Have You Thought Through the Concerns Which May Require an Estate Plan?

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Estate Planning

Couples growing older together enjoy the enviable status of having a companion late into life. But in most such cases, one spouse eventually becomes widowed or a widower. It is difficult enough to deal with the loss of a spouse. It’s important to plan ahead as a couple to ensure that the surviving spouse isn’t caught off guard by taxation, income loss or other things that will change when they lose their spouse.

The widow or widower’s penalty: When one spouse passes away, the surviving spouse will start paying income taxes according to the “single” tax brackets. These brackets are much narrower than the “married filing jointly” brackets. The previous income stream may put the survivor in a tough tax situation.

For example, when spouses leave all of their retirement assets to each other, the required minimum distribution (RMD) for the surviving spouse might not change much when a spouse dies. But now, as a single filer, the survivor will have a smaller standard deduction and also be subject to those narrow individual tax brackets. Surviving spouses can find themselves exposed to higher tax rates. You can plan ahead to minimize the impact of the surviving spouses penalty.

Changes to household income: Suppose two spouses together received $5,000 per month of Social Security benefits ($3,000 and $2,000). When the first spouse dies, the surviving spouse keeps only the larger benefit. That means that the household’s Social Security income goes down by $2,000 per month.

Other factors: There may be circumstances in some marriages that could cause complications. If one spouse is significantly older than the other, if there are children from prior marriages, who is and will be collecting on your social security record and what is the family maximum benefit social security provides. Particularly, if there is a disabled adult child or a divorced wife collecting benefits on your social security record. How does the family maximum benefit affect social security benefits? You may want to consider these concerns. With the right plannng, documents and beneficiary designations in place these particulars don’t need to be problems.

Are you addressing the drop in Social Security income when your spouse dies? Is there a backup income stream?

Questions to consider to help you prepare: Think about these questions and gather some information. What would you want your spouse’s life to look like without you? How will your income change when one spouse passes away? Would the surviving spouse benefit from an additional stream of income? Is there a financial plan for the surviving spouse in case they need caregiving? How will property pass to the surviving spouse? Consider reviewing how your assets (real estate and financial accounts) are titled. Be sure to understand how those assets will transfer at the death of the first spouse. Is there individually owned property to consider?

Individually owned property might have to pass through probate. Where will the surviving spouse live? Could they maintain where they live now? The sale of the primary residence provides a capital gains tax break. The passing of a spouse will allow for a step up in cost basis Would they need to move closer to family or friends? Will assisted living or long-term care be needed? Downsizing can free up equity that can be used for care. Are there other beneficiaries to consider?

A surviving spouse should update beneficiary designations after the death of their spouse. Generally, there’s a need to name new primary and contingent beneficiaries. Should you consider establishing a trust? Some properties, such as vacation homes, can be placed in a trust to ensure a smooth transition to beneficiaries. Trusts can also be used to control the distribution of assets to beneficiaries, protect assets from creditors like hospitals and nursing homes if put toghether enough time in advance. In Pennsyvlania that is 5 years.

This can be helpful for beneficiaries who aren’t ready to manage money, those who may have special needs, younger beneficiaries such as grandchildren, making charitable contributions, using your unified credit wisely and preseving your assets in the event a creditor attempts to lay claim to your net worth.

Always consult your CPA, Attorney, Investment and Financial Advisor. The Investment Advisor dooes not offer tax or legal advice.

For further information contact The Investment Advisor at 1-877-414-9021