What Should I Do when my Spouse Dies?

Mourning the loss of a spouse can be one of the hardest experiences one can face. The emotional aspects of grief can also be difficult enough without having to concern yourself whether you’re financially unprepared.

Nj.com’s recent article entitled “Financial planning considerations after the loss of a spouse” says that when a spouse passes away, there can be many impacts to the financial picture. These can include changes in income, estate planning and dealing with IRA and insurance distributions. The first step, however, is understanding and quantifying the financial changes that may happen when your spouse dies.

Income Changes – Social Security. A drop in income is frequently an unforeseen reality for many surviving spouses, especially those who are on Social Security benefits. For retirees without dependents that have reached full retirement age, the surviving spouse will typically get the greater of their social security or their deceased spouse’s benefits – but not both. For example, let’s assume Dirk and Melinda are receiving $2,000 and $1,500 per month in Social Security benefits, respectively. In the event Dirk dies, Melinda will no longer receive her benefit and will only receive Dirk’s $2,000 benefit. That is a 42% reduction in total social security income received.

Social Security benefits typically start at 62, but a widow’s benefit can be available at age 60 for the survivor or at 50 if the survivor is disabled within seven years of the spouse’s death. Moreover, unmarried children under 18 (up to age 19 if attending elementary or secondary school full time) of a worker who passes away may also be eligible to get Social Security survivor benefits.

Income Changes – Pension Benefits. This is another type of income that may be decreased because of a spouse’s death. Those eligible to receive a pension often choose little or no survivorship benefits, which results in a sudden drop in income. Therefore, a single life annuity pension payment will end at the worker’s death leaving the survivor with no additional benefits. However, a 50% survivor option will pay 50% of the worker’s benefit to the surviving spouse at their death. A surviving spouse needs to understand what, if any pension benefits will continue and the financial effect of these changes.

Spousal IRA Benefits. Spouses must understand their options for inherited retirement accounts. A spousal beneficiary can roll the funds to their own IRA account, which lets the spousal beneficiary delay Required Minimum Distributions (RMDs) until age 72. In this case, the spousal beneficiary’s life expectancy is used to calculate future RMDs. This may be appropriate for those over 59½, but spousal beneficiaries under that age that require retirement account distributions may subject themselves to early withdrawal penalties, including a tax and a 10% early withdrawal penalty, even on inherited funds. Spouses younger than 59½ may consider rolling the account to a beneficial or inherited IRA for more flexibility. In this case, RMDs will be taken annually based upon the life expectancy of the beneficiary, with distributions avoiding the 10% penalty. Distributions greater than the RMD may also be taken, while still avoiding early withdrawal penalties. Inherited IRAs can be a great tool for spousal beneficiaries who need income now to help support their lifestyle but have not reached 59½.

Updating the Estate Plan of the Surviving Spouse. It is easy to forget to review your estate plan drafted before your spouse passed away. Check on this with an experienced estate planning attorney.

Updating Financial Planning Projections. You don’t want to make any major decisions after the loss of a loved one, you can still review the numbers. Create a new financial plan to help provide clarity.

Reference: nj.com (Jan. 9, 2021) “Financial planning considerations after the loss of a spouse”

When Does a Power of Attorney Fail to Do Its Job?

A power of attorney is an essential component of a comprehensive estate plan. However, there are at least two important situations when the power of attorney (POA) will not be recognized and followed.

The IRS and Social Security Administration don’t recognize traditional POAs, explains Forbes’ recent article entitled “Two Times When Your Power Of Attorney Isn’t Going To Work.”

The IRS requires the use of its Form 2848, “Power of Attorney and Declaration of Representative” before it will let anyone act on your behalf. This form is required when an agent, even a relative, tries to handle your tax matters, when you are not able to so.

One of the requirements of Form 2848 is that it requires you to state the tax matters and years for which the agent is authorized to act. Form 2848 also requires you to list the type of tax, the IRS form number and the year or periods involved. That is different from a traditional POA to handle financial matters, which frequently has a blanket statement allowing the agent to take a broad range of actions on your behalf in certain matters.

For a married couple that files joint tax returns, each spouse must also separately complete and sign a form. They cannot simply execute a joint form.

Technically, the IRS could accept other POAs, as indicated by the instructions to Form 2848. However, as you can see a POA must meet all the IRS’ requirements to be accepted.

The Social Security Administration is much the same. When you need someone to manage your Social Security benefits, you contact the Social Security Administration and make an advance designation of a representative payee.

This lets you name one or more people to manage your Social Security benefits. The Social Security Administration then is required to work with the named individual or individuals, in most cases.

A person who already is receiving Social Security benefits may name an advance designee at any time. A first-time claimer can also name the designee during the claiming process.

This designee can be changed at any time.

If you do not name any representatives, the Social Security Administration will designate a representative payee on your behalf, if it determines that you need help managing your money. Relatives or friends can apply to be representative payees, or the Social Security Administration can select someone.

Reference: Forbes (Jan. 28, 2021) “Two Times When Your Power of Attorney Isn’t Going to Work”

How to Benefit from a Roth IRA and Social Security

When originally created, Social Security was designed to prevent the elderly and infirm from sinking into dire poverty. When most working Americans enjoyed a pension from their employer, Social Security was an additional source of income and made for a comfortable retirement. However, with an average monthly benefit just over $1,500 and few pensions, today’s Social Security is not enough money for most Americans to maintain a middle-class standard of living, says the article “3 Reasons a Roth IRA Is a Perfect Supplement to Social Security” from Tuscon.com. It’s important to plan for additional income streams and one to consider is the Roth IRA.

Roth IRAs can be funded at any age. Many seniors today are continuing to work to generate income or to continue a fulfilling life. Their earnings can be put into a Roth IRA, regardless of age. If you are still working but don’t need the paycheck, that’s a perfect way to fund the Roth IRA.

Withdrawals from a Roth won’t trigger taxes on Social Security benefits. If your only income is Social Security, you probably won’t have to worry about federal taxes. However, if you are working while you are collecting benefits, once your earnings reach a certain level, those benefits will be taxed.

To calculate taxes on Social Security benefits, you’ll need to determine your provisional income, which is the non-Social Security income plus half of your early benefit. If you earn between $25,000 and $44,000 as a single tax filer or between $32,000 and $44,000 as a married couple, you could be taxed as much as 50% of your Social Security benefits. If your single income goes past $34,000 and married income goes past $44,000, you could be taxed on up to 85% of your benefits.

If you put money into a Roth IRA, withdrawals don’t count towards your provisional income. That could leave you with more money from Social Security.

A Roth IRA is flexible. The Roth IRA is the only tax-advantaged retirement savings plan that does not impose Required Minimum Distributions or RMDs. That’s because you’ve already paid taxes when funds went into the account. However, the flexibility is worth it. You can leave the money in the account for as long as you want, so savings continue to grow tax-free. You can also leave money to your heirs.

While you don’t have to put your savings into a Roth IRA, doing so throughout your career—or starting at any age—will give you benefits throughout retirement.

Reference: Tuscon.com (Oct. 5, 2020) “3 Reasons a Roth IRA Is a Perfect Supplement to Social Security”

The Wrong Power of Attorney Could Lead to a Bad Outcome

There are two different types of advance directives, and they have very different purposes, as explained in the article that asks “Does your estate plan use the right type of Power of Attorney for you?” from Next Avenue. Less than a third of retirees have a financial power of attorney, according to a study done by the Transamerica Center for Retirement Studies. Most people don’t even understand what these documents do, which is critically important, especially during this Covid-19 pandemic.

Two types of Durable Power of Attorney for Finance. The power of attorney for finance can be “springing” or “immediate.” The Durable POA refers to the fact that this POA will endure after you have lost mental or physical capacity, whether the condition is permanent or temporary. It lists when the powers are to be granted to the person of your choosing and the power ends upon your death.

The “immediate” Durable POA is effective the moment you sign the document. The “springing” Durable POA does not become effective, unless two physicians examine you and both determine that you cannot manage independently anymore. In the case of the “springing” POA, the person you name cannot do anything on your behalf without two doctors providing letters saying you lack legal capacity.

You might prefer the springing document because you are concerned that the person you have named to be your agent might take advantage of you. They could legally go to your bank and add their name to your accounts without your permission or even awareness. Some people decide to name their spouse as their immediate agent, and if anything happens to the spouse, the successor agents are the ones who need to get doctors’ letters. If you need doctors’ letters before the person you name can help you, ask your estate planning attorney for guidance.

The type of impairment that requires the use of a POA for finance can happen unexpectedly. It could include you and your spouse at the same time. If you were both exposed to Covid-19 and became sick, or if you were both in a serious car accident, this kind of planning would be helpful for your family.

It’s also important to choose the right person to be your POA. Ask yourself this question: If you gave this person your checkbook and asked them to pay your bills on time for a few months, would you expect that they would be able to do the job without any issues? If you feel any sense of incompetence or even mistrust, you should consider another person to be your representative.

If you should recover from your incapacity, your POA is required to turn everything back to you when you ask. If you are concerned this person won’t do this, you need to consider another person.

Broad powers are granted by a Durable POA. They allow your representative to buy property on your behalf and sell your property, including your home, manage your debt and Social Security benefits, file tax returns and handle any assets not named in a trust, such as your retirement accounts.

The executor of your will, your trustee, and Durable POA are often the same person. They have the responsibility to manage all of your assets, so they need to know where all of your important records can be found. They need to know that you have given them this role and you need to be sure they are prepared and willing to accept the responsibilities involved.

Your advance directive documents are only as good as the individuals you name to implement them. Family members or trusted friends who have no experience managing money or assets may not be the right choice. Your estate planning attorney will be able to guide you to make a good decision.

Reference: Market Watch (Oct. 5, 2020) “Does your estate plan use the right type of Power of Attorney for you?”

How Do I Find a Great Elder Law Attorney?

Elder law attorneys specialize in legal affairs that uniquely concern seniors and their adult children, says Explosion’s recent article entitled “The Complete Guide on How to Find an Elder Law Attorney.”

Finding the right elder law attorney can be a big task. However, with the right tips, you can find an experienced elder law attorney who is knowledgeable, has the right connections and fits your budget.

While, technically, a general practice attorney will be able to handle your retirement, Medicaid and even your estate planning, an elder law lawyer is deeply entrenched in elder law. This means he or she will have extensive knowledge and experience to handle any case within the scope of elder law, like the following:

  • Retirement planning
  • Long-term care planning and insurance
  • Medicaid
  • Estate planning
  • Social Security
  • Veterans’ benefits; and
  • Other related areas of law.

While a general practice lawyer may be able to help you with one or two of these areas, a competent elder law lawyer knows that there’s no single formula in elder law that applies across the board. That’s why you’ll need a lawyer with a high level of specialization and understanding to handle your specific circumstances. An elder law attorney is best suited for your specific needs.

A referral from someone you trust is a great place to start. When conducting your elder law lawyer search, stay away from attorneys who charge for their services by the hour. For example, if you need an elder law attorney to work on a Medicaid issue, they should be able to give you an estimate of the charges after reviewing your case. That one-time flat fee will cover everything, including any legal costs, phone calls, meetings and court fees.

When it comes to elder law attorneys, nothing says more than experience. An experienced elder law lawyer has handled many cases similar to yours and understands how to proceed. Reviewing the lawyer’s credentials at the state bar website is a great place to start to make sure the lawyer in question is licensed. The website also has information on any previous ethical violations.

In your search for an elder law attorney, look for a good fit and a high level of comfort. Elder law is a complex area of law that requires knowledge and experience.

Reference: Explosion (Aug. 19, 2020) “The Complete Guide on How to Find an Elder Law Attorney”

How Does Social Security Benefits Work in My Estate Planning?

A financial power of attorney (POA) is a critical element of an estate plan. This document makes certain that a person you named takes care of your finances, when you are unable. Part of managing your finances is coordinating your Social Security benefits—whether you already are getting them or will apply for them down the road.

However, what many people don’t realize, is that the Social Security Administration (SSA) doesn’t recognize POAs. Instead, as part of your estate plan, you need to contact the SSA and make an advance designation of a representative payee, according to Forbes’ article entitled “The Surprising But Essential Estate Planning Step For Social Security Benefits.”

This feature lets an individual select one or more people to manage their Social Security benefits. The SSA then, in most situations, must work with the named individual or individuals. You can designate up to three people as advance designees and list them in order of priority. If the first one isn’t available or is unable to perform the role, the SSA will move to the next one on your list.

A person who’s already getting benefits may name an advance designee at any point. Someone claiming benefits can name the designee during the claiming process. You can also change the designees at any time.

When you name a designee, the SSA will evaluate him or her and determine the person’s suitability to act on your behalf. Once he or she is accepted, a designee becomes the representative payee for your benefits. They will get the benefits on your behalf and are required to use the money to pay for your current needs.

A representative payee typically is an individual. However, it can also be a social service agency, a nursing home, or one of several other organizations recognized by the SSA to serve in this capacity.

If you don’t name designated appointees, the SSA will designate a representative payee on your behalf, if it feels you need help managing your money. Relatives or friends can apply to be a representative payee, or the SSA can choose a person. When a person becomes a designated payee, he or she is required to file an annual report with SSA as to how the benefits were spent.

Being a designated representative doesn’t give that person any legal authority over any other aspect of your finances or personal life. You still need the financial POA, so they can manage the rest of your finances.

Reference: Forbes (April 17, 2020) “The Surprising But Essential Estate Planning Step For Social Security Benefits”

What Must Be Done when a Loved One Dies?

When a member of a family dies, it falls to the people left behind to pick up the pieces. Someone has to find out if the person left a last will, get the bills paid, stop Social Security or other automatic payments and file final tax returns. This is a hard time, but these tasks are among many that need to be done, according to the article “How to manage a loved one’s finances after they die” from Business Insider.

This year, more families than usual are faced with the challenge of taking care of the business of a loved one’s life while grieving a loss. When death comes suddenly, there isn’t always time to prepare.

The first step is to determine who will be in charge. If there is a will, then it contains the name of the person selected to be the executor. When a married person dies, usually the surviving spouse has been named as the executor. Otherwise, the family will need to work together to pick one person, usually the one who lives closest to the person who died. That person may need to keep an eye on the house and obtain documents, so proximity is a plus. In a perfect world, the person would have an estate plan, so these decisions would have been made in advance.

Don’t procrastinate. It is hard, but time is an issue. After the funeral and mourning period, it’s time to get to work. Obtain death certificates, and make sure to get enough certified copies—most people get ten or twelve. They’ll be needed for banks, brokerage houses and utility service providers. You’ll also need death certificates for taking control of some digital assets, like the person’s Facebook page.

The first agency to notify is Social Security. If there are other recurring payments, like VA benefits or a pension, those organizations also need to be notified. Contact banks, insurance companie, and financial advisors.

Get the person’s credit cards into your possession and call the credit card companies immediately. Fraud on the deceased is common. Scammers look at death notices and then go onto the dark web to find the person’s Social Security number, credit card and other personal identification info. The sooner the cards are shut down, the better.

Physical assets need to be secured. Locks on a house may be changed to prevent relatives or strangers from walking into the house and taking out property. Remove any possessions that are of value, both sentimental or financial. You should also take a complete inventory of what is in the house. Take pictures of everything and be prepared to keep the house well-maintained. If there are tenants or housemates, make arrangements to get them out of the house as soon as possible.

Accounts with beneficiaries are distributed directly to those beneficiaries, like payable-on-death (POD) accounts, 401(k)s, joint bank accounts and real property held in joint tenancy. The executor’s role is to notify the institutions of the death, but not to distribute funds to beneficiaries.

The executor must also file a final tax return. The final federal tax return is due on April 15 of the year after death. Any taxes that weren’t filed for any prior years, also need to be completed.

This is a big job, which is made harder by grief. Your estate planning attorney may have some suggestions for who might be qualified to help you. An attorney or a fiduciary will take a fee, either based on an hourly rate for services performed or a percentage of the entire value of the estate. If no one in the family is able to manage the tasks, it may be worth the investment.

Reference: Business Insider (May 2, 2020) “How to manage a loved one’s finances after they die”

 

 

Social Security Issues, if You’re Self-Employed

Did you know that when you’re self-employed, you’re thought of by the IRS as both the employee and the employer? Therefore, it’s your job to withhold Social Security from your earnings—contributing the employer’s matching portion of Social Security and the individual’s portion. Instead of withholding Social Security taxes from each paycheck and, because many self-employed people don’t get regular paychecks, you pay all the Social Security taxes on your earnings, when you file your annual federal income tax return. This is both your personal contribution and your business’ contribution.

Investopedia’s recent article entitled “How Social Security Works for the Self-Employed” explains how to calculate the Social Security taxes you owe, if you’re self-employed.

IRS Schedule SE is where you report your business’ net profit or loss as calculated on Schedule C. The federal government uses this information to calculate the Social Security benefits you’ll be entitled to in the future. Self-employment tax consists of both the employee and employer portion of Social Security (6.2% + 6.2% = 12.4%), as well as the employee and employer portion of Medicare (1.45% + 1.45% = 2.9%). Therefore, the total the self-employment tax rate is 15.3%.

If you are self-employed, what you pay in Social Security taxes is derived from your net income. On Schedule SE, you multiply your business’ net profit or loss as calculated on Schedule C by 92.35%, then you see how much self-employment tax you owe.

Note that the CARES (Coronavirus Aid, Relief, and Economic Security) Act lets employers defer employee Social Security taxes through Dec. 31, 2020—50% of the deferred amount will be due Dec. 31, 2021, and the other half by Dec. 31, 2022. Good news: this break also applies to the self-employed.

There are many business expenses that the self-employed can use to decrease their tax liability, in addition to the Social Security tax deductions you can take when you’re self-employed. Business expenses reduce your overall tax, which ultimately lowers your Social Security taxes. These tax deductions are a way of minimizing self-employment tax and Social Security taxes. However, you should know that this can be a negative as far as your Social Security benefit calculations. That’s because these are based in part on your taxable earnings. The more deductions you have, the lower your Schedule C income. Lowering your Schedule C income is a good way to reduce how much federal, state, and local income tax you owe, but that lower amount will be part of your Social Security earnings history. As a result, you may receive lower benefits in retirement, than if you didn’t take those deductions.

There’s no Social Security taxes on your wages that exceed a certain earnings threshold. The wage base for 2020 is $137,700 (up from $132,900 in 2019), and you don’t owe Social Security taxes on your earnings that are greater than that amount.

Social Security really isn’t much different whether you’re self-employed or work for someone else. Self-employed individuals earn Social Security work credits the same way employees do and qualify for benefits based on their work credits and earnings. It’s the business tax deductions that are the biggest difference. If you work for someone else, you pay Social Security taxes on all of your earnings, up to the $137,700 limit in 2020. However, if you work for yourself, deductions you claim on Schedule C can make your taxable income substantially lower. That may decrease your Social Security taxes today, but also may decrease your Social Security benefits later.

Reference: Investopedia (April 29, 2020) “How Social Security Works for the Self-Employed”

Medicare Patients Be Wary of COVID-19 Scams!

It’s still not easy to get tested for COVID-19 in many states, so it’s not surprising to learn that scammers are exploiting the shortage. They’re especially preying on the elderly.

Money Talks News’ recent article entitled “Are You on Medicare? Beware Coronavirus Scammers” reports that scammers use stolen personal data to commit Medicare fraud and identity theft, according to the U.S. Department of Health and Human Services.

Medicare warned beneficiaries in a recent email, “Unfortunately, scammers are using the COVID-19 pandemic to try to steal your Medicare number, personal information and money. And they’re using robocalls, social media posts and emails to do it.”

Some of these criminals are even knocking on people’s doors to talk them out of their personal data.

Seniors are advised to not divulge their personal information, including their Medicare number, with anyone, except a trusted health care provider or other qualified expert. If you’re unsure who’s legitimate, call for help and advice from your Senior Medicare Patrol, volunteer groups funded by the Department of Health and Human Services (HHS).

Health and Human Services says that your personal information can be used to fraudulently bill federal health care programs and commit medical identity theft.

You may also wind up being responsible for charges, if Medicare denies the claim for an unapproved test. You need to protect your Medicare and Social Security information, because it can be used in fraud schemes. If you think you’ve been contacted by a scammer, do the following:

  • Report suspected criminals to the National Center for Disaster Fraud Hotline at 866-720-5721 or write to disaster@leo.gov.
  • Be on guard, if someone requests your Medicare number, when you didn’t ask for services.
  • Be suspicious of those offering coronavirus supplies or testing.
  • When using social media, don’t click or respond to advertisements and offers for coronavirus testing.
  • If you think you should get a COVID-19 test, ask your doctor or doctor’s office.

In addition, the FBI advises everyone — not only seniors — to be aware of and to report:

  • Bogus emails purporting to be from the Centers for Disease Control and Prevention (CDC).
  • Phishing emails, which try to trick you into sharing personal information.
  • Counterfeit treatments and equipment, like sanitizing products, masks, face shields, goggles, respirators, protective gloves or gowns.

Reference: Money Talks News (May 19, 2020) “Are You on Medicare? Beware Coronavirus Scammers”