Handling retirement alone can be challenging. And if you’re a grieving widow, you may find those challenges even more difficult. Not only are you trying to navigate what lies ahead, but you may also need to incorporate what’s been left behind.
Unfortunately, it can also be difficult to find the right help. And while well-meaning friends and family may offer advice, they could do more harm than good if they lack expertise.
There are also plenty of “financial experts” out there who are more interested in their return on investment than yours. While outright fraud is a concern, there’s also legal, but unethical products that could be pushed on unsuspecting widows (ex: certain annuities). Women, on average, are already facing greater obstacles and are more likely to lose a spouse.
A Fiduciary financial planner can be your trusted advisor. A lifelong thinking partner to build your confidence, secure your retirement, and walk with you as you move forward. One who patiently listens to your concerns (and those of your family and friends). And someone who can address those concerns with the right tax, insurance, Social Security, estate, and retirement account planning.
Tax Planning For Widows
As a widow, your tax planning process is unique. And there are key implications to consider in their relationship to your retirement. These include the qualifying widow filing status, and the widow’s exemption.
Filing As A Qualifying Widow Or Head Of Household
A qualifying widow is an official IRS tax filing status. And it’s designed to help provide you with financial relief in the wake of your spouse’s passing. Tax rates for qualifying widows are the same as joint returns filed by couples. This makes them lower than the rates for a head of household and single filers. But before we touch on more of the status’ benefits, let’s see first if you’re eligible.
Qualifying Widow Requirements
There are specific IRS guidelines that establish who can file as a qualifying widow. Eligibility requirements for the status include:
Having A Dependent: This stipulation requires that you have at least one dependent that you can claim on your tax return. This includes a child or step child, but does not include foster children. You don’t actually have to claim a dependent, but you must have a qualifying one.
Spousal Death and Remarriage: You can only use this for the two tax years after your spouse passed away. And you cannot have remarried within that time.
The IRS has other requirements as well so be sure to consult a qualified tax preparation professional.
Qualifying Widow Filing Benefits
You can file a joint return for the year your spouse passed away, and then file as a qualifying widow in the next two years if you qualify. While the status is technically different, you’re essentially filing jointly as far as the tax treatment is concerned (as long as you stay unmarried).
Potential benefits include, and are not limited to lower rates, higher credits, and further deductions.
Eventually, however, your status will return to that of single or head of household. This change in status also carries important considerations and can result in higher taxes, sometimes referred to as a “widow penalty”. And should you get remarried, you’ll again need to consider the filing status that makes the most sense moving forward.
Widow’s Tax Exemption
After your marital partner passes, the IRS allows for what’s known as a widow’s exemption. On a federal level, this means there is no estate tax on transfers to a surviving spouse. Depending on the level of wealth, you can also elect “portability”, which could lower future estate taxes when you pass away.
If you’re inheriting any property, you may also be able to receive a step-up in basis. Depending on your unique circumstances, this could be a full or half step up. This can decrease future capital gains tax when property is sold.
Additionally, the first $250,000 of profit from the sale of a primary home is tax-free, assuming the qualifying criteria is met.
On the state level, things get a bit trickier. That’s because widow exemption laws will vary by where you live.
Important note: Widow exemption benefits only apply to surviving spouses of legally recognized marriages.This includes widows of same-sex relationships where the marriage was legally recognized by the state. But arrangements like civil unions and domestic partnerships, are not usually eligible for the benefits.
Insurance Planning For Widows
Insurance needs are also nuanced for widows. That’s because the passing of a partner can have a significant impact on the coverage you need. Together, we’ll review the potential changes to your life, medical, disability, and long-term care insurance needs.
Life insurance needs can be radically changed when becoming a widow. So you will need to take inventory of your new circumstances. Great places to start are with your receival of a death benefit, individual policy, and beneficiaries.
Receiving A Death Benefit: If your spouse had a life insurance policy, you may have been listed as a beneficiary. If so, your receival of a tax-free death benefit may have made a major difference in your own life insurance needs, and the durability of your retirement as a whole.
Occasionally an insurance company representative will try to sell you something other than a “lump-sum” benefit, such as an annuity. Be careful with this because it could be an irreversible decision.
Reevaluating Coverage Needs: Life insurance may no longer be necessary as a widow. Receiving a large enough death benefit, having no children, or pursuing certain retirement goals, can render it unnecessary. On the other hand, further financial protection for the people you care about may still be a necessity.
Changing Beneficiaries: If you decide to keep or add life insurance coverage, you’ll want to take a second look at your beneficiaries. If your spouse was the primary beneficiary, your death benefit will go to any secondary, or contingent beneficiaries listed. If none are listed, you may be leaving your death benefit subject to probate, a potentially costly and lengthy legal process.
Medical insurance in retirement can be broken down into two major categories: pre-Medicare and Post-Medicare. You typically aren’t eligible for Medicare until age 65, but you’ll still need quality coverage before then. And as a widow, there’s new perspectives to consider in both categories.
Unfortunately, many people pay far too much for their health insurance. Higher costs are simply written off as just price for quality. But that’s not always the case. You need to be aware of factors like your family history, present health, and network needs before deciding on a policy.
Additionally, you need to be aware of the full range of your options. If you’re employed, it’s critical to review your employer’s coverage as well as those of outside providers. If you were on a spouse’s plan, they may have options for surviving family members. There are potentially a lot of options that will need to be evaluated.
It may also make sense to take advantage of tools like a Health Savings Account should you end up participating in a qualifying high-deductible health plan.
Once you’re 65, you’re eligible for Medicare coverage. This change can come with significant savings, but also with its fair share of complexities. There’s still benefit selection, premiums, and out-of-pocket expenses to worry about before your enrollment.
Additionally, you may need to look into Medicare Supplemental Insurance (Medigap). This is for covering areas not taken care of by Medicare. So again, make sure you have a clear understanding of the health needs most essential to you.
As a widow, you may not have had a chance to go through this process with your spouse. And the prospect of handling all the details on your own can be overwhelming. But as a team, we can navigate the complicated world of Medicare together.
As a widow, your ability to earn an income may be more important than ever. Without a spouse’s financial or other support, your sole pay may be the primary driver of your retirement. And lacking the proper disability insurance can leave you far too vulnerable.
Disability insurance protects your income at the time you’ll need it most. It kicks in if you become disabled, and are unable to return to work. And it can ensure you still have a solid income coming in for an appropriate amount of time.
Together we can review the disability insurance coverage that’s right for you. We can perform cost-benefit analysis, and we can also find ways to optimize your benefits from a tax standpoint (ex: funding disability insurance with after-tax dollars).
Long-Term Care Insurance
As a widow, having a long-term care plan is important. Loving family and friends may be able to provide some help. But it’s still a good idea to have a plan in place. Dealing with health complications in old age can be a sizable emotional, and financial burden on those closest to you.
Long-term care insurance can help with the financial burden. Typically, a long-term care insurance policy will pay or reimburse for assisted living and/or skilled nursing care (among other expenses) if you aren’t able to do 2 ADLs (Activities of Daily Living).
Together, we’ll help you clarify your potential long-term care needs ahead of time. We’ll be able to go through several “what-if?” scenarios. Understanding the trade-offs can help you decide whether or not you want insurance as a part of your long-term care plan.
Social Security As A Widow
Social security needs to be part of your retirement planning regardless of whether you’re a widow or not. As an individual, the taxation, amount, and long-term utility of your benefits will be impacted by your decisions.
However, as a widow, there are additional factors that need to be considered. The biggest of which is that of survivorship benefits.
These are Social Security benefits that can be passed on to you (and your children) in the event of your spouse’s passing. These are known as survivorship benefits.
Whether or not you’re eligible for them will depend on your specific situation. And the same goes for the amount of survivorship benefits you receive. They will depend on factors like your age, children, your work history and your spouse’s work history. Be sure to check out the Social Security Administration’s guidelines to learn more about the survivorship benefits you can earn.
It is important to note that surviving spouses can claim either their own benefit or survivors benefit, and switch later. For example, you could claim a survivor’s benefit at age 66 and let your own benefit increase to age 70, at which time you could switch. Whether or not this will work for you depends on your circumstances but it can make a large difference in lifetime benefits and should be evaluated.
We’ll be able to help you incorporate Social Security into your overall retirement income plan on both an individual, and survivorship basis. And together we’ll figure out how to get the most of what you’re eligible to receive.
Retirement Account Planning As A Widow
Another central part of retirement planning involves making best use of retirement accounts. And as a widow, this may involve incorporating the savings of a spouse that’s passed away. If you were listed as a beneficiary on your spouse’s IRA or 401(k), you have multiple options at your disposal.
These options include:
Withdrawing All Funds: You have the ability to receive your spouse’s savings directly. With this option, you’ll have to pay income tax. However, you won’t be subject to an early-withdrawal penalty even if you receive the money before age 59 ½.
Rolling Over Funds: You can also rollover your spouse’s savings into your own retirement account. If you’re the beneficiary of a traditional IRA, 401(k), or SEP-IRA, the funds must go to a traditional IRA. However, if you’re receiving a Roth IRA, you can rollover the funds into your own Roth IRA. After the rollover, all funds are subject to the normal rules of the individual account.
Treat As An Inherited IRA: You can treat your spouse’s IRA as an inherited account. However, some of the account’s rules are still tied to the original owner (i.e. your spouse). For example, if you’re inheriting a traditional IRA, you may be required to take required minimum distributions (RMDs) depending on the age of your spouse when they passed. But, you may be able to access the funds penalty free if under age 59.5.
Estate Planning As A Widow
As a widow you’ve likely witnessed first hand the impact a financial legacy can have on others. And as your trusted financial partner, we’ll help you build a strong legacy of your own.
Essential Estate Paperwork
Getting the proper paperwork together is the cornerstone of a solid estate plan. And as a team, we’ll work with you and your lawyer (or one we recommend) to get the right documents in place to ensure a smooth transfer of your assets. That way, those you care about receive what’s rightfully theirs with as few hassles and taxes as possible.
- Asset Titles & Deeds: These can be used to pass assets to heirs outside of probate and generally overrules beneficiary designations and your Will.
- Beneficiary Designations: These also can be used to pass assets to heirs outside of probate, and will generally overrule your Will.
- Will: This makes your final wishes clear in relation to your assets and dependents. It lists out what will be done with your possessions after your passing. It can also include trust provisions that would kick-in after your death
- Living Trusts: Using a living trust to expedite the transfer of your assets to the rightful heirs could be beneficial for more complex estates, or to help avoid probate depending on your asset structure.
- Financial Power of Attorney: This assigns someone to oversee your property and finances on your behalf. This allowance may include, but isn’t limited to: paying bills, investing, and collecting insurance benefits.
- Advance Directive: If you become incapacitated, this expresses your wishes regarding actions to be taken medically on your behalf, and allows you to name a healthcare proxy.
- Life Insurance: Life insurance (if still needed) can be used to protect loved ones, and causes you care about in the event of your passing.
Lastly, should you remarry, you’ll want to go through this paperwork again. It is shockingly easy to disinherit your children and you’ll want to plan ahead, and consult an attorney, if you’re getting remarried.
Estate Taxes And Education
As a financial advisory firm, we’re able to look ahead and identify potential future tax liabilities. This is particularly important in your estate planning. By working together, we can identify where the government may attempt to tax your estate. And we’ll be able to discuss strategies used to protect your assets, and maximize the inheritance of your beneficiaries.
Additionally, depending on your net worth, you may look into electing portability to protect yourself from future estate tax liabilities. This allows you to use your deceased spouse’s estate exemption.
We’re also able to help your successors. By providing education before, and after your passing, we can prepare them to make better decisions.
When it was you and your spouse, decisions could be made as a couple. Your asset allocation may have accounted for a combination of time horizons, risk tolerances, and long-term retirement objectives. Now may be time for a recalibration.
On average, women live longer. This means they may need to adopt and follow a dynamic spending strategy to reduce the changes of outliving their retirement savings.
As a team, we’ll go through your present assets and determine the course of action best-suited to your new needs. We’ll be able to help preserve what you built with your spouse, but steer it in the direction that’s right for you as an individual.
Partner With Provision To Get Started
At Provision Financial Planning, we seek to provide more confidence and less worry to those retiring solo. This includes those who are working to put together a financial plan as widows.
Being a widow carries important financial implications on multiple levels. It affects your taxes, insurance, Social Security, retirement accounts, and estate. Each of these areas will need to be reviewed for updates, and changes to align with your new journey in retirement.
But you don’t have to make this journey alone. Together we’ll work to get you feeling confident again about your financial future. Perhaps just as important, we’ll be your ongoing thinking partner so you can proactively stay on top of these items. Feel free to schedule your complimentary consultation, or call us directly at (410) 870-7054.
Editor’s Note: This article was originally published in June of 2020. It has been updated to provide a more in-depth view of retirement planning for widows.