EP 98: Financial Steps To Take After The Death Of A Spouse with Mike Piper

by Peter Lazaroff | May 3, 2023 | Podcast

The death of a spouse is one of the most emotionally challenging times of a person’s life. In this financially driven conversation, Mike Piper explains the financial steps to take for a surviving spouse.

Listen now and learn:

What married couples can do to make it easier on a surviving spouse in the future
Financial planning techniques a surviving spouse can use to maximize their wealth and minimize taxes
When it makes sense to disclaim an inheritance

Watch Now

Listen Now

Show Notes

In this episode, I’ve invited Mike Piper to discuss his latest book: After the Death of Your Spouse: Next Financial Steps for Surviving Spouses. Mike Piper is a Missouri Licensed CPA and the author of several personal finance books, but he may be best known for his blog The Oblivious Investor.

Mike started the blog back in 2008 to convey that people don’t need to be super-tuned into the market every day to be a successful investor – and instead, it’s usually advantageous to tune it out entirely.

It goes without saying that this discussion (and the book) is financially focused. Neither of us has lost a spouse, but we’ve each worked with individuals who’ve lost a spouse and we’ve each experienced loss ourselves….so we realize that there are some tremendously important emotional and personal issues. So while we aren’t qualified to discuss those issues, we hopefully can create some clarity on the more objective aspects of the financial steps to take after the death of a spouse.

Here are my notes from our conversation…

What to Do Before and Immediately After the Death of a Spouse (4:30)

The death of a spouse is one of the most emotionally challenging times of a person’s life. And unfortunately, the way our various legal and financial systems are designed, the surviving spouse gets a ton of administrative work dumped on them at a time they’re least able to deal with it.

In Mike’s and my experience, most married couples have one person who takes the lead on financial matters. Naturally, about half the time it’s that person who dies first, leaving the surviving spouse arguably in an even more challenging position.

Mike’s book does a wonderful job of offering a roadmap to the spouse who maybe doesn’t have decades of experience dealing with all these matters.

There are three things you can do to make it easier on a surviving spouse.

Simplify your accounts and custodians. These days, there isn’t much benefit to having your assets spread out across multiple custodians.

Thoughtfully title your accounts and beneficiaries. It’s important to have the essential estate planning documents in place, but you also must title your accounts to make those estate planning documents work. Not all accounts necessarily have to be titled in the name of a trust, but there are ways to title accounts that make them pass to the surviving spouse easily. Similarly, be sure to name beneficiaries of retirement accounts and insurance policies to make them pass directly to the spouse with little hassle.

Know where to find all necessary financial information. Not only do both spouses need to know where various accounts or insurance policies are held, but they need information about how to sign into the accounts. Similarly, be sure you both know the location of records related to tax returns, outstanding loans, major purchases, etc.

Once a spouse has passed away, the first place to get started is obtaining a separate death certificate for each account your spouse has in their name. Because it will take a few weeks for the death certificates to show up, the next step is getting yourself organized.

There’s a lot of paperwork, so creating a filing system will help you start learning a little bit about the things you’ll be doing over the next few months. And most importantly, TAKE NOTES. This is something Mike repeats throughout his book because it’s easy to forget what you’ve done, what is in process, what due dates are approaching, what needs additional documentation, etc.

Estate Planning (8:40)

A surviving spouse will need to update their estate plan in many ways. Oftentimes, the named beneficiary on their own accounts is the now-deceased spouse. And if you inherit any accounts from your spouse, those beneficiaries will need to be updated as well.

In the unfortunate case of the death of a younger person, the surviving spouse might want to think about updating their will. Obviously, if that person doesn’t have a will, getting one is extremely important in order to name guardians for children.

A personal representative administers the estate and serves as a fiduciary of the estate’s beneficiaries. Most people are surprised by how daunting the role is the first time they take on the responsibilities required in administering an estate.

It’s common for spouses to pick each other as the personal representative of their estate, but there are instances where the cognitive decline of the surviving spouse makes it necessary to pick somebody else. There are also instances where the person simply doesn’t want to do it – they’d prefer one of the kids or someone else in the family or even a professional hand those responsibilities.

Social Security (12:50)

Once you get past those immediate steps after the death of a spouse, a lot of the decisions and actions have to do with financial planning, whether it’s maximizing benefits or minimizing your taxes whenever possible.

When thinking about Social Security, Mike describes two broad scenarios.

In the scenario with a younger surviving spouse with minor children, you’ll want to read up on child benefits. Children under 18- or 18-year-olds still in high school can receive child benefits on their deceased parent’s work record. And there’s really no downside to filing for those, so you usually want to file for them immediately,

You might also be able to qualify for what’s called a mother/father benefit, which is if the child is younger than 16 or disabled, you receive a benefit rather than the child receiving it. Again, there’s usually no downside to filing for it. But if you’re younger than your full retirement age, have a minor child, and you’re still working, then the Social Security earnings test could result in your benefit being reduced or potentially eliminated.

The more common scenario is when somebody passes away at a more advanced age. For the surviving spouse, there are two benefits they want to be thinking about (1) their own social security retirement benefit and (2) their benefit as a surviving spouse. The general strategy in this situation is to figure out which of those benefits has the potential to grow to a larger amount.

Survivor benefits max out at full retirement age, which is somewhere between 66 and 67. Retirement benefits max out at age 70. By comparing the survivor benefit at full retirement age to your retirement benefit at age 70, you want to file for the smaller benefit as early as possible (age 60 for the survivor benefit and 62 for the retirement benefit) and leave the larger benefit alone so that it grows to that larger amount.

There are some exceptions, the biggest one is if you’re still working, which means you need to think about the earnings test. This adds a little bit of additional complexity to the decision, but Mike developed this Social Security tool to help you compare the different filing options.

Inherited IRAs (16:15)

When you’re inheriting an IRA from your spouse, the current options are (1) continuing to own it as the spousal beneficiary or (2) rolling it into your own IRA.

When rolling into your own IRA, all the regular rules apply. If it’s an inherited spousal IRA, there are a handful of differences in the rules. For example, when you take money out of a Traditional IRA, it’s going to be taxable but it won’t be subject to the 10% penalty even if you’re younger than 59.5 years old.

That’s a really important planning point for a surviving spouse who is younger than 59.5 years old….it often makes sense to leave this money in that inherited IRA so that they can spend from it without the 10% penalty, and then think about rolling it into their own IRA once they do reach 59.5 years old.

Starting in 2024, the SECURE 2.0 Act allows you to act as if you are the deceased spouse, but that’s not applicable yet.

Disclaiming Assets (18:05)

The beneficiary of any asset is allowed to disclaim that asset by basically saying, “No thanks, I don’t want to inherit that,” and then that asset goes to whoever is next in line to inherit it.

A common misconception is that people who disclaim the asset get to pick who it goes to, but that’s not the case. For example, an IRA will go to the contingent beneficiaries. If it’s an asset listed in the will and doesn’t have contingent beneficiaries named, then it gets lumped in with all the rest of the assets and gets distributed accordingly.

There are a few reasons why people would want to disclaim assets.

Although it’s not common, sometimes the person inheriting assets doesn’t like how the deceased person distributed their assets. For instance, they might feel like someone is getting the short end of the stick. If they are listed as the contingent beneficiary, that could be preferable from a tax perspective than taking it yourself and giving it to them.

A more common case is if you are the named beneficiary of a tax-deferred account, but you have a particularly high tax rate on distributions. Perhaps the named contingent beneficiary has a lower tax rate such that if you disclaimed it, they could take distributions from the account and pay taxes at their lower tax rate. A common example of this situation is when young adult children that are early in their careers or maybe even haven’t started their careers are named as the contingent beneficiaries.

And you don’t have to disclaim everything, you can claim half or two-thirds or whatever percentage of a divisible asset and then disclaim the rest.

What to Look for in a Fiduciary Advisor (21:20)

Throughout Mike’s book, there are so many examples where multi-generation planning can be so effective, but people don’t know all the rules or think about the different time horizons of beneficiaries.

For more on this topic, see:

We both agree that the number one thing to look for in a financial advisor is someone that acts as a fiduciary at all times.

The second thing is looking at an advisor’s experience and expertise. Financial planning is a really broad field, much more so than a lot of people realize, and no one person can be an expert in every single subtopic within the financial planning world. Just like in the medical profession, different specialists have knowledge and experience that other specialists don’t even think about.

If you work with an individual or a smaller practice, you need to really understand that person’s strengths and weaknesses. At larger firms that have the scale to employ specialists of all kinds, you want to understand how the advisors utilize those specialists.

A third thing to evaluate is compensation. Basically, all financial advice models have some conflict of interest, there’s really no way around it. But if you want somebody to provide ongoing advice, then a compensation model that allows the advisor to proactively reach out to you makes a lot of sense. Conversely, if you’re somebody who prefers to do the work and simply wants someone to look into one particular topic, then someone who does short-term engagements is perhaps a better fit.

There isn’t a right or wrong choice. It’s just about understanding your needs.

On final thing we discuss on this topic is when people who prefer to do it themselves may consider entering into an ongoing relationship. It’s common to see the spouse who typically takes the lead on finances hire someone as a backup plan for their surviving spouse. In this case, it’s important to communicate to your spouse who you would hire if you choose to delay such a decision.

Other times, the financial decision-maker will enter an ongoing relationship with an advisor as a backup plan for their own inevitable cognitive decline. In this case, there’s a good argument for choosing an advisor when you’re not experiencing any cognitive decline because it’s very difficult to notice (or admit) that it’s happening.

Resources:

Submit Your Question For the Podcast

Do you have a financial or investing question you want answered? Submit your question through the “Ask Me Anything” form at the bottom of my podcast page.

If you enjoy the show, you can subscribe wherever you listen to podcasts, and please leave me a review. I read every single one and appreciate you taking the time to let me know what you think.

About the Podcast

Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.

Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.

Support the Show

Thank you for being a listener to The Long Term Investor Podcast. If you’d like to help spread the word and help other listeners find the show, please click here to leave a review.

Free Financial Assessment

Do you want to make smart decisions with your money? Discover your biggest opportunities in just a few questions with my Financial Wellness Assessment.