Financial planning considerations for a surviving spouse

Death is a difficult and feared subject for most people. Many people tend to postpone dealing with important estate planning issues until “the time comes.” Unfortunately, when it does, survivors are expected to make many crucial financial and legal decisions for which they may be unprepared. For a grieving person, the pressure to quickly make these decisions can be overwhelming. However, it doesn't have to be – if you are prepared.

When a loved one dies people often ask, “What do I do now?” This paper provides a checklist of financial planning considerations that may help you make important financial decisions, honor your spouse's wishes and care for yourself and your family during the first year after their death.

Settling your spouse's estate

Settling an estate can be a complex process that may take upward of a year. The term “estate” refers to your deceased spouse's assets and liabilities, essentially what he or she owned and owed at the time of his or her death. If you were named the
executor in your spouse's will, you are responsible for handling the financial and legal issues related to settling your spouse's estate.

An important first step is obtaining copies of your spouse's will and death certificate. The attorney who drew up the will usually retains a copy, and you can obtain copies of the death certificate by contacting your state's vital statistics office.

You'll need copies of your spouse's death certificate to close out bank accounts, apply for Social Security and life insurance benefits, transfer stocks and bonds, etc.
Estate expenses such as lease or loan payments can lower the value of your spouse's estate and related taxes on the estate.

Consider opening a separate checking account to handle estate-related expenses, keep an accurate record of all expenses paid and keep tax records apart from your personal taxes.

Paying off debt

As executor, you will need to pay off any outstanding debt such as credit cards or car loans held solely in your spouse's name. Contact one of the three major credit bureaus (Experian, Equifax and Transunion) to request a copy of your spouse's credit report and view all outstanding debts.

You should also provide the credit bureau with a copy of the death certificate so your spouse's name will be deleted from their files, reducing the risk of fraud.

Additionally, you will want to notify all creditors that your spouse has died. Cancel any credit cards that are held in your spouse's name and change any jointly held cards to be listed in your name only.

Because it may take time to receive death benefits, you may find yourself short on cash and unable to pay some bills on time. Communicate with creditors as soon as you realize you might miss payments. They may be willing to avert late fees, interest charges and unfavorable credit reporting.

Distributing property

Within each state's probate process, executors play a central role in making sure distributions and sales of property occur in accordance with the will's terms. If the will lacks specific instructions, an executor would also typically have the responsibility and discretion to distribute the decedent's personal property.

Paying taxes

Depending on the value of the decedent spouse's gross estate, the executor may be required to oversee filing a federal estate tax return, which would be due within nine months of death.

The federal estate tax is a tax on transfers of property at death. It operates in conjunction with the federal gift tax, which applies to certain transfers made without adequate consideration during one's life.

Federal estate tax might be avoided if the decedent spouse's taxable estate, plus taxable lifetime gifts, is less than the current exclusion amount of $2,000,000 for 2008 ($3,500,000 for 2009) or if you are the sole recipient of your spouse's assets that exceed the applicable exclusion amount. The executor would also be responsible to file the decedent spouse's final federal income tax return by April 15 of the year following your spouse's death.

Depending on your state of residence, a surviving spouse serving as executor would also need to complete any applicable state estate and/or inheritance tax return and final state income tax return. Work with your tax attorney for help with filing your spouse's last returns.

Obtaining benefits

Notify Social Security Administration of your spouse's death to determine what benefits, if any, you'll be eligible to receive right away. Survivor benefits vary according to several factors including your age, the age of your children and your spouse's earnings.

If your spouse served in the military, contact the Department of Veterans Affairs to determine if you qualify for survivor's benefits.

Many companies provide several benefits to their employees that are transferred or distributed to their heirs after death, including pension benefits, retirement assets and vacation/sick day payouts.

You also may be entitled to your spouse's unpaid bonus pay, stock options or insurance benefits. Check with the human resources department of your spouse's most recent employer as well as former employers.

There are two main types of company retirement benefits: traditional pension (defined benefit) plans or employer-sponsored retirement (defined contribution) plans.

• With traditional pension plans, the employer guarantees a regular benefit and is required to provide survivor benefits to the widowed spouse. If your spouse worked for a branch of the government, public agency, nonprofit organization or a church, there are separate rules governing pension plans and survivor benefits, and you will need to contact the employer to find out specific details.
• Employer-sponsored retirement plans include 401(k), 457 and 403(b) plans. If your spouse participated in one of these, you will need to contact the employer to determine your options for receiving benefits. You may be able to rollover assets into your own IRA and avoid paying taxes on the distribution.

Now may also be a good time to update the beneficiary for your own retirement plans if you previously listed your spouse.

Settling life insurance

Since life insurance proceeds are often the biggest source of income for many surviving spouses, you should begin processing claims for any life insurance benefits right away.

You'll also want to update the beneficiary for your own personal life insurance policy if you previously listed your spouse.

A variety of benefit options are typically available. Talk with your financial advisor about the best way to receive the life insurance distribution and invest the proceeds.

• Lump sum. Receive the entire death benefit in one payment.
• Specific income provision. The life insurance company pays you principal and interest on a predetermined schedule.
• Life income option. Guaranteed income for life, with the income amount dependent on the policy's death benefit and your age.
• Interest income option. The life insurance company holds the proceeds of your policy and pays you the interest earned. With this option, the policy's death benefit remains intact and is paid to the secondary beneficiary upon your death.

Maintaining health insurance coverage

Contact your spouse's employer to understand your health insurance coverage options. If your spouse received health insurance through their employer, and was employed at the time of death, by law you are eligible for COBRA coverage. COBRA
coverage will allow you, and any eligible dependents, to continue your health insurance for up to 36 months, provided you continue to pay the monthly premium.

COBRA premiums are typically higher than those paid by your spouse, as you are now responsible for paying both the employee and employer portions of the costs.
However, the cost for COBRA coverage is generally less than what you would pay to acquire individual coverage on your own.

If you are not eligible for COBRA coverage, individual and family health insurance coverage can be obtained through private insurance companies. Health insurance policies, plans and coverage varies widely among private insurance companies so it is important to compare policies to determine the best health coverage, at the right price, for you and your family.

Obtain help from your financial advisor

The first few years following a spouse's death are a demanding and discouraging time. You can lessen the financial stress by taking a step-by-step approach to settling your spouse's estate, then building a financial foundation for yourself.

An Ameriprise financial advisor can help you through the planning process by helping you with budgeting, managing your debts, preparing for your retirement, financially caring for children and helping you ensure that your own estate plan is in place and current. Your financial advisor can help you address both the immediate money-management challenges and plan ahead for your future. If you don't have a financial advisor, you can search for an advisor in your area.