Power Up Wealth podcast – Episode 116 – Preventing Financial Turmoil for Surviving Spouses
James Derrick 0:00
According to CNBC, $54 trillion is going to be transferred to surviving spouses over the next decade. We all better have a plan in place for our assets. I’m James Derrick, President of Smedley Financial, and today we’ll be talking with expert and guest, Parker Thompson, about taking action now, so surviving spouses can avoid some difficult decisions in some of the most difficult times of their lives.
Shane Thomas 0:27
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James Derrick 0:43
Thank you for joining me today, Parker.
Parker Thompson 0:45
Thanks for having me.
James Derrick 0:46
Parker is a private wealth manager at Smedley Financial Services. He has a certified financial planning designation. And recently Parker you’ve been going around with Jordan Hadfield giving a series of presentations on “What the Will Doesn’t Say.” I feel like that’s going to dovetail in nicely with what we’re talking about today, which is the great widow transfer.
Parker Thompson 1:06
Yeah, a lot of this, the topics, and a lot of the things that we address in that presentation really trail nicely into this. We talk to the executors directly with that presentation, and that in that series, we’re talking usually to the next generation, but a lot of the topics and a lot of the tips that we bring up are very much useful to the spouses of someone who’s taking care of an estate after their loved one passes away.
James Derrick 1:25
The first thing you shared that I really liked was this idea of taking an active role. Would you elaborate on that?
Parker Thompson 1:31
Yeah, we’re going to go into some of the changes of exactly what to look out for, some of the major things that happen when, when a surviving spouse takes on the estate of someone who’s passed away, or when their loved one passes away. The overarching theme here is to take action and to do it before, sooner than later. Essentially, what I mean by taking action is to take a more active role in your financial situation. So, if you’re married to someone and you haven’t necessarily been the financial person per se over the years, if your spouse is going to meet with the financial advisor, or is doing most of the financial moves on the back end, and you’re not really involved. My challenge is to get involved. Is to be in a more active role, to know what’s happening financially in your household. To know some of the ins and outs of your accounts, of the income, and minute details like that, because if you are left with that situation after someone passes away, if you then have to then take on that role, it can be very cumbersome. It can be very overwhelming, and you can be sort of left in the dark in a lot of ways if you don’t know preemptively, or at least have not had any prior knowledge about what happens financially in your household.
James Derrick 2:36
When you meet with a client, Parker, do you typically have both spouses come in?
Parker Thompson 2:41
We try to as much as possible. We always invite both spouses to come in. There are some where it doesn’t work, scheduling wise, but we want to at least make sure that the spouses are aware. We just can’t always guarantee that if we’re speaking to one spouse in that meeting, that they go home and they tell exactly what happened to the meeting, or they relay that to their to their significant other. And even if we have people, I mean, we want both spouses or both partners to be in every single meeting. There’s a lot of times that both of them will come in and one will just kind of not really say much in the meeting or not contribute a whole lot, won’t ask a lot of questions. We try to push back against that as much as possible. We want this person, we want whoever’s not necessarily the financially savvy one in the relationship to speak up and to ask questions and make sure they understand what we’re talking about.
James Derrick 3:24
Fantastic. What about some of the changes that happen immediately when one of the spouses passes?
Parker Thompson 3:30
Initially, the first big hit that most spouses will see or feel in their wallet is the cash flow changes. What happens to income when one person passes away? I mean, fairly obvious to think that if you are in your working years and you’re building up money, that if you lose one person’s income, that would be a huge difference in your life in terms of your lifestyle and what you can spend on, but if you’re living on a fixed income, right, which most of our retirement clients. We also have to be cognizant of how or what happens with those cash flow changes, namely if you are on social security or have some sort of a pension, you have to be cognizant of which one’s going to drop off and which one you keep. So, typically, if you have a loved one that passes away, you will take the higher social security of the two of you, but then the other one will drop off, and so you got to be aware of how much of a difference is that, is it going to affect our daily or month to month actions on what we can spend on, what we can allowably spend on, and how do we make that transition as smooth as possible. The other one that we see a lot of the times is with a pension. Sometimes pensions are what we advocate for, 100% survivors, so 100% of that benefit goes to the next person or the surviving spouse. We opted for that, but a lot of times, in some cases, it’s not that. Sometimes it’s 75% of the benefit or 50%. Sometimes it’s zero, sometimes it doesn’t transfer to the next spouse. And when you see fixed income pension payments that are in the 1000s of dollars, that can mean a drop of 1000s of dollars of income per month, and that can really affect someone’s life.
James Derrick 4:56
What about taxes?
Parker Thompson 4:58
Have you ever heard of the widow’s penalty, in terms of taxes?
James Derrick 5:02
The widow’s penalty sounds like something that maybe the IRS should get rid of, but they’re not going to.
Parker Thompson 5:06
Yeah it’s the widow’s penalty. It almost sounds like it’s a, it’s a terrible parable, and we’re trying to make sure that we’re making people aware of that. The widow’s penalty is typically your tax situation also changes when a surviving spouse passes away because you’re going from typically a married filing jointly or a married filing together situation where your tax brackets and your marginal taxable income has a lot higher limitations, so your actual tax rate is a lot higher when you’re married. So, when someone passes away, spouse passes away, usually within a year or two, in some cases you have a small window where you can still be in that married filing jointly tax bracket, where your tax rate is significantly lower. After that, when you become a widow or a widower, you jump up in a single tax filing status to a higher rate. So that’s why they call it the widow’s penalty.
James Derrick 5:56
You are literally just going from married filing jointly to single.
Parker Thompson 6:01
Yeah typically in most cases the same income, the same lifestyle, the same accounts, everything stays the same, but your tax bracket jumps in some cases double, just for being filing single going forward. So the reason that we want to bring this into the light is that that inevitably will happen. Anytime we can recognize a significant capital gain or a significant income event, we want to do that in the first year or two when a spouse passes away, because otherwise, if we do that later when they’re single filing, that could be a lot higher of a tax rate. You can send a lot more of those dollars to the government than you probably want to.
James Derrick 6:36
Let’s drill down a little bit on to something you just said, which is that there’s a window of time when certain things can be done. Are there other things that fall in that same window of time? You know, where within the first year of one of the spouses dying, a financial advisor can help you know what options you have, and then they diminish over time?
Parker Thompson 6:58
In some cases, if there are businesses that need to be sold, right, in the case of someone being passed away, or if there are significant capital gains in an account that’s not a retirement account, and we want to, we were otherwise not trying to recognize those, we may want to forcibly recognize those, right, in the best way possible for someone in that situation, just because when they get to a single filing tax status, it would be a lot more harmful, or I guess it would take a lot more of the dollars away and less in their pocket by recognizing it after the fact. It’s a time in your life where a significant other or loved one has passed away, and you don’t really want to be making 1000 different decisions. You sort of have to anyways. We don’t always think about these decisions, but if we can, if we can help it, we want to make those financial decisions to recognize income or to recognize gains in those optimal years.
James Derrick 7:47
Talk for a moment about retitling of assets.
Parker Thompson 7:50
Most of the time, hopefully, we’ve titled them such that they are titled jointly, so that they transfer easily to the surviving spouse, but.
James Derrick 7:59
So, for example, like if it’s in a trust.
Parker Thompson 8:01
Right
James Derrick 8:01
Where both spouses are named in that trust?
Parker Thompson 8:04
Yes.
James Derrick 8:04
As trustees?
Parker Thompson 8:06
If both spouses are named as trustees in a trust, then the trust provisions will state that surviving spouse will take over in terms of managing that asset that’s already in the trust. So, there’s not a whole lot to do for changes, unless you don’t have your contingent trustees or your successor trustees set up the way that you want to, right? So that would be the only change that I would make as a surviving spouse, is if they, if the successor trustees, aka the next generation or children, are not quite where they need to be now that you’re the only trustee, as is the owner of the trust you want to make sure that everything goes smoothly after that point after you pass. So there might be some changes or amendments that you need to make at that point.
James Derrick 8:48
Makes perfect sense. Lifestyle also changes?
Parker Thompson 8:51
Again if you’re going to have any sort of a dip in income or an increase in income because surviving spouse passes away, or let’s say that typically you as a couple were a little bit more conservative and you, as an individual, now want to become a little bit more, you know, voluntary, or a little bit more generous with your income. There can be changes like that, but again, the ones that are forced on you sometimes are the changes in income with social security and pension, and so the lifestyle that you were living beforehand may not be as attainable, or may not be as easily done with this new income going forward, so you want to kind of get it down to a science, as far as this is what I was living on, now I’m going to be living on this, and how do I adjust to that? Can I sustain the same things going forward?
James Derrick 9:34
Now, I know you’ve been going around doing this, this presentation, giving several public speeches on what the will doesn’t say, or preparing your heirs. What other pro tips? I know we can’t go into all of it right now, but what other pro tips would you have? You know, would you like to share with us today?
Parker Thompson 9:50
It’s been fun in presenting to different groups, and we naturally, because we are talking to clients and executors, we’ve geared it towards the next generation, we’ve geared towards the executors or the trustees of these clients’ estates. We inevitably get everyone in the room, and much of what we’re talking about applies to the surviving spouse. It applies to someone, or surviving spouse, or a child who is going to be taking care of someone medically, even before they pass away. So, there’s a lot of different things there, and this has become adjacent, because a lot of times we’re talking with couples that are both still living, the spouses are both still living, and so before they go to the next generation, before the executor is going to pick up the estate, usually one of them is going to have to continue it on. One of the things that is coming to mind right now is just all of, in all the wake of someone passing away and the funeral proceedings and making all those decisions, there’s a couple things that people forget to do that are really useful that make some of those transition times easier, namely, we don’t always think about it, but you don’t necessarily want to turn off someone’s cell phone. I don’t know if you, if you’ve thought about this, or if you’ve considered this, you don’t necessarily want to take off someone’s cell phone plan as early as you think, right? You think if someone passes away, you can turn off that phone, or you can turn off that cell service early. We want to have people do that a lot later than they think, because if you try to access accounts, or if you try to get in contact with their pension or social security, typically they’re sending either a code, or there’s information that is crucial that is on that phone, or that is needs to be sent either via phone call or text to that phone, so that’s one thing that we’re seeing that people are realizing is an aha moment. They’re saying, hey, maybe I need to keep a cell phone on for a surviving spouse a little bit longer, so that I can have access to some of those things.
James Derrick 11:32
It may even give you access to emails and other things, and you might find out they’ve got some assets I didn’t even know about.
Parker Thompson 11:37
Yeah, the other thing along those lines is, do you have the passcode to get into a phone, a lot of things that we are not aware of. I don’t know how you are now in your household, but there are a lot of spouses that do not know the passwords and the logins and the usernames for their significant other. So, again, we’re talking about pensions changing and social securities changing and different accounts, if there’s retirement accounts, IRAs, and all that stuff transitioning over during this period, but to be prepared for that, do you both have each other’s passwords, or do you have kind of a depository of all of your passwords and usernames and logins and websites that you use, so that you can easily access that information? If you’re going to be taking over the financial household, and you haven’t previously done that, imagine how much of a headache it would be to try to track all that down and reset all the passwords, but if you already have access to that and you have it in the form of a password manager or some cloud operating system that allows you to pull that down, how much easier that would be to then transition that estate into your control.
James Derrick 12:36
Absolutely, thank you for coming in today, Parker. I’m going to give a little plug to Smedley Financial, as we’re ending here, just to say that if you are interested in the Prepare Your Heirs or What the Will Doesn’t Say presentation, to give us an email at [email protected] or give us a call at 801-355-8888. I don’t normally plug things in this podcast, but I think it’s worth saying you also have a fantastic workbook. You fill out the workbook, all the blank pages and all the blank lines that are asking you the right questions. You fill it out and you keep it with your will and your trust, so that the surviving spouse and or the heirs of the estate will be ready, so that they have fewer of these difficult decisions and difficult times that they have to make. Thank you.
Parker Thompson 13:24
Yeah, absolutely.
Shane Thomas 13:30
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Osaic Wealth, Inc., member FINRA/SIPC. Investment advisory services offered through Smedley Financial Services, Inc.® Osaic Wealth is separately owned, and other entities and/or marketing names, products, or services referenced here are independent of Osaic Wealth.
