is different. It is not an easy situation to address. However, one thing is certain: ignoring it will not make the problem go away.

Reference: Kiplinger (April 20, 2022) “When You Claim Social Security Can Have Huge Implications for Your Spouse”

What Is Federal Estate Tax Exemption, and Does It Matter?

“The federal estate tax exemption and gift exemption is presently $12.06 million. A married couple can transfer $24.12 million to their children or loved ones free of tax with proper planning. The exemption is tied to inflation, so it will continue to rise.”

Why should most of us be worried about losing an estate tax exemption, when most people’s estates are nowhere near $12.06 million? This recent article, “Don’t Throw Away a $12.06M Estate Tax Exemption By Accident” from Kiplinger explains it all.

Despite the Congressional gridlock over many estate tax issues, whether Congress moves forward or not, on January 1, 2026, the federal estate tax exemption will sink from $12.06 million to approximately $6 million. There was a Democrat proposal during the presidential campaign to reduce it even less, to $3.5 million.

Suddenly, the federal estate tax exemption will matter again to a lot more people. However, don’t wait for that 2026 date, since you could miss a big exemption.

If you are married and your spouse passes, you could take advantage of the current $12.06 million estate tax exemption, even if your estate is nowhere near this value. The exemption is a “use it or lose it” tax planning alternative. Use it.

In most estate plans, one partner leaves most or all of their estate to the surviving spouse. Assets left to a surviving spouse qualify for what is known as “an unlimited marital deduction.” If there is no taxable estate on the death of the first spouse because all assets have gone to the surviving spouse, who qualifies for the marital deduction, the deceased spouse’s unused exemption does not have to be lost.

A deceased spouse may transfer any unused portion of their exemption to the surviving spouse, known as “portability.” Many families may find themselves with an unnecessary tax burden in the near future, if they fail to take advantage of this because they think it won’t apply to them.

Consider a family with a $10 million estate, owned as community property, where each spouse owns one half. If one spouse dies tomorrow, the family probably thinks they don’t need to worry about the federal estate tax, as there’s $12.06 million exemption for the wife and $12.06 million exemption for the husband. However, this would be an expensive mistake.

If the family files a portability election on the timely—filed estate tax return for the first spouse to die, the second spouse’s lifetime exemption of $12.06 million goes to the second to die spouse’s estate.

If the second spouse lives to at least January 1, 2026, and the estate is worth $10 million, the taxable estate after the exemption is $4 million. With an estate tax of 40%, the estate tax liability is $1.6 million, which needs to be paid in full nine months after the date of death. The portability exemption could have prevented this tax liability.

A portability-only estate tax return can be filed up to two years from the date of death, which your estate planning attorney will be able to help you with. There is a fee for the filing, but the savings to be had make this a worthwhile fee to pay. Consider this a form of tax insurance. Any families with a net worth of $2 million or more should be talking now with their estate planning attorney about how to manage the changing estate tax exemption.

Reference: Kiplinger (April 14, 2022) “Don’t Throw Away a $12.06M Estate Tax Exemption By Accident”

What are the New IRA Distribution Rules?

“The Internal Revenue Service (IRS) recently issued much anticipated proposed regulations that clarify and revise some of the required minimum distribution (RMD) rules for qualified plans (i.e., 401ks, 403bs, etc.) and individual retirement accounts (IRAs).”

Many of the proposed distribution rules, which will be subject to further action in late spring, depend upon whether or not the original IRA owner died before or after the appliable required beginning date for distributions. As explained in the article “The Internal Revenue Service (IRS) Issues Proposed Minimum Distribution Rules” from The National Law Review, the age changed as a result of the SECURE Act, to 72.

Spousal Beneficiaries. If the spouse of the deceased IRA owner is the sole designated beneficiary and elects not to rollover the distribution, the surviving spouse may take RMDs over the deceased’s life expectancy. However, if the owner died before their required beginning date and the spouse is the sole beneficiary, the spouse may opt to delay distributions until the end of the calendar year in which the owner would have turned 72.

If the decedent died after turning 72, the annual distributions are required for all subsequent years and the spouse may take distributions over the longer remaining life expectancy.

Minor Children Beneficiaries. If the beneficiary of the IRA is a minor child, under age 21, annual distributions are required using the minor child’s life expectancy. When the minor turns 21, they must take annual distributions and the account must be fully distributed ten years after the child’s 21^st birthday.

Adult Children Beneficiaries. If the account owner dies after their required beginning date (age 72), an adult child who is a beneficiary must take annual distributions based on the beneficiary’s life expectancy. The account must be completely emptied within ten years of the original IRA owner’s death.

This applies only to adult children who are beneficiaries and are not disabled or chronically ill. Disabled or chronically ill adult children fall into a different category under the SECURE Act, with different distribution rules.

Special Rules for Roth IRAs. The benefits of Roth IRA accounts remain. There are no minimum distributions from a Roth IRA while the account owner is still living. After the death of the Roth IRA owner, the required minimum distribution rules apply to the Roth IRA, as if the Roth IRA owner died before their required beginning date.

If the sole beneficiary is the Roth IRA owner’s surviving spouse, the surviving spouse may delay distribution until the decedent would have attained their beginning distribution date.

If you own IRAs or other retirement accounts, speak with your estate planning attorney to determine if you need to update your estate plan. There are strategies to protect heirs from the significant tax liabilities these changes may create.

Reference: The National Law Review (March 25, 2022) “The Internal Revenue Service (IRS) Issues Proposed Minimum Distribution Rules”

Why Is Social Security Important?

“Even for the wealthy, their lifetime Social Security benefits likely rank high among their largest assets. For people with average lifetime incomes, it is often the biggest.”

Knowing the ins and outs of various Social Security strategies is important to make the most of the program for you as an individual and for your family. Questions about making the right financial moves and investing are usually not followed by questions about Social Security. However, they should be. A recent article from CNBC titled “Social Security may be a ‘treasure trove’ for you and your family. But first you have to navigate some complex rules” explains how Social Security includes thirteen different kinds of benefits.

The list of different payments includes disability benefits, spousal benefits, divorced spousal benefits, child-in-care spousal benefits, widow/widower benefits, child benefits, disabled child benefits, mother/father benefits, divorced widow/widower benefits, parent benefits, grandchild benefits and death benefits.

Each type of benefit has its own requirements. The one catch: Social Security is a “use it or lose it” system. If you do not know you are eligible for a benefit, you might miss it.

One basic fact: you can wait until age 70 to get the maximum benefit. However, there is no advantage to delaying taking Social Security benefits past age 70. Eligibility begins at age 62, and for each year you collect benefits before your Full Retirement Age (FRA), you lose about 7%. FRA is based on your date of birth. Therefore, if you can wait to collect at your FRA, you will get 100% of your benefits. For every year past FRA, benefits increase by about 8%.

If you can wait from age 62 to 70, your benefits will be about 76% higher. Most people do not wait because they need the income or have serious health conditions and do not expect to live long enough to benefit from the increase.

For some families, maximizing the benefits is less about the wage earner and more about the family. If the wage earner has a disabled child, claiming benefits could trigger the child-in-care spousal benefit and a disabled child benefit. In this case, it may be better to take benefits earlier to help the entire family.

Another advantage of waiting until age 70 is it will result in a higher surviving spouse benefit, enabling a widow or widower to receive the full amount of their spouse’s monthly benefit plus their own benefits, if the surviving spouse has their own earnings.

Ex-spouses who were married for at least ten years and did not remarry until they reached age 60 are eligible for survivor benefits. You may not want to wait until FRA or age 70 on their behalf, but circumstances vary, so you should at least be aware of this.

The survivor benefit for young children or disabled children of any age, if they were disabled before age 22, does not change regardless of when you claim.

The complexity of all of these programs makes it sometimes difficult to know what the best claiming strategy is. Most people focus on the individual or couple, but not the entire family’s benefits.

Social Security experts advise wage earners to speak with more than one employee to get answers, since you may get different answers. Do your research and be your own advocate to ensure that you and your family receive the correct benefits.

Reference: CNBC (Feb. 7, 2022) “Social Security may be a ‘treasure trove’ for you and your family. But first you have to navigate some complex rules”

Does Marriage have an Impact on a Will?

“Being married is significant both for a married person’s lifetime estate planning and subsequent administration of the estate at death. Important rights and responsibilities exist between married persons.”

It is very difficult to challenge a marriage once it has occurred, since the capacity needed to marry is relatively low. Even a person who is under conservatorship because they are severely incapacitated may marry, unless there is a court order stating otherwise, says the article “Estate Planning: On Being Married, estate planning and administration” from Lake Country News. This unfortunate fact allows scammers to woo and wed their victims.

What about individuals who think they are married when they are not? A “putative” spouse is someone who genuinely believed they were married, although the marriage is invalid, void, or voidable because of a legal defect. An example of a legal defect is bigamy, if the person is already married when they marry another person.

Once a couple is married, they owe each other a duty to treat each other fairly. In certain states, they are prohibited from taking unfair advantage of each other. Depending on the state of residence, property is also owned in different ways. In a community property state, such as California, marital earnings and anything acquired while married is presumed to be community property.

In a community property state, debts incurred before or during the marriage are also shared. In a number of states, marriage is sufficient reason for a creditor to come after the assets of a spouse, if they married someone with pre-marital debts.

There are exceptions. If a married person puts their earnings during marriage into a separate bank account their spouse is not able to access, then those deposited earnings are not available for debtor spouse’s debts incurred before the marriage took place.

If a married person dies without a will, also known as “intestate,” the surviving spouse is the next of kin.  In most cases, they will inherit the assets of the decedent. If the decedent had children from a prior marriage, they may end up with nothing.

These are all reasons why couples should have frank discussions about finances, including assets and debts, before marrying. Coming into the marriage with debt may not be a problem for some people, but they should be advised beforehand.

A pre-nuptial agreement can state the terms of the couple’s financial health as individuals and declare their intentions. An experienced estate planning attorney can create a pre-nuptial to align with the couple’s estate plan, so the estate plan and the pre-nuptial work together.

Marriage brings rights and responsibilities which impact life and death for a couple. Starting a marriage based on full disclosure and proper planning clears the way for a focus on togetherness, and not solely the business side of marriage.

Reference: Lake Country News (Feb. 12, 2022) “Estate Planning: On Being Married, estate planning and administration”

What are the Most Common Estate Planning Mistakes?

“With apologies to poet Robert Burns, the best-laid estate plans of women and men sometimes go awry.”

There are so many estate planning horror mistakes, it’s hard to know which is the worst. One is the woman who had an estate plan created, but only named one guardian for her teenage daughter. When the guardian declined to serve, the girl was moved into foster care. Many estate planning attorneys recommend not one, but two alternate guardians, according to the article “Don’t get tripped up by these common estate planning pitfalls” from MarketWatch.

Joint ownership of bank accounts leads to a tangled mess. Seniors often add one of their adult children to ownership of their bank accounts, so the child can manage their affairs or keep an eye open for financial elder abuse. However, when the parent dies, the account is the sole property of the child, and siblings have no say over what the new owner does with the money. Even if the children agree to split the money evenly, the federal gift tax exemption is limited to an annual gift, gift tax returns have to be filed and a simple idea becomes expensive and time consuming.

If joint ownership of an account is necessary, it may be better to add all of the children or have in a separate writing the intention that this is an asset you want divided equally among the children. Easier still: create a new account dedicated to paying bills and maintain a small balance. Even better, if the institution allows you to arrange for the account to “pay on death,” then designate all of your children as beneficiaries. This approach will avoid probate, while treating all children equally and not exposing your account to any potential divorces, lawsuits, or bankruptcies during your lifetime.

Giving money to grandchildren directly. Putting a minor as a beneficiary of a percentage of an estate requires the involvement of a judge approving the bequest and the appointment of a custodian over the account until the minor becomes an adult. An estate planning attorney would likely recommend the use of a trust for the benefit of the minor. Alternatively, limit bequests to adult children and adult grandchildren.

An adult child or surviving spouse living in the house. A man created a property trust to allow his second wife to remain in the house he owned before their marriage. The couple had jointly paid off the mortgage. The man named his daughter from a prior marriage as the successor trustee. The daughter began making unreasonable demands on the surviving spouse to make expensive improvements. Years of bad blood between the two erupted into years of litigation. The parties finally agreed to revise the trust terms and name a professional trustee, but not after an expensive and stressful battle.

When one of the children is living in the house and the will says the home is to be divided among the siblings equally, what happens? Does the child who lives in the house get first right of refusal to buy out their sibling’s shares? Are they paying rent to siblings? What if the child living in the house decides to sell, after they personally have invested a lot of money improving the house?

Estate planning attorneys bring up these kinds of situations with clients not because they want to scare people, but because they have seen firsthand what happens when an estate plan fails to anticipate a variety of situations. The estate planning attorney needs to know about the family’s dynamics in detail, in order to create the best plan to achieve the desired outcome and prevent as many twists and turns as possible.

Reference: MarketWatch (Jan. 6, 2022) “Don’t get tripped up by these common estate planning pitfalls”