Financial
Tips For Widows, Widowers
A surviving spouse shouldn't make
big moves with an inherited portfolio right away, but the survivor does need to
take ownership of the portfolio and adapt it to the new circumstances over
time.
Life can be difficult and
complicated for surviving spouses. Contending with some financial rules and
procedures in addition to everything else can amount to piling on. Yet widows
and widowers need to make key decisions about their finances, and some
decisions need to be made within deadlines. Social Security, individual
retirement accounts, employer retirement plans and investments are the major
areas with deadlines or some urgency. Let’s examine the key issues that arise
in the first year.
The best advice for a surviving
spouse is not to make financial decisions in a hurry. There’s enough time to
seek advice and collect information, review the options and make the best
decisions. As with other financial issues, you shouldn’t rely on a rule of
thumb or copy what someone else did.
Social Security
You are eligible for the higher of
your own Social Security retirement benefit or a survivor’s benefit. A
survivor’s benefit can be paid as early as age 60. The survivor’s benefit
generally is 100 percent of the retirement benefit the deceased spouse was
receiving or would receive at normal retirement age.
But as with retirement benefits,
when you take the survivor’s benefit before normal retirement age, the amount
you receive is reduced. So a surviving spouse who wasn’t already receiving
Social Security retirement benefits or wasn’t planning to begin them soon
shouldn’t automatically claim survivor’s benefits even if he or she is age 60
or older. You want to think long term. Delaying benefits can increase them
substantially, so you might not want to begin benefits just because you’re
eligible. When you don’t need the income right away, you could be better off
long term by waiting and letting the benefits increase. But you can begin
taking survivor’s benefits and later switch to your own earned benefits if they
are higher. Taking survivor’s benefits before age 66 won’t reduce your earned
retirement benefits.
Individual Retirement Accounts
Surviving spouses have three choices
when they’re the sole beneficiaries of a spouse’s IRA. You can withdraw all the
money and pay income taxes on it. You also can choose from two rollover or
transfer options.
A surviving spouse has a special
option to roll over the inherited IRA to an IRA in his or her name. This will
be treated as a new IRA and sometimes is called a “fresh start IRA.” The
surviving spouse with a fresh start IRA won’t have to begin required minimum
distributions until he or she is over age 70.5 and then will take them based on
his or her own life expectancy. A new group of beneficiaries also can be
selected.
The other option is to transfer the
IRA into an inherited IRA the way other beneficiaries would. The beneficiary of
an inherited IRA must begin required minimum distributions by Dec. 31 of the
year after the year of the owner’s passing. When the deceased owner already
reached age 70.5, the beneficiary can continue the distribution schedule the
owner was using or can schedule the distributions over his or her own life
expectancy. When the owner wasn’t already age 70.5, the distributions can be
taken over the beneficiary’s life expectancy or the IRA can be emptied by the
end of the fifth year following the year of the owner’s passing.
In most cases the best move for
surviving spouses is to roll over the inherited IRA to a new IRA. That creates
more options and flexibility. But there’s a catch when the survivor is under
age 59.5. If distributions are taken from a rolled over IRA before age 59.5,
the distributions are subject to both income taxes and the 10 percent early
distribution penalty. But when the distributions are from an inherited IRA that
wasn’t rolled over to a new IRA, the distributions aren’t subject to the 10
percent penalty. A younger survivor who plans to take distributions from the
IRA immediately is better off with the transfer to an inherited IRA instead of
a rollover to a new IRA.
Filing Estate Tax Returns
The new estate tax establishes that
lifetime estate tax exemptions are portable between spouses. Each person has a
$5.25 million lifetime exemption. When one spouse passes away and the estate
isn’t valuable enough to exhaust the exemption, the unused amount can be
transferred to the surviving spouse. That gives the surviving spouse an
exemption of $5.25 million plus whatever wasn’t amount used by the other
spouse.
The trick is that under Internal
Revenue Service regulations the surviving spouse can’t use that surplus
exemption unless the estate of the first spouse filed an estate tax return. For
portability to be effective, the estate of the first spouse to pass away must
file an estate tax return, even if it otherwise isn’t required to under the
law. A surviving spouse and the executor must be aware of this rule and file a
return to preserve the unused exemption.
Investment Decisions
Often, a surviving spouse doesn’t
really know what the other spouse’s portfolio strategy was. Or the two spouses
have very different risk tolerances or investment ideas. Ideally, the deceased
spouse either explained the details to the other spouse or was using a
professional adviser or money manager who can provide continuity in portfolio
management. But that often doesn’t happen.
A surviving spouse shouldn’t make
big moves with an inherited portfolio right away, but the survivor does need to
take ownership of the portfolio and adapt it to the new circumstances over
time. Too often, the surviving spouse believes little or nothing should be
changed in the portfolio. Sometimes, the deceased spouse told the other spouse
not to change the strategy or portfolio. Or the deceased spouse had said
certain investments never should be sold. At other times, the survivor either
believes the portfolio shouldn’t be changed or isn’t sure of the changes to be
made.
A survivor needs to be sure the
portfolio over time is adjusted to reflect his or her income needs, risk
tolerance, market changes and other circumstances. Professional help should be
sought when the survivor needs guidance and the deceased spouse didn’t leave
advice regarding a professional money manager.
— Bob Carlson