I sometimes say to clients when planning “if you could tell me when you are going to die, when your spouse will die, and who will get sick and when, I can write you an amazing retirement and estate plan!” Things being as they are, we unfortunately (or fortunately) do not know the answers to these questions and others. Consider the state of the economy and the tax laws or, closer to home, how will your spouse (or you) handle finances on death, will any of your children encounter serious financial problems not of their own making such as disability? So much is uncertain that we probably try not to think of the alternatives too often.
Finally, while we frequently plan for our estates considering what we leave to our spouses and children it is probably a fact that we rarely consider the long life ahead for many spouses as widows or widowers. While our spouse could remarry, it is also likely she or he could decide to remain single. Is she (or he) prepared to face the financial and other challenges ahead alone?
This thought came to mind when a professor teaching a course in financial planning I was attending commented he strongly encouraged his wife to go back for additional education, his motive being that he wanted to assure she had a profession to fall back on for financial support if some day she needed to manage the finances alone.
Some considerations include when to take Social Security benefits and whether to take a lump sum distribution on retirement or what is referred to as a joint and survivor annuity. These are both subjects on which I have commented quite a bit over the years.
The general impression these days is to delay taking Social Security if it does not cause too much of a hardship. You could take Social Security as early as age 62 but could boost your benefit 76% if you wait until age 70. The difference between taking it at what is now full retirement age (66 +) and age 70 is 32%, a fairly generous secure rate of return. This may be relevant to your spouse’s financial survival if your spouse earns less than you. If your Social Security is higher on death than your spouse’s, she (or he) may claim on your higher benefit.
So what do you do? You make reasonable assumptions and build them into your plan. If conditions change, you change the assumptions. This is what we do all the time with clients.
Regarding single life distribution on retirement vs. joint and survivor annuity, the question is do you take the higher figure on retirement or a somewhat lower one that continues both through your life and the life of your surviving spouse. Consider this. You could choose to receive the higher sum up front and die a week later. This would leave your spouse without an additional source of income for the rest of her or his life.
Years ago, when planning estates, it would have generally been assumed that a surviving spouse might not live long after her husband or his wife died. If both died in their 60’s or early 70’s there would not be an extended period when the survivor would need to fend for herself. Today it is not out of the question for one spouse to die at age 60 and the other go on to live into her 90’s or beyond.
One factor that has seriously complicated estate trust planning is the top heavy incidence of IRA, 401(k), 403(b) and similar retirement and pension accounts in the overall portfolios of couples in higher tax brackets. Retirement funds such as IRA’s need a “designated beneficiary” and do not lend themselves easily to trusts without considering tax consequences. It can be done but with extreme care.
Finally, without knowing how long you or your spouse will live it can be difficult to know how to plan. Do you plan so your children will inherit sooner or are you concerned your spouse who is your widow or widower will run out of money? You make decisions that of necessity have to be based on inadequate information about the future which in some ways has probably always been the case.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.