Estate Planning For The Surviving Spouse

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This is the Truth Network. Welcome to Finishing Wealth, brought to you by cardinalguide.com, with certified financial planner, Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Wealth, we'll examine both biblical and practical knowledge to assist families in finishing wealth, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now, let's get started with Finishing Wealth. Darrell Bock Welcome to Finishing Wealth, with certified financial planners, Tom Griffith and Hans Scheil.

Always very fun to have them here today. We've got an amazing show, actually, estate planning for their surviving spouse. And you might just find out that someday that you may think that you were going to be the surviving spouse, but as my father, who was about 17 years older than his wife, never would have dreamed that he would be the surviving spouse. But as it turned out in his life, he was. His wife got brain cancer when she was very young, and she went to be with the Lord, and so there he found himself the surviving spouse.

And actually, as Hans knows, and I know, all his estate planning was in that other direction, and so everything was not where it would have been, you know, had anybody ever done any planning for the other thing to happen. And so when I was thinking about what the biblical application of this is, is that the Bible teaches all sorts of things about the door. In fact, when you get to Revelation, you'll find Jesus stands at the door and knocks, and he's saying that to the church, so he's talking to us believers that he wants in on what's going on, and he wants in on the planning.

And the idea of that is beautiful when you think about it. Number one, we have every moment of every day we can open up the door and invite him into the decisions that we're making, but it requires humility. Because actually, the letter Dalet is also the word door in Hebrew, same letter and the same word, and it has to do with humility. Humility to say, you know what? I can't handle this, all this planning stuff on my own. I need your help, Jesus. And then Jesus hopefully, well, I shouldn't say hopefully, I know Jesus will, points you in a direction of a counselor that can help you.

And again, it takes humility and then faith, right? And judgment in order to determine all those things, and all those ideas are in the word Dalet. And so with that idea of like, man, I need to learn about this stuff, especially when it comes to these things that we just don't know what's gonna happen. You might be the surviving spouse, but for sure, you need to be taking care of yours. You know, if you're not the surviving spouse, you want to take care of your wife or your wife wants to take care of you, this is a very relevant subject we're talking about today, right, Hans?

Dr. Hanage Well, it is. And so this is one of the topics that has just developed out of the work that Tom and I do, is just looking at many, many couples coming through here and advising them. And this is the biggest issue in estate planning for couples is that one of you passes away, and that happens maybe at a youngish age in the 70s, early 80s. And then the other one lives on for quite a period of time, many years, there's a few things that happen that are really devastating. And so we need to start planning for those right from the beginning.

And so for the format of this show, we have gone through all seven worries or seven topics in the YouTube video. And we've talked about, okay, when the first spouse dies, what happens with Social Security? What happens with Medicare? What happens with long term care? What happens to your IRA money? What happens to your income that you've been depending upon? What are the estate implications?

And what happens with taxes? And so what I'd like to do is just go, as far as Social Security, what happens, Tom, when the first spouse dies? Dr. Hanage Yeah, when the first spouse passes away, the lower check stops. And so if you have two people on Social Security, generally one check is going to be higher than the other.

Sometimes it's not by much. But whatever the situation is, that lower check stops at the death of the first spouse, regardless of who passes away. So the net effect of that is you have a reduction in income, sometimes pretty substantial reduction in income at that first step.

So that is a big point. So not only are you dealing with the death of your loved one and your spouse, emotionally, it's hard. Financially, it can be really hard as well, because your income has just been reduced.

Dr. Hanage Okay. So the next topic, which I'm going to go to the very end, what happens to your tax situation, when you have a couple, and then the first one of the couple passes away? Now they're living on that one Social Security check, plus some other things. But what happens to their tax situation?

I think this is an area that is often overlooked and really overlooked in a big way. Because your taxes, you go to file the single tax rates, which are much higher, much higher taxes and much more quickly, versus joint tax returns, joint tax rates. And so the year of death, you still get to file a joint tax return. But the following year, you're filing taxes at a single rate. And a lot of people, they didn't think about this, they don't adjust their withholding. And they find out about it when they go file their taxes the next year. And they owe a lot of money because they just didn't withhold enough of taxes. So this is a big area. This is one of the areas we do a lot of planning around, and ways to prepare for the death of the first spouse where you're not leaving the surviving spouse in trouble with the tax rates.

Well, it's just real simple. The top of the 22% tax bracket for a couple is $190,000. And the top of the 22% tax bracket for a single is $95,000.

So, you know, any money over that, I mean, I could do that at any point. The top of the 12% bracket is 89 grand for a couple, it's $44,000 for a single. So their taxes go up on the survivor who's now a single person. Now, that just seems crazy that, you know, their income drops, their taxes go up. The good news is that we got a whole lot of planning stuff that's gonna come later on in the show, but right now we're just gonna take you through a little bit about, you know, a whole lot changes as really you've come into a whole new world, right Hans?

Yeah. We're gonna attempt to fix these problems in the second part of the show, but let's look at Medicare. So what happens to people's Medicare? I mean, I can answer the first part is that part B charges for the one who's passed away stop. So you could almost look upon that as a plus, but what else happens with Medicare?

Especially for the higher earners. And so this is people who are facing the Irma, or maybe they aren't facing the Irma on a, if they're filing a joint tax return, and we have other shows and radio shows on that, but that's the income related monthly adjustment amount. It's where they charge you more for Medicare based off your income. Those thresholds for a single filer, they shrink just like the tax returns do, tax rates do, is you start having to pay more for Medicare at sooner, your income sooner in the, as you're earning income, you have to pay it more for Medicare.

So the Irma becomes a problem. So we have, I mean, I'll go off the top of my head here, but for a couple, the first break threshold break for the Irma is $194,000. For someone who's filing a single tax rate, tax rate, it's like 90,000 something dollars, 94, I think is somewhere in that range. And so you could be earning, say 130, 140, you have a really comfortable retirement as a couple. Now you, your spouse passes away, your social security gets decreased, you're filing taxes at a higher rate. And oh, by the way, you have to pay more for Medicare too.

I mean, it just all comes right at you. And it's just right at the same time that, you know, your income from other sources like social security have been reduced. So it's definitely something we want to plan for.

Yeah. And so we don't want to hang up on all the subjects. But the other thing that happens is when you have a couple, generally the healthy one is the caregiver for the one who just passed away. But for the years prior to that, the person who's in poor health has been able to rely on their spouse to take them to doctor's appointments, to do all the things that need care of a person who's in poor health. So the medical advocacy and just transportation. And so let's talk about what happens with long-term care.

Okay. And I think that's sort of what you were just talking about feeds right into that is when you have a couple, generally one of the spouses is taking care of the other to some extent, if they get sick, right. You know, hopefully they're not having to provide all the caregiving, but they're there, they're available, they're helping out just that's what, you know, people who are married due to each for each other's spouses. When the first spouse passes away, you don't have that built-in caregiver right at home. It's like, if you were to get sick and need care, generally you'd want that to start at home. If you're living by yourself, you neither need to bring in professionals to do it.

You need to bring in kids, neighbors, family members. I mean, that's a big change when the first spouse passes away. And if you have long-term care insurance, your spouse who's now deceased may have used up a portion of the long-term care benefits if you have a joint pool. And if they don't have long-term care insurance, they may have depleted the savings. And so, now you're left as a single and with a depleted savings and possibly facing long-term care yourself down the road. So, one more of these moving on, like what happens with your 401k and IRA?

I mean, RMDs continue. The Roth conversion is more expensive. So, people that put off Roth conversions and they all of a sudden see the light after they're a single taxpayer and they start doing that on a larger RMD because it's just on one person, two accounts on one person, they have to pay higher tax rates to do Roth conversions. Tom, what happens with your income when two becomes one? So, we've already talked about social security.

So, that's a big one. But a lot of people, if you're lucky enough to have a pension, depending on what you elected when you started that pension, there could also be a reduction in that income. So, when you first filed that pension for your pension, they give you a choice whether you want to take a hundred percent joint survivor benefit. That means your spouse continues to get the full check. Fifty percent survivor means they only get half the checker or no survivor benefits.

They get no check. We got to go to a break here in a minute, but we want to remind you that, of course, this show is brought to you by CardinalGuide.com. And there at CardinalGuide.com, you're going to see the Seven Worries tab.

And, of course, today has got to do with the state. And you can click on that and see the show notes or the wonderful YouTube video, the board they're talking about, which outlines all these details for you. It's all there at CardinalGuide.com, as well as Hans' book, The Complete Cardinal Guide, The Planning for and Living in Retirement.

And, of course, my favorite, it's just pretty easy to see the phone number to call and go 1-800-HANDS or 1-800-TOM, whichever, and get them right on the phone to help you. And so we'll be right back with so much more on estate planning for the surviving spouse. Investment advisory services offered through Brookstone Capital Management, LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with certified financial planner, Hans Scheil and Tom Griffith. And today's show, we're talking about estate planning for the surviving spouse. And as we mentioned at the beginning of the show, you don't know necessarily who that may be.

But quick review, Hans. Okay, so what's going to happen when the first one of you dies is you're going to go from two Social Security checks to one. The larger check is going to survive, the smaller check is going to go away. And then other income sources are going to go down potentially, like a pension or that sort of thing. And then tax rates are going to go up because now you're a single filer. And so you put those two things together, it's devastating to the surviving spouse. And so this is the first estate planning issue when we get to that section in our financial planning that we address.

What were you going to say? I was going to say related to the taxes, Medicare premiums can go up. I mean, that's just another form of a tax is that Irma. And so you have income going down, taxes going up, your expenses really don't change a lot when the first spouse passes away. So it can be, you know, a jolt to someone's sort of overall plan if this happens unexpectedly. So what we'd like to do for the rest of the show is talk about some of the tools that we use. So what can we do now in our 60s or 50s to prepare for this so that our spouse does not live on impoverished or on a very limited income?

So what's the first one of these Tom? Yeah, I think one thing that just comes to mind immediately is life insurance, is life insurance provides an influx of cash when someone dies immediately. I mean, it comes right away much faster than having to go through the will much faster than dealing with other accounts. I mean, you send in a death certificate and they send you a check very quickly. And so that is a way to, especially if you've done something like taken just the single payout on a pension where there is no survivor benefits or social security, if the reduction of one of the checks will be really impactful to the surviving spouse, life insurance is a way to make up that difference very easily.

What's the next one? And the next on our list is the use of lifetime annuities. And so we sell a lot of these in our practice where we have a couple coming in, we set up using some of their money, 401k, IRA funds, and generally, and we put that aside in an annuity that's designed to create an income that neither one of them can outlive.

And so you set this up each one is different based off the client's needs. But once it's started, that income is guaranteed to come in as long as either one of them alive, it really helps smooth out the income sources when one of them dies because they just can count on that check continuing. I love that idea because, you know, what you always talk about Hans is, you know, let that money bake.

Because like you say, you don't know who and when, right? And so that money could actually just sit in there and grow, grow, grow until the point that somebody does pass away. And at that point, the surviving spouse can turn on the income for the rest of their life, which just overcomes, you know, the loss of the Social Security and the tax differences and whatever. And if both of you don't, then guess what, you know, obviously, it becomes a wonderful benefit for your beneficiaries, right?

Sure. So the next one, Roth conversions, pretty simple. We pay taxes now, selectively and over time and spread out strategically throughout the years. But we've got a pot of tax free money that we're really not going to touch until we have to. And that spouse is now in a higher tax bracket because of they're now a single filer. And they've just got one Social Security check. They can draw off of a tax free account for some of their income.

I mean, that's just pretty simple. The other benefit of the Roth conversions is you're doing this at a joint tax rate, which is more favorable. And you're reducing the future RMD requirements out of this account. So an RMD is a required minimum distribution. This is where the government says you have to start taking money out of this account.

It's based off the account balance and based off your age. And so by doing these Roth conversions, we're lowering the account balance in the traditional IRA, giving it over into a Roth IRA, which is tax free. And so when the first spouse passes away, we have a lower IRA balance that RMD requirement is still there, but it's based off a lower balance. And that makes it easier for that surviving spouse to continue because of the higher tax rates and not having to worry about those as much. And the other thing that I, you know, just so I could feel like I may have learned something, was that, right, since you've got this IRA, this Roth IRA money that you can draw on, it's going to reduce your income so you may not have to pay ARMA as well, right?

From a planning standpoint, that's kind of hard to bring up a lot of times. But I mentioned earlier in the show, the year of death, you still get to file a joint tax return. So if there is a couple, and one of them has passed away, and they still have a lot of IRA money, we might want to take advantage of that final year of filing taxes at a joint filing rate, and do a final conversion in that year of death to really start drawing down that balance at those joint rates, right? So the next thing that we can do is if we haven't started social security yet, is we can delay the social security, the timing of it on whoever has the larger check. So if we've got somebody that they can wait till 70, and then perhaps we can start the smaller check earlier, because it's going to go away after one of the two of them dies. So there's not as much benefit from delaying the taking of the smaller check.

So that's pretty simple. If we can do that, we draw some money from some other source to make up for it just a few years, that's going to leave the survivor with a larger social security check. This is an area that we deal with a lot where people come in with this notion that they want to take social security. Now I've paid in all these years, I want to take it right now, because who knows how long I'm going to live, which that's a factor, we need to consider that. But they often miss what they're going to do for their spouse if they were to die soon, because it's generally that higher check that they're wanting to start.

It's like, well, let's delay this one, leaving your spouse in a better position if you were to die where he or she is not going to be in such a tough situation. Well, yeah, and if you've got an IRA balance or a 401k balance, we can just draw the amount of that check out of your IRA balance and let you live off that while you're delaying, and that's going to work out a lot better in the projections into the future for the survivor. Another tactic, long-term care insurance.

I mean, it's just smart for both of them, because number one is if the person who passes away first uses some long-term care, I mean, that's that much, we haven't depleted the savings to pay for long-term care, and then the person that lives a longer life and lives it alone, long-term care insurance is even more important. So that's a tactic that is worth looking at. RMD planning.

So why don't you talk about that a second, how that affects the survivor. Yeah, so I mean, I think this is sort of related to the Roth conversions and things, but the RMD stands for required minimum distribution. All that means, that is the minimum amount you have to take out. Oftentimes, it makes sense to take more than the minimum.

I mean, we want to do some planning around that. And whether that's doing Roth conversions or just distributing more to yourself while you're alive to get it out of the IRA, is we just want to be thoughtful around that. Because again, when the first spouse passes away, the IRA balance has not changed. That does not get affected by that death. But now they're having to take the same dollar amount out as an RMD, the surviving spouse, and they're filing taxes at the single rates, you get to keep less of it. And so we want to do some planning while you're both alive to lower future RMDs, which might mean taking more out now than you're required to. Right. So 100% survivor on pensions.

So that's at election time. So people that are fortunate to have a pension, and they will work toward that, we see a lot of people making pension decisions before they get advice. So that's the one thing I would say is, if you've got a pension decision in front of you, where they give you one amount, and then your spouse gets half that amount after you die, or they give you a choice that you could take less, but after you die, your spouse gets the same amount, and they have a bunch of choices, people will make those decisions without consulting a professional. And I would just encourage you, and in the matter of spouses and taking care of the survivor, the 100% survivor option is obviously the best choice, if that's a priority, but I'm not telling you to just check that box, because everybody's situation is different. That's just a maneuver that we can do if that decision is still in front of you.

I think Hans, you're right, is you need to consult with the professional on this. I mean, there are a lot of, we could tell you story after story of people who've come in that have made this choice before they met us, and we're looking at their whole situation and recommended them do something different. And some really sad stories where they take it, they're both healthy at the time, they think they're going to live forever, and then one of them gets sick two years later after taking the benefit, and you start looking at life expectancy, and the one spouse is much lower now, and he's the one who took the single payout, and they're really worried about the surviving spouse, the wife, getting, what are they going to do when he dies? And so that's where life insurance can come into play, is life insurance can help sort of minimize the risk of that. Oh yeah, there's all kinds of options to prepare for this, and so this is the first estate planning issue that we deal with. The couples that come in to see us, and most people that are coming in, they don't really have a planned distribution to the next generation. Their main concern is them and then that survivor, and you don't know who that's going to be. Well, as always, we've run out of time before we've run out of show, but we want to remind everybody, of course, that this show is brought to you by CardinalGuide.com, and you can go to CardinalGuide.com, and there you see the Seven Worries tab, and of course today's show was on estate planning.

There's a tab all there for that. There's a YouTube video that was just recently sent out on this very subject with the show notes, the board that they're talking about, and all sorts of details on these kind of things, as well as, of course, Hans's book, The Complete Cardinal Guide for Planning for and Living in Retirement, and of course, a way to contact with either Tom or Hans right there at CardinalGuide.com. As always, great show, guys. Thank you so much. God bless you.

Thank you. The opinions expressed by Hans Schile and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.

Any statements or opinions are subject to change without notice. Investments involve risk, and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.

Finishing Whale is designed to provide accurate and authoritative information with regard to the subject covered. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a Registered Investment Advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Whale, brought to you by CardinalGuide.com. Visit CardinalGuide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement and The Workbook. Once again, for dozens of free resources, past shows, or to get Hans' book, go to CardinalGuide.com. If you have a question, comment, or suggestion for future shows, click on The Finishing Whale radio show on the website and send us a word. Once again, that's CardinalGuide.com. CardinalGuide.com. This is the Truth Network.