Worst Case Scenario

According to author David Bach in Smart Women Finish Rich (page 28), one in four widows go through their husband’s benefits within two months of their husband’s death. For this to be true, I used to believe that the husbands must have been underinsured. However, I am becoming very conscious of the fact that widows and widowers do not make good financial decisions in the year following the death of their spouse.

I have had probates where the surviving spouse did not know what the couple owed or owned. One widow had not paid any bills during her marriage; she paid for everything with a credit card and her husband made the credit card payment every month. She did not realize that the credit card was not paid off monthly nor did she realize how much she owed to creditors.

In another case, when the wife became ill unexpectedly, the husband needed to start handling the finances to qualify the wife for Medicaid. The husband did not know where the bank accounts were located or how much the couple owned in stock certificates and U.S. savings bonds. The lack of knowledge regarding their finances and bank accounts created a period of paralysis in an already stressful period.

Therefore, I thought it might be beneficial for a surviving spouse if the couple discussed their finances and what should happen if one spouse died or became incapacitated while both spouses are healthy and capable. Here are 10 things that a couple should discuss prior to one spouse becoming incapacitated or dying:

1.         Where are the assets owned by the couple?

It appears to me that in every family one spouse is primarily responsible for finances. The spouse that is not involved in the finances needs to know where to find the information regarding all of the accounts. To this end, the Wealth Discovery and Tracking Booklet that I provide to my clients when they come in for estate planning can serve as a starting place for a spouse to locate assets.

2.         How much does the couple need every month to pay bills? Are the bills on an auto-pay system? Are the bills paid online? Is there a cushion in the account so that the bank account will not be overdrawn if the surviving spouse does not deal with the finances in a timely manner? What are the passwords to the financial accounts and where can the surviving spouse locate them?

Spouses need to know how much income they need to pay the basic bills every month or they can find the bills overwhelming when they begin paying bills after the death or incapacity of their spouse. If the surviving spouse is not the spouse who controls the finances, who would be willing to assist the surviving spouse in paying the monthly bills or what process should be followed to find someone to pay the bills for the surviving spouse? There are individuals and companies that provide bill paying services for a fee. In addition, a brokerage firm, trust company or private banker that you already have a relationship with is sometimes willing to assume those duties – but do not count on it without asking first.

3.         Where is the money going to come from to pay the monthly bills? Do any pensions end or become reduced when a spouse dies? How much in Social Security benefits will a surviving spouse receive if one spouse dies?

If the spouse that dies is the primary breadwinner, then paying the monthly bills may be challenging for a stay-at home spouse or a working spouse who makes significantly less than the primary breadwinner. Spouses should discuss a plan for how the surviving spouse will be able to pay monthly bills, or at least discuss which bills are most important to be paid in a timely manner each month.

4.         What are the outstanding debts?

Spouses need to know how much they owe and to whom they owe money. Many debts require monthly payments, but some debts require quarterly, semi-annual, annual or even balloon payments. For example, insurance premiums may be due annually, and real property taxes are due semi-annually.

5.         What assets are depreciating and should be sold as soon as possible?

For example, is the wife going to use the husband’s fishing boat or is it going to sit unused until it has little or no value? If a couple owns four cars, the surviving spouse may need only one car. I have discovered that surviving spouses frequently purchase new vehicles after the death of their spouse even though they do not need a new car.

6.         Who are the advisors that the widowed spouse should consult with after the death of their spouse?

The surviving spouse should know which attorney, accountant, bookkeeper, life insurance agent and financial advisor to contact. The advisors should be able to assist with the probate or trust administration and to advise on financial matters.

7.         If the couple owns a business, what should the surviving spouse do with the business? Is it a business that the surviving spouse can maintain? Should the business be sold or merely wrapped up and closed? Which key employees will be able to assist the surviving spouse in whatever the surviving spouse needs to do with the business?

Depending upon the business, the surviving spouse may have several options, but a succession plan detailing how the surviving spouse should deal with the business can make a significant difference with the success in realizing the value of a business.

8.         Where is the surviving spouse going to live?

I have discovered that many widows and widowers purchase a new residence after the death of their spouse and tend to sell their current residence for less than optimum value. Sales for less than fair market value can be attributed to there being insufficient funds to pay the current mortgage on a residence and the inability of the surviving spouse to complete needed work to the residence without hiring a contractor.

9.         Who is going to care for young children if one spouse dies? Will the surviving spouse quit his or her job to care for the children? Will a stay-at-home parent need to find a job outside the home? How will the surviving spouse choose a caregiver for the children?

The caregiver for the children may change, depending upon the circumstances, but a process should be discussed so that the surviving spouse does not have to think about how to locate a caregiver. A couple should also discuss the date on which the stay-at-home surviving spouse needs to locate a job. For example, a couple may decide that they want a stay-at-home parent to remain at home with the children until the youngest child attains the age of six. The couple then needs to plan their finances so that the stay-at-home parent has sufficient funds to stay at home until the youngest child is six years old.

10.       If the couple owns life insurance, how should the life insurance proceeds be invested or used to provide for the lifestyle that was intended?

The use of life insurance proceeds would not necessarily be the same for both spouses. For example, one spouse may use life insurance proceeds to pay off debts, while the other spouse may use life insurance proceeds to supplement their monthly income or as an emergency fund or to pay for capital improvements that the surviving spouse would not be able to complete by himself or herself. In any case, the surviving spouse should not view the life insurance proceeds as a windfall.

As a general rule, surviving spouses should make no major decisions regarding money in the first year following the death of their spouse. This means that the widow or widower should not buy a new house or a new car or quit their job. The death of a spouse causes some people to spend money to fill the void in their life instead of using their money to maintain the lifestyle that the couple initially intended to provide to a surviving spouse. Couples should discuss the what-ifs and strategize on how money should be spent and invested after the death of one spouse to avoid a surviving spouse from being destitute shortly after the death of the first spouse.

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