Losing a spouse can be devastating. Not only does this life-changing event take a significant emotional toll, but it also creates uncertainty around financial matters. As a widow, the financial planning process in particular may seem overwhelming, leaving you with questions about how best to move forward with managing your family’s wealth.
To help you begin to navigate the process, we’ve outlined below the five key steps of financial planning for widows. But before attending to the financial details, however, the best first step is to take time for yourself.
Widow Financial Planning: Pause Before You Plan
Before you review your finances, it’s important to take time to grieve and heal. You’ve just experienced a tragic event, and you may be in shock. it’s best to wait until you feel you can think clearly before making any major decisions. don’t rush into anything based on emotion. The steps you take from this point forward should all be in your best financial interest.
The main thing to do in the short term after your spouse has passed away is ensure you have some money in your bank accounts and a general idea of what your financial situation looks like. You’ll likely have a sense for whether you have a few weeks or several months to begin making financial decisions or changes.
it’s also helpful to find one person who you trust for advice, and filter out all the other noise in your life at this time (as best you can). Many professionals offer financial help for widows. Just be wary of purchasing financial products out of fear; you may realize later they weren’t a good fit.
Financial Planning For Widows: 5 Steps
Step 1: Gather your financial documents.
Once you’ve had a chance to breathe and mourn your spouse, your next step is to collect a few pertinent financial documents, including:
- your will
- your bank account statements
- your life insurance policy
- information on your assets and liabilities
Gathering this information will lay the groundwork for your future financial plan.
Step 2: Assess your situation.
Now, it’s time to get a sense for your income going forward. Your situation will look different if you’re currently working than if your spouse was the sole earner in your household. You’ll want to determine whether your spouse had pension survivor benefits, annuity spousal survivor benefits, and/or Social Security benefits. You may be entitled to survivor benefits for yourself at age 60, or to swap your Social Security benefits for your spouse’s if their benefits were higher. In addition, if you have children under age 18, they may be entitled to Social Security benefits and could receive monthly payments.
Also establish a clear picture of your assets. These could include cash in bank accounts, your home, Individual Retirement Accounts (IRAs), Roth IRAs, company retirement accounts, annuities, education savings accounts, rental properties, business interests, and life insurance policies.
You should also gain an understanding of any debts associated with these assets, such as a mortgage, credit cards, loans against retirement plans, or other debts. Transferring assets from one spouse to another may have tax consequences, so you’ll want to be careful. This is where a trusted financial advisor can help.
Next, evaluate your fixed expenses. These could include your car payment, and any regular monthly payments you can find on your bank account or credit card statements. don’t forget to review your mail for any late payment notices. Doing so could alert you to a life insurance policy or other financial information you may not have known about.
Step 3: Begin making financial decisions.
Once you have an understanding of your assets, liabilities, income, and expenses, you may need to start making decisions about how you’ll meet your financial obligations and objectives. This could include transferring bills into your name, reviewing loans, or canceling payments.
If little to no assets come into your possession after your spouse passes away or your income is significantly reduced, you might need to make some changes in your life. These could include returning to the workforce, or selling your house and downsizing or reducing your overall expenses.
On the other hand, your spouse may have left you in a good financial position by providing a substantial life insurance policy, pension survivor benefits, or other retirement accounts sufficient to cover your expenses. In this case, you can create your own financial plan based on the assets you have, working with an advisor who can provide you with information on the best investment options for widows.
Step 4: Seek tax planning advice.
While it’s important to take your time when making financial decisions after your spouse’s death, there are certain aspects of your finances that you should attend to in the year your spouse passes away, including tax planning.
For example, if your spouse passed on January 31, 2022, your status in that tax filing year will be considered “Married Filing Jointly.” This means you may have the opportunity to take advantage of being in a lower tax bracket as a joint filer, which could save taxes and bolster your financial position during this difficult time.
This is particularly key if you have a low income or no income without your spouse. In this case, you may want to explore tax strategies like Roth conversions, since you’ll lose the Married Filing Jointly status in the year after death and these strategies will be less advantageous. Roth conversions can provide you with several benefits, such as reducing future required minimum distributions, taking advantage of a low tax bracket, and the ability to grow your wealth tax free and pass down money to future generations in a tax-efficient manner.
You can retain your status as a “Qualifying Widow” for two years after your spouse’s death to remain in the “Married Filing Jointly” tax bracket, as long as you meet the requirements: You have a dependent child, and you do not remarry during the two-year period. After two years, your tax status will change to “Single.”
What You Need To Know About Tax Status
When your tax status shifts from “Married Filing Jointly” to “Single,” be aware that the following will also change:
- Tax Rate: The “Married Filing Jointly” tax bracket is much higher than “Single.” In the former instance, income up to $340,100 (2022) will be taxed at 24%, whereas in the latter instance, the 24% tax bracket ends at $170,0500 (2022). This means that, as a single filer, all your income above $170,050 will be taxed at a rate of 32% to 35% instead of 24%.
- Standard Deduction: Not only does your tax bracket go down as a single filer, but you also lose half of the standard deduction. In 2022 as a married filer, you would receive a deduction of $25,900, whereas you’d only receive $12,950 as a single filer.
- Capital Gains: Capital gains occur if you sell a stock that you’ve held for more than a year and recognize a gain. As a married filer, if your income is under $83,550, you will pay 0% tax on those sales. However, as a single filer, capital gains are taxed at 0% up to the 12% bracket, which ends at $41,775.
Step 5: Revisit or create your estate plan.
Now that you’ve gotten a handle on your financial situation, you may want to work with a lawyer to rewrite your estate plan to align with your new financial plan. This is a good step to take if your circumstances and/or objectives have changed since your spouse’s passing. For example, perhaps your spouse left a significant amount of life insurance to you, and you’d like to donate it to charity. it’s important to take the time to revisit your estate documentation to make sure your wishes can be carried out.
You can also consult a financial advisor to review and update the beneficiaries on your accounts and get your own life insurance policy in place, which is especially important if you have young children. For instance, if your spouse was listed as the primary beneficiary of 100% of the funds, it’s wise to update the account and name your children (or other) as the primary beneficiaries. This will eliminate any headaches in the event of your death, and help your children (even in their adult years) avoid any administrative problems in the midst of an already difficult situation.
Your attorney and financial advisor can also help you avoid estate tax pitfalls if your spouse’s assets went into a trust upon their passing. This is a common method of removing assets from your family’s estate, which your spouse may have leveraged to reduce their tax burden. Many trusts are set up so that you can take income from them for the rest of your life after your spouse’s death, and the assets will eventually pass to your children.
However, it’s important to be careful about withdrawing money from the trust to support your income needs. You’ll want to be careful when generating income in a trust, since taxes on those funds could be high. Instead, consider using money outside of your trust and letting the funds in the trust grow, which may minimize future estate taxes.
Curio Wealth Provides Financial Help For Widows
At Curio Wealth, we understand that becoming a widow can be an extremely emotional event, and it’s one we have personal experience with. During this time, finding an advisor who can provide you with advice and help is crucial, so you don’t have to worry about financial logistics.
As fee-only, fiduciary financial advisors, we will act solely in your best interest during the widow financial planning process. We also have close relationships with estate planning attorneys, and can put you in touch with them to create your will and administer your estate. Get in touch with us today to learn more.
