As a financial professional, you probably have clients with spouses who are not interested in learning about finances. This can create a very difficult situation if the in-control spouse dies first.

This article will provide a few guidelines for advising survivors who are less savvy financially, or just not interested in financial topics, in general. I will offer some strategies to consider while both spouses are still alive to help guide the financially uninterested spouse through the financial and grieving process following the other spouse's death. I will also cover some strategies for the surviving spouse to consider at that difficult time.

Before The Death Of The First Spouse

You can lay the foundation for a productive, working relationship with the surviving spouse by getting both spouses involved in discussing their financial strategy while both partners are still living. The first step is to discuss the problems that could result if the in-charge spouse dies first. These may include the need to make investment, spending and estate planning decisions. Let them know that your recommendations will take these issues into consideration.

Prior to a spousal death, it is important to establish proper ownership of assets so that they transfer easily and avoid probate. It’s also important to arrange for quick and easy access to assets by the surviving spouse. You can help them get organized so both understand where all the financial and estate planning documents are located. Use a checklist approach for simplicity.

Start by making sure the client has a proper strategy for titling assets and checking beneficiary designations. You'll want to verify that transfer designations are accurate (including both primary and secondary beneficiaries) and create a summary list for arrangements—group benefits, transfer on death (TOD) accounts, life insurance, etc. Also, make sure nonqualified assets are owned/titled appropriately to help eliminate probate (if that’s a client goal).

In the category of nonqualified assets, consider that joint tenants with right of survivorship (JTWROS) and tenants by entirety transfer ownership, usually directly to the survivor. Also, help your clients understand that tenancy in common and sole ownership pass through probate and are subject to the client’s will. 

Individual retirement arrangements are another matter you should discuss with your clients while both are living. There are tax implications and other nuances to both traditional and Roth IRAs, and a number of strategies your clients may want to consider today, including naming a beneficiary of each of their IRAs while both spouses are alive. You should ask the couple if income deferral will matter to the surviving spouse. If so, have them consider their beneficiaries.

It's a good idea to make a routine practice of checking beneficiary designations on the client's life insurance, retirement assets, annuity contracts, payable-on-death accounts and transfer-on-death accounts to determine if any updates are needed. You'll need to make sure that all nonqualified assets are owned and titled appropriately, to help eliminate probate (if that is a client goal).

Health-related concerns are another area you will want to discuss with your clients. In the event that you have client couples with both spouses living, there are pre-death considerations to consider with an attorney that you should encourage your clients to discuss. These include Power of Attorneys (POAs) for both spouses; health care directives and establishing a will. They'll also want to review or consider trusts, and review ownership and beneficiaries of assets. 

Finally, ask your clients about their long-term care plan, which may or may not be well thought-out or documented. Do they plan to self-fund care, depend on spousal care or care from a child, or rely on Medicare or Medicaid? Possible long-term care financing solutions include life insurance, an annuity or a long-term care insurance policy.

After The First Death—Start Slow

After the first death, you will want to sympathize with and support the survivor, and most importantly, listen to what they have to say. Ask them about their primary financial concerns, especially immediate worries that may make them anxious or agitated. Identify their other influencers—do they have children, a family CPA or other trustworthy friends or family members that are helping with the process?

You can make the survivor's life easier by offering your own easy-to-execute checklist or considerations list. Start with simple actions that don’t need complex strategic thinking. While it’s obviously important to interact tactfully, the surviving spouse must believe you are competent and capable of leading him/her through this uncharted territory. You will want to have a process that you can easily communicate to your client.

One key point in working with survivors: it is important to avoid advocating quick, major decisions that can’t be undone. At this stage it's best to take a “go slow” approach, giving the surviving spouse plenty of time to process grief and other emotions. The length of time needed for this process will vary, depending on the individual.

For the surviving spouse who had little financial interest or involvement while married, suddenly being forced to make financial decisions can be an overwhelming experience. They may feel emotions ranging from shock, anxiety, disorientation and fear, to feelings of being overwhelmed.

Those emotions may affect the survivor’s functionality, making him or her vulnerable to influences by others who may not have his/her best interest in mind.

They may become emotionally paralyzed and not know whom to trust or how to move forward. Or, they may overcompensate and feel they need to project a strong front and make bold yet uneducated decisions, while maintaining a confident demeanor. You can help prevent or reduce these feelings by helping your clients prepare before a death occurs.

Annuities may be one option for a surviving spouse because they can provide multiple allocation or index options, a level of risk control (may be available at an additional cost), tax deferral¹, income in retirement and reduce probate exposure when he/she dies.

In regard to life insurance beneficiary rules, generally, the death benefit is income-tax-free, so a lump-sum payment is common. There are some exceptions, such as the transfer for value rule or violations of employer-owned life insurance rule, etc. Clients should see their tax advisor and estate planning attorney for more specifics on their own situation.

Income Stability

One of the first steps in working with the surviving spouse is helping them establish income stability; doing so will help reduce their anxiety. You can start by asking what sources of reliable income the survivor has. What is their income stability ratio?

The income stability ratio is also a measure of risk. Income that is not stable (e.g., dividends) is generally created from investment return on assets. While utilizing income that is not stable may be feasible, market volatility (especially if the client is only marginally ready to retire) can result in a potential income shortage.

Potential sources of more stable income may include annuities, survivor's pension benefits and Social Security benefits. Even if the surviving client has their own Social Security income, the lower of the two Social Security benefits terminates after one spouse dies, and the higher—often the deceased or primary wage earner’s Social Security benefits—become the survivor’s income benefits. Delaying the start date for retirement benefits can help a surviving spouse.

Client Considerations After The Financially In-Charge Spouse Dies

You will need to verify that all transfer designations are accurate and up-to-date, including the names of all primary and secondary beneficiaries. You will want to create a summary list of arrangements—transfer on death (TOD) accounts, group benefits, investment accounts, life insurance and other financial assets. Include access information in the list.  

After the death of the financially-in-charge spouse, there may also be income tax considerations for the financially uninterested spouse. The surviving spouse may face an income tax increase as a single filer, even while seeing a reduction in Social Security income benefits. To prevent this situation, it may be appropriate for the client to consider strategies like a Roth IRA conversion² while both spouses are alive.

When it comes to working with a client after the death of a spouse, remember that preparation is the key. It is important to help your clients understand these issues today rather than waiting until after the event when they may not be in the best position to make important decisions. As part of that process, you should be aware of potential problems that can arise with a financially uninterested spouse, and consider adding strategies to assist that spouse. Helping them become more organized today can have a huge effect on their ability to manage financially after the death of their spouse in the future.

Kelly LaVigne is vice president of advanced markets for Allianz Life.

 

¹ Purchasing an annuity within a retirement plan that provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to purchasing an annuity within a tax-qualified retirement plan.

²Please remember that converting an IRA or an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Clients should consult with a qualified tax advisor before making any decisions regarding their IRA.

It is generally preferable that an IRA owner has funds to pay the taxes due upon conversion from funds outside of the IRA. If an IRA owner elects to take a distribution from the IRA to pay the conversion taxes, the owner should keep in mind the potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions.