When contemplating retirement most thoughts, understandably, are centered on ensuring enough funds are set aside to maintain a vibrant life.
However, the thing that is often overlooked is the inevitable passing.
For the sake of all loved-ones please take the time to get very organized to ensure the smooth transition of your hard-earned assets.
It’s not just for simplicity it is also to ensure that the money does not get tied up in a probate process, or that various professions provide services that significantly reduce the total windfall that your loved-ones will receive.
A little organization and work now, will save money and time after you pass.
Let’s start with Beneficiary designations. If this is done correctly it can save you tens of thousands of dollars and many hours of effort.
We’ll go by account type to keep the review organized.
401k Plan Death Benefit
Things are pretty straight forward with a 401k.
The laws sets that if you are still married your spouse will receive 100% of all funds, independent of who you designate as beneficiary.
If you are single, whoever you designate as beneficiary will receive the funds.
The options as the beneficiary is to leave the funds in place with new account owner, rollover to an IRA, or take a withdraw and pay the tax and early withdraw fee if applicable.
IRAs, when designed, were set to establish an intended recipient so often these accounts will not be covered in a standard will.
That makes it very important that the beneficiary be intentional and reverified as part of this process.
There is something unique about IRAs and should be considered in your selection of beneficiaries.
If there are multiple parties listed as beneficiary, all parties will be required to take minimum distribution based upon the life expectancy of the oldest recipient.
A best practice is to take the above into consideration when you are setting up beneficiaries on the individual plans.
For example, if your objective is to distribute 3 IRA accounts across 5 individuals, you may be better off segregating beneficiaries by age cohorts and setting groups of beneficiaries accordingly.
If your 5 heirs fall across the spectrum of young, middle age, and older, you may want to set the beneficiaries by group.
Next, below are the 5 possibilities, as beneficiary, to receive the IRA account funds. I listed them from least to most impactful in terms of fees and opportunity cost.
Every situation is different but the below should help you think through:
Disclaim all or part of the assets (Opt out)
This is simply deciding you do not want the distributions and prefer the money is passed to others that were designated.
Take the money
Convert the accounts to cash. Based on your age you will be subject to early withdraw penalty 59 ½, and will certainly be subject to income tax.
Also, noted in my other posts you will be giving up a tremendous amount of tax-free compounded investment returns.
Convert to a Roth IRA
This would only be done if you believe your incremental tax rate will be substantially higher in the future than it is today.
This may be the case if a surviving spouse or child does not currently work but intends to return in the future, it may make sense to pay taxes now, convert to Roth, and avoid taxes upon distribution.
This should be carefully modelled before making this decision.
Convert the IRA to a Rollover IRA
You will have to transfer the accounts into a like IRA account (Traditional/Rollover or Roth Account).
This is only available if you are the surviving spouse. This will allow you to receive the funds without paying a penalty or tax.
As the spouse, you set your beneficiaries to your preference and you can put off taking the RMDs based upon your current age.
Keep IRA intact
This will make sense if the deceased person has already started to take distributions.
The Required Minimum Distributions (RMDs) will be based on the deceased person’s age rather than the beneficiary’s. This can be changed if the beneficiary submits a new schedule.
Estate taxes should always be considered if the person passing had substantial assets.
This is a complex subject and when time permits, we’ll have dedicated reviews to mitigate estate tax if this were to apply.
For this article we’ll leave it simple, in 2019, your beneficiaries will not need to worry about estate tax if the transferred assets are less than $11.4 million.
If My Spouse Dies Do I Get His Social Security?
Social Security is normally thought of as a post retirement defined benefit.
However, there are several benefits that may apply to children of a working parent that suddenly passed away if they are under 19 years of age.
There is a benefit to a surviving spouse, and even an ex-spouse, if unmarried currently, marriage was greater than 10 years, plus other criteria.
You can review the article that I published that details this topic further.
In general this area has enough moving pieces that the Social Security Administration asks that you reach out to a counselor to have them guide you through the process.
I put the below infographic together to help you prepare for that conversation.
If Spouse Dies Before 62
You don’t have to wait until age 62 to collect survivor benefits. As a surviving spouse you can make claims for benefits as early as 60. If you are disabled, this can back as early as 50.
An important consideration in this benefit is if you get remarried and at what age did you get remarried.
If the answer is that you were remarried prior to the age of 60 you may have forfeited your rights to this benefit. If after, you path to a successful claim will be easier.
Once again, every situation is unique here and you should definitely reach out directly to the SSA with all the facts and they will guide accordingly.
Do You Get Your Spouse’s Pension if They Die?
The answer is “Yes, if you qualify.”
The qualification depends on where your spouse worked, when did they retire (year), when they passed, and whether you have previously waived your rights.
Where did your spouse work?
Private pension plans are governed by a regulatory act called Employee Retirement Income Security Act (ERISA).
If your spouse worked for a company that offered a private pension, the rules specified here will apply.
If your spouse was an employee in non-private pension you would have to look at the specifics of their plans.
ERISA established a regulated standard but only applies to private pension plans.
Federal, state, city employees, military personnel, and employed members of religious organizations make up the vast majority of non-private pension plans.
When did your spouse die?
ERISA required benefits to extend to surviving spouses.
However, prior to August 1984 the employee could elect not to designated the spouse as a beneficiary and that did not require the spouse’s consent/signature.
So if your spouse after that period of time you should track down the paperwork and understand your entitlements.
When did your spouse retire?
Same framework as above. Prior to 1985 there was little protection for the surviving spouse; thereafter, there should be a paper trail that establishes your rights.
Did you forego your rights to a survivor’s benefit?
If the working employee excluded you, as current spouse, as a beneficiary and you signed the “spousal consent” to this exclusion, you have waived your rights.
If you were married during the time credit was received under this defined benefit plan, but later divorced, you may have waived your rights to this benefit in the divorce settlement.
If this asset was not specifically addressed during the settlement, it may make sense to review your rights to claim at this point.
The Bottom Line
Although death is difficult to think about and even more so when thinking about a spouse’s passing, it is very important to get organized.
The opportunity cost in lost time and money is significant.
Also when you are well educated, or at least oriented, the probability of a “professional” taking advantage of your situation or you following poor advice is significantly reduced.