By Michael Vaughn, CFP®
Life can take unexpected turns, and it’s vital to be prepared for any eventuality. While many of us don’t like to speak about “what-ifs,” it’s important to consider what would happen if you had to handle everything after the loss of a partner. Would you be prepared if widowhood happened tomorrow? By facing this question head-on, you can create a plan to provide confidence and peace for yourself and your family.
Do You Have a Trust in Place?
If you and your spouse do not have a trust, consider drawing one up in order to control where your assets go now, and in the future. A trust ensures assets are protected and disbursed to the right heirs. You can have both a will and a trust, but while a will takes effect after one’s passing, a trust can be used both during life and after one’s passing. Be sure to ask your advisor about state laws when it comes to the differences between wills and trusts—having a comprehensive estate plan, and understanding the nuances of that plan, is critical for both partners.
Without a trust, it can take longer to get closure, and the details about how assets should be passed on can get messy in the process. If you do have a trust, make sure it’s up to date by working with a qualified estate attorney to get all the legalities in place.
What Benefits Are Available to You?
Understanding your benefits is another important aspect in preparing for the possibility of widowhood. Things like Social Security, life insurance, pensions, and annuities should be assessed ahead of time so that you’re not struggling to make difficult financial decisions immediately after loss.
If your spouse is still working, there may be other employer-sponsored benefits available as well. Work together with your loved one to make a list of all the benefits either of you will receive in the event of widowhood as well as the information needed to access these resources. As difficult as it may be, talking about these benefits ahead of time can help you both feel prepared if widowhood were to happen.
Do You Have Access to All Financial Account Information?
One of the hardest parts of widowhood is moving forward without the support of your spouse. Maybe they were the one who handled all of the day-to-day financial matters and now you are stepping into this role for the first time in your life. It can be overwhelming to say the least.
The best way to prepare for this possibility is to make sure both spouses have access to important financial account information including checking and savings accounts, retirement plans, and other investments. At a minimum, both spouses should have access to the account numbers and any log-in information. Also keep in mind that in some cases, settling an estate may require a birth certificate and/or marriage certificate (even if you are divorced), so it’s important to keep these in a safe and accessible location.
Additionally, understanding how these accounts are titled (joint or individual), as well as who is listed as the beneficiary, are crucial aspects of estate planning. Having joint ownership on all accounts, or listing each other as beneficiaries, can help the assets transfer smoothly by avoiding probate.
What Does Your Spending Plan Look Like?
Life after widowhood will be challenging, but a detailed spending plan can help ease the transition by alleviating the stress of making day-to-day financial decisions. Start by creating a current budget, if you don’t have one already. Together, you and your spouse can discuss the types of expenses that will either be added or removed from the budget if widowhood were to happen. It may seem strange in the moment, but it can be an incredible aid when planning for the future.
Special attention should be paid to debts like mortgage payments, monthly utilities, car payments, credit card debt, and other loans. Understanding how these debts will be managed in the event of widowhood is crucial to creating a sound financial future for the surviving spouse. The last thing either spouse wants to do is leave behind debt that their loved ones can’t manage. Planning ahead can help alleviate this burden and provide comfort to both spouses knowing that their partner is going to be okay on their own.
Are You Aware of the “Widow’s Penalty”?
One factor that can impact your financial future is what’s called the widow’s penalty, which refers to the situation where a surviving spouse ends up paying higher taxes on a potentially reduced income following the death of their partner. There are a number of reasons for this scenario that can become a frustrating and expensive lesson for the surviving spouse.
One reason is when you go from married filing jointly to filing single, you lose 50% of the standard deduction. This means that more of your income will be counted in your tax bill, so you’ll have to pay more than you’re used to, which can be a surprise to some.
Further, if you have not done any Roth conversions prior to this point, then the surviving spouse will have to take required minimum distributions from the combined IRAs/401(k)s. Even if the RMD amount is the same as before, the tax bill will still be higher because of the different filing status.
Not only can there be added financial responsibilities and burden on the surviving spouse, there also might be the chance of paying a higher tax rate to boot.
Do You Have a Trusted Advisor?
In times of sorrow and transition, the last thing you want to worry about is financial instability. By having a well-crafted trust and will in place, you can help your loved ones be cared for and confident that your assets are managed according to your wishes. Beyond this, understanding the benefits available to widows can provide additional support during a challenging period.
Remember, you’re not alone on this journey. At Pinnacle Family Advisors, your financial well-being is our priority; and as fiduciaries, you can trust that we’re putting your interests above all else, period. Schedule your complimentary introductory meeting by emailing me at [email protected], calling (417) 351-2942, or using my online calendar.
Michael Vaughn is a CERTIFIED FINANCIAL PLANNER™ professional and Vice President at Pinnacle Family Advisors (PFA) with 22 years of industry experience. Before joining the PFA family, he served clients with investment management and retirement planning at The Mutual Fund Store for 14 years. Michael graduated from Missouri State University with a bachelor’s degree in business administration and management and earned his CFP® certification in 2004. He also served 20 years in the Missouri National Guard, retiring in 2007 as a Major. He currently volunteers on the board of directors for Good Dads and Fellowship of Christian Athletes. Michael is married to Lori and they have two daughters. To learn more about Michael, connect with him on LinkedIn.