How Do You Survive Financially after Death of a Spouse ?

The financial issues that arise following the death of a spouse range from the simple—figuring out how to access online bill payment for utilities—to the complex—understanding estate and inheritance taxes. The first year after the death of a spouse is a time when surviving spouses are often fragile and vulnerable. It’s not the time to make any major financial or life decisions, says the article “The Financial Effects of Losing a Spouse” from Yahoo! Finance.

Tax implications following the death of a spouse. A drop in household income often means the surviving spouse needs to withdraw money from retirement accounts. While taxes may be lowered because of the drop in income, withdrawals from IRAs and 401(k)s that are not Roth accounts are taxable. However, less income might mean that the surviving spouse’s income is low enough to qualify for certain tax deductions or credits that otherwise they would not be eligible for.

Surviving spouses eventually have a different filing status. As long as the surviving spouse has not remarried in the year of death of their spouse, they are permitted to file a federal joint tax return. This may be an option for two more years, if there is a dependent child. However, after that, taxes must be filed as a single taxpayer, which means tax rates are not as favorable as they are for a couple filing jointly. The standard deduction is also lowered for a single person.

If the spouse inherits a traditional IRA, the surviving spouse may elect to be designated as the account owner, roll funds into their own retirement account, or be treated as a beneficiary. Which option is chosen will impact both the required minimum distribution (RMD) and the surviving spouse’s taxable income. If the spouse decides to become the designated owner of the original account or rolls the account into their own IRA, they may take RMDs based on their own life expectancy. If they chose the beneficiary route, RMDs are based on the life expectancy of the deceased spouse. Most people opt to roll the IRA into their own IRA or transfer it into an account in their own name.

The surviving spouse receives a stepped-up basis in other inherited property. If the assets are held jointly between spouses, there’s a step up in one half of the basis. However, if the asset was owned solely by the deceased spouse, the step up is 100%. In community property states, the total fair market value of property, including the portion that belongs to the surviving spouse, becomes the basis for the entire property, if at least half of its value is included in the deceased spouse’s gross estate. Your estate planning attorney will help prepare for this beforehand, or help you navigate this issue after the death of a spouse.

It should be noted there is a special rule that helps surviving spouses who wish to sell their home. Up to $250,000 of gain from the sale of a principal residence is tax-free, if certain conditions are met. The exemption increases to $500,000 for married couples filing a joint return, but a surviving spouse who has not remarried may still claim the $500,000 exemption, if the home is sold within two years of the spouses’ passing.

There is an unlimited marital deduction in addition to the current $11.7 million estate tax exemption. If the deceased’s estate is not near that amount, the surviving spouse should file form 706 to elect portability of their deceased spouse’s unused exemption. This protects the surviving spouse if the exemption is lowered, which may happen in the near future. If you don’t file in a timely manner, you’ll lose this exemption, so don’t neglect this task.

Reference: Yahoo! Finance (July 16, 2021) “The Financial Effects of Losing a Spouse”

 

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What are the 411 on 529 College Savings Plans?

There are two basic types of 529 plans, says Texas News Today’s recent article entitled “What you need to know about the “529” Education Savings Account.” The more common type is the 529 College Savings Plan. This allows parents, grandparents and others to invest money to cover eligible education for beneficiaries. The less common type is the 529 prepaid tuition program, in which tuition is paid at a set price.

Contributions to the 529 Plan aren’t tax deductible at the federal level. However, many states offer state income tax deductions or credits. Your money grows tax-free and withdrawals to pay tuition and other eligible expenses are free of federal taxes and, in many instances, state income taxes.

529 plans can be used to pay for various college fees like tuition, room, food, books, and technology. You can pay up to $10,000 a year for K-12 tuition. You can also transfer the money in your account to other recipients. There are more pluses than minuses. However, you should note that you may face tax impacts and penalties for withdrawals that aren’t considered eligible costs. Your child’s college needs financial assistance may also be reduced, and you cannot purchase individual stocks within the 529 plan. However, you can select a number of investment options. Even so, you have fewer options than if you were designing your own portfolio.

You can transfer some or all of the existing funds in your account to another investment option twice in a calendar year or after changing beneficiaries. You can also select a different investment option whenever you join the plan. You can switch to another state’s plan once every 12 months. However, there are a few states that exclude such shifts from their plans.

Each state has set a total contribution limit of $235,000 to $542,000 per beneficiary. When an account hits the limit, you will not be able to make any more donations. However, revenue will continue to accumulate. There’s no annual donation limit, but donations are considered gifts for federal tax purposes. Therefore, this year, you could donate $15,000 per donor and per recipient with no federal gift tax. You can also make a $75,000 tax-exempt 529 plan donation and evenly distribute it to your tax return for the next five years, which is an option that some grandparents use as a tool for real estate planning.

The benefits of saving for college through the 529 plan are likely to outweigh the potential impact on financial assistance. Assets in an account owned by either a student or their parents are considered parental assets for federal financial assistance purposes, and typically only 5.64% of accounts are considered annually in the FAFSA (Federal Student Assistance Free Application) calculation. This is an advantage over being counted as a student asset because distribution under this ownership structure doesn’t disqualify the university for financial assistance. The assets of the grandparents’ account don’t impact the student’s FAFSA, but the distribution counts as the student’s income and affects aid.

Reference: Texas News Today (June 8, 2021) “What you need to know about the “529” Education Savings Account”

 

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What Is the Required Minimum Distribution for 2021?

There have been a number of changes to the requirements for RMDs—Required Minimum Distributions—from traditional retirement accounts, says a recent article titled “2 Essential Strategies for Taking Your RMDs” from Kiplinger. In 2019, the age for RMDs was raised from 70½ to 72. In 2020, they were waived altogether because of the pandemic. Now they’re back, and you want to know how to make good decisions about them.

Most people take the default approach, taking a lump sum of cash at the start or the end of the year. This is not the best approach. Investment markets and your own need for income are better indicators for how and when to take your RMD. If you can at all avoid it, never take an RMD from a declining market.

You can take your Required Minimum Distributions anytime during the calendar year, from January 1 to December 31. If it’s the first time you’ve taken an RMD, you get a bonus: you can wait until April 1 of the year after your 72nd birthday. The RMD is calculated, by dividing the account balance on December 31 of the preceding year by your life expectancy factor, based on your age. You can find it in the IRS’s Uniform Lifetime Table.

2021 distributions will be bigger, and not just because of the market’s 2020 performance. Instead, distributions will be bigger because of how the accounts are designed, with RMDs becoming a larger percentage over time. It starts as a small percentage and eventually becomes the entire account, which is then depleted. Remember, the sole purpose of the RMD is to force retirees to take money out of their retirement accounts and pay taxes on the money.

Many retirees take Required Minimum Distributions because they need the money to live on. Here’s where money management gets tricky. It’s far easier to take smaller amounts of money at regular intervals, kind of like a paycheck, than taking a big amount once a year. We’re creatures of habit and are used to receiving income and managing it that way.

Distributions on a regular basis also fosters a better sense of how much money you have to live on, encouraging you to create and adhere to a budget.

If you don’t need the income, taking money through regular installments also has an advantage. It’s like the opposite of dollar-cost averaging. Instead of putting money into the market in small increments over time to even out market ups and downs, you’re taking money out of the market at regular intervals. You’re not cashing out at the market’s lowest point, or at the highest. And if you’re reinvesting RMDs in a taxable account, this strategy works especially well.

Reference: Kiplinger (June 10, 2021) “2 Essential Strategies for Taking Your RMDs”

 

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Prescription Medications – How Do Seniors Get a Huge Discount?

Seniors can now join Walmart+ with a paid membership to receive a selection of free medications, plus thousands of other prescription medications at a discount of up to 85%.

Money Talk News’ recent article entitled “New Walmart+ Perk Can Save You Up to 85% on Drugs” explains that the prescription medications savings program — Walmart+ Rx for less — can save you money on “the most commonly prescribed medications across a variety of health needs, including heart health, mental health, antibiotics, allergies and diabetes management,” Walmart says.

Walmart says that free and discounted prescriptions are available at over 4,000 participating Walmart pharmacies around the country. However, they caution that the program isn’t insurance and isn’t available in all states.

Walmart+ Rx for less can’t be combined with insurance.

Seniors can sign up for a free trial. When it ends, as a Walmart+ member they can access their digital pharmacy savings card in their Walmart+ account on the Walmart website or app.

Next time a senior needs a prescription filled they can share the info on their digital pharmacy savings card with the pharmacist.

The new program is not the first time the nation’s largest retailer has tried to cut prescription drug costs.

Since 2006, Walmart has offered a $4 generics program that charges $4 for a 30-day supply of many generic drugs, or $10 for a 90-day supply. That program is still available to all Walmart shoppers, even those who are not Walmart+ members.

Walmart+ Rx for less is the latest perk added to the Walmart+ program

In December, the program rolled out free next-day and two-day shipping for members with no minimum purchase requirement, similar to Amazon’s Prime membership.

In a press release, Janey Whiteside, executive vice president and chief customer officer for Walmart U.S., says the newest prescription medications perks are part of an effort to make Walmart+ the “ultimate life hack” for customers:

“We know we can use our size and scale to help simplify things for our customers in a way only we can.”

Walmart ranks fifth in the top U.S. pharmacies ranked by prescription drugs market share in 2020 at 4.7%. CVS is first at 24.8%, and Walgreens is second at 19.1%.

Reference: Money Talk News (June 14, 2021) “New Walmart+ Perk Can Save You Up to 85% on Drugs”

 

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What are Retirement Biggest Blunders Folks make after 50?

It’s time to reassess and make sure that your retirement financial plan is in order. If you wait until later, you may make serious mistakes that will threaten your future financial security. AARP’s recent article entitled “10 Retirement Planning Mistakes People Make at 50” gives us 10 errors that 50-year-olds make that may have serious consequences in the future:

  1. Expecting to work past retirement age. Data from the Employee Benefits Research Institute (EBRI) show that 48% of people retire sooner than planned, often due to layoffs, health issues or family matters. If you lose your job in your 60s, it may be incredibly tough to find a new one, especially with the same pay and benefits. Plan for an earlier retirement date, and if you work well into your 60s, it should be because you want to, and not because you must.
  2. Taking too much or too little risk. Some people realize that time is running out, and they may do one of two things: take in too much risk, frequently in the form of speculative investments or they sell everything and move into cash, CDs, or fixed annuities, which can deprive them of decades of growth. Too much risk might mean huge losses, when they can least afford them. Instead, create an investment strategy based on your goals, aspirations and concerns.
  3. Missing the 50-plus catch-up provisions. As a 50-year-old, you can catch up in your savings. For 2021, the IRS is allowing individuals to contribute an additional $1,000 to an IRA in addition to the standard $6,000 limit. Self-employed people 50 and older with a SIMPLE IRA can add $3,000 to the $13,500 limit. If you have an employer-sponsored 401(k), you can max out your contributions by adding $6,500 over the $19,500 limit. While you are still employed, you can start a Roth IRA with a 2021 contribution limit of $7,000 for those 50-plus.
  4. Too much credit card debt. Paying down debt is critical, and you should work toward having no debt, except your mortgage. Once other debts are paid off, and you are funding your retirement, then attack your mortgage.
  5. Adding college debt. Parents take on too much debt to fund their kids’ schooling because they did not save enough in their 529 plans. Some take out home equity loans or other debts that they may be unable to pay off before retirement. These put a tremendous drag on monthly cash flow, especially for those on a fixed budget. Instead, make your children take loans in their names and help them with payments as much as you can or wish to. Do not jeopardize your own financial security.
  6. Overlooking health maintenance. Spending time, energy and money in your health now will help to reduce health-related expenses later. You will also enjoy the journey more because you feel better. Watch your weight, exercise and eat a healthy diet.
  7. Neglecting life insurance. Many healthy 50-year-olds may not think much about insurance, but at 60, buying a long-term care policy may be difficult. Health can worsen from 50 to 60, making a policy harder and more expensive to obtain. Life insurance is also important because you do not want your family to experience emotional and financial stress in the event of your untimely and premature death.
  8. Living the same lifestyle after a divorce. Divorce is the number one risk to retirement. Dividing assets and assuming individual expenses can be financially devastating. Envision your financial plan as a single person and look at the way in which divorce will impact your long-term goals. Keeping your past lifestyle and budget is a common mistake. If you need to downsize post-divorce, do it sooner rather than later.
  9. Failing to update important documents. If you have an estate plan, make certain it is current. If you do not, see an experienced estate planning attorney and get one. Life changes, so review your will, trusts, health care proxies, living wills, powers of attorney and beneficiary designations.
  10. Letting the market frighten you. Do not make the mistake of trying to time the market. You should have amassed substantial assets, so do not be distraught if the market plunges. Filter out the noise and stick with your strategy.

Reference: AARP (May 11, 2021) “10 Retirement Planning Mistakes People Make at 50”

 

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Should I Include an Annuity in Estate Planning?
Retirement

Should I Include an Annuity in Estate Planning?

Annuity  – Kiplinger’s recent article entitled “Annuities: 10 Things You Must Know” explains that, as traditional sources of guaranteed retirement income (like pensions) are no more, many retirees are wondering where to look. An annuity may be an option. However, not all annuities are alike, and some may not be appropriate for everyone’s situation.

Immediate Annuities vs. Deferred Annuities. There are two types of annuities: immediate annuities and deferred annuities. Immediate annuities are best for retirees who want to receive payouts immediately. If you invest money in an immediate annuity, an insurance company guarantees that you will receive a fixed payment every month for as long as you live (or as long as you or a beneficiary are alive). However, usually your money is locked up after you give it to the insurance company. Some insurance companies, however, permit a one-time withdrawal for emergencies. In light of this, you may not want to tie up all of your savings in an annuity.

Deferred annuities are better for people who are still saving for a future retirement because that money they invest grows tax-deferred, until it is withdrawn later. A deferred annuity, also known as a longevity annuity, needs a smaller cash outlay. You get guaranteed payments when you reach a certain age, and you’ll receive the highest payout with an annuity that stops paying when you die.

Annuity Payouts: Single Life vs. Joint Life. If you buy an immediate annuity, you’ll get the highest annual payout if you buy a single-life version. The payouts cease when you die, even if your spouse is still alive. However, if your spouse needs that income, you may want to take a lower payout that will also continue for his or her lifetime.

Fees for Cashing Out Your Annuity. Although deferred annuities let you cash out at any time, you may not see all your money returned. A surrender charge is usually imposed that’s about 7% to 10% of the account balance in the first year. It gradually decreases every year, until it disappears after seven to 10 years. If you withdraw money before age 59½, you generally have to pay an early-withdrawal penalty of 10%.

Deferred Annuities: Fixed vs. Variable. Most deferred annuities allow you to invest your money in mutual-fund-like subaccounts. These products are known as deferred variable annuities. They let you add (for a fee), guarantees that you won’t lose money, even if the underlying investments decline in value. If the market drops, you can still withdraw about 5% of the guaranteed balance each year. You can also withdraw the actual account value at any time (after the surrender period expires) if your investments increase in value.

Reference: Kiplinger (May 21, 2021) “Annuities: 10 Things You Must Know”

 

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Should I Name a Living Trust Beneficiary of a Roth IRA?

The simple answer is yes, a living trust can be the beneficiary of a Roth IRA. However, without knowing more about an individual’s specific circumstances, it’s hard to know if this is a wise move.

A November 2018 article from NJ Money Help entitled, “Be careful when choosing a beneficiary,” explains that there are several things you need to know when considering a living trust as the beneficiary of a Roth IRA.

By designating a living trust as your beneficiary, the distributions from the Roth IRA at your death will become mandatory based on the life expectancy of the oldest beneficiary named in the trust.

This is an important point if you’re currently married. That’s because you’ll forfeit the ability for a spousal rollover, by naming the trust as your beneficiary.

Current law permits IRAs to be passed to a spouse as a beneficiary, and the spousal beneficiary can treat the account as if it was their own IRA.

In the case of a Roth IRA, this means the surviving spouse can continue to defer distributions tax-free for their lifetime.

By naming the living trust as beneficiary, this benefit is lost no matter if your spouse is one of the living trust beneficiaries.

Why?

Distributions are required to begin immediately, if the beneficiary is anyone other than a spouse.

Thus, you would forgo the ability to allow the funds to continue to grow tax-free for a longer period of time.

You should talk about this with an experienced estate planning attorney. He or she will be able to look at your entire financial situation before you determine if this is a wise move for you.

Reference: NJ Money Help (Nov. 2018) “Be careful when choosing a beneficiary”

 

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The Stretch IRA Is Diminished but Not Completely Gone

Before the SECURE Act, named beneficiaries who inherited an IRA were able to take distributions over the course of their lifetimes ( Stretch IRA ) . This allowed the IRA to grow over many years, sometimes decades. This option came to an end in 2019 for most heirs, but not for all, says the recent article “Who is Still Eligible for a Stretch IRA?” from Fed Week.

A quick refresher: the SECURE ActSetting Every Community Up for Retirement Enhancement—was passed in December 2019. Its purpose was, ostensibly, to make retirement savings more accessible for less-advantaged people. Among many other things, it extended the time workers could put savings into IRAs and when they needed to start taking Required Minimum Distributions (RMDs).

However, one of the features not welcomed by many, was the change in inherited IRA distributions. Those not eligible for the stretch option must empty the account, no matter its size, within ten years of the death of the original owner. Large IRAs are diminished by the taxes and some individuals are pushed into higher tax brackets as a result.

However, not everyone has lost the ability to use the stretch option, including anyone who inherited an IRA before January 1, 2020. This is who is included in this category:

  • Surviving Spouses.
  • Minor children of the deceased account owner–but only until they reach the age of majority. Once the minor becomes of legal age, he or she must deplete the Strech IRA within ten years. The only exception is for full-time students, which ends at age 26.
  • Disabled individuals. There is a high bar to qualify. The person must meet the total disability definition, which is close to the definition used by Social Security. The person must be unable to engage in any type of employment because of a medically determined or mental impairment that would result in death or to be of chronic duration.
  • Chronically ill persons. This is another challenge for qualifying. The individual must meet the same standards used by insurance companies used to qualify policyowners for long-term care coverage. The person must be certified by a treating physician or other licensed health care practitioner as not able to perform at least two activities of daily living or require substantial supervision, due to a cognitive impairment.
  • Those who are not more than ten years younger than the deceased account owner. That means any beneficiary, not just someone who was related to the account owner.

What was behind this change? Despite the struggles of most Americans to put aside money for their retirement, which is a looming national crisis, there are trillions of dollars sitting in IRA accounts. Where better to find tax revenue, than in these accounts? Yes, this was a major tax grab for the federal coffers.

Reference: Fed Week (March 3, 2021) “Who is Still Eligible for a Stretch IRA?”

 

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Elder Financial Abuse Increases with Social Isolation

Social isolation , whether because of a pandemic or because an elderly person is alone, is a leading factor contributing to the financial exploitation of seniors. The necessity of quarantining for older adults because of COVID has increased the number of people vulnerable to elder financial abuse, reports the article “Social Isolation and the Risk of Investment Fraud” from NASDAQ.com.

Financial abuse can take place at any time during a person’s life. However, scammers typically strike during times when seniors are more susceptible. It is usually during a health crisis, after the death of a loved one, or when younger family members live far away.

Scammers get information about their prospective victims by reading the obituaries and social media. They also become involved with senior social and support groups to ingratiate themselves into seniors’ lives.

Combine social isolation with lessening cognitive capacity and the situation is ripe for a scam. Senior investors are often flattered when their new-found friends praise their superior understanding of investment opportunities. Decreased judgment paired with a lifetime of savings is a welcome mat for thieves, especially when friends and family members are not able to visit and detect changes indicating that something bad is occurring.

Widowed or divorced seniors are more likely to be victimized. People who suffer from isolation, more and more often turn to the internet as a social outlet. Research shows that people are contacted by scammers through social media or pop-up messages on websites. Those who are dependent and engage more frequently in online life are more likely to engage with a scammer and lose more money than those who are targeted by phone or scamming emails.

How to protect yourself or your aging parents from fraud during quarantine

Scammers isolate their victims. Talk with family, friends, your estate planning attorney, or financial advisor for advice before making any decisions.

Do your homework first. If you don’t know how to do an internet search to see if the website or the person is a scammer, talk with a family member or professional advisor who can. Don’t invest money, unless you fully understand the risks and can verify the legitimacy of the offer and the company involved.

Educate yourself about finances and investments. This is a good project for people with too much time on their own. There are many worthwhile websites where you can learn about investments and finances. Look for well-known financial publishing companies. Don’t bother with marginal websites—that’s where fraudsters lurk.

Don’t be embarrassed to file a complaint. If you think you have been defrauded, you can file a complaint with the SEC, FINRA, and your state securities regulator. Your estate planning attorney will also know what resources you can tap to defend yourself.

Warning Signs of Elder Financial Abuse:

  • A new “friend” who suddenly appears and tries to keep family and friends away.
  • Someone who presses you to provide financial information and passwords to accounts.
  • Fear or anxiety when a certain person calls or sends a text.
  • Sudden and unexplained changes in estate planning documents or beneficiary designations.
  • Anyone who asks for passwords to financial accounts.

Generally speaking, anyone who promises a high return with no risk is not telling the truth. The same goes for anyone who tells you that you need to act fast.

Seniors who are socially distant can stay in touch with family and friends through phone calls and if they can manage the devices, by video chat. Regular contact goes a long way in preventing strangers with bad intentions from insinuating themselves into your life or your parent’s lives.

Reference: NASDAQ.com (Feb. 11, 2021) “Social Isolation and the Risk of Investment Fraud”

 

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Should I Pass a Certificate of Deposit in My Will?

Certificate of Deposit – There are three categories of property, and only one requires probate, so it can be accessed when the owner passes away, says njmoneyhelp.com’s recent article entitled “How can we avoid probate for this account?”

First, it’s important to understand that property that passes by operation of law is any asset that’s owned jointly with right of survivorship. These accounts are sometimes labeled as “JTWROS.”

When one co-owner dies, the property passes by law to the surviving co-owner. Probate isn’t needed here.

Married couples typically have most of the accounts held in this manner.

A second category is contract property, which includes life insurance, retirement accounts and any non-retirement accounts that have beneficiaries designated upon death.

These designations supersede or “override” a will and also pass outside of probate directly to the named beneficiary.

These are frequently designated as “POD” (payable on death) or “TOD” (transfer on death).

The third category is everything else. This includes accounts that are owned solely by the person who died with no POD or TOD designation.

A certificate of deposit is a time deposit. It’s a financial product commonly available from banks, thrift institutions and credit unions. Certificates of deposit are different from savings accounts because a CD has a specific, fixed term and usually, a fixed interest rate.

To avoid the probate process to access a CD or any other account owned by a spouse’s name, you can either make the account jointly owned by husband and wife with right of survivorship.

Another option is to designate your spouse designate you as a beneficiary upon death.

Either option will avoid the need to probate the will to access that particular account, like a certificate of deposit.

Contact an experienced estate planning attorney with questions about CDs and probate.

Reference: njmoneyhelp.com (June 6, 2019) “How can we avoid probate for this account?”

 

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