You’ve lived a life together. You can close your eyes and remember walking down the aisle with grains of rice being sprinkled on your head and those early days of cheering each other on in your daily journeys whether that be a career or juggling all manner of duties on the home front. You paid the bills and had “date nights” and celebrated milestones and burned the mortgage when you FINALLY paid it off. You saved for vacations and new cars and retirement and perhaps college. You might have danced at your daughter’s wedding or taken that “once-in-a-lifetime” trip or bought the motorhome you’d always dreamed of and visited all the national parks. Life was full and exciting, but now, where there were two, there is only one. You’ve lost your best friend and the world feels like it’s falling out from under you. The grief and fear are often paralyzing. You want someone to tell you how you get from one day to the next, physically and emotionally. Money and taxes? That’s the last thing on your mind.
You and your spouse may have done some estate planning and feel like you have all your bases covered. A will or a trust? Check. A life insurance policy? Yep, got that. You both designated each other as your primary beneficiary on your IRA, 401K or other retirement plan? Yes, remembered that. If you’re one of the lucky ones, you might have signed paperwork that allows your spouse to still receive a portion of your pension after your death. I bet you’re feeling like the heavy lifting is done and you can be at peace about end-of-life matters. What if I told you, though, that there’s a little-known problem in the U.S. tax code that is going to blow your best-laid plans to pieces? I’m sorry to be the bearer of bad news, but please read on.
The latest figures available from 2021 peg the average male to live 76.1 years from birth and females to live 81.1 years from birth according to simplyinsurance.com. If you’re a married woman and man, that means the wife will outlive her husband a good 5 years, and that’s if you’re the same age. Many women are younger than their partners; they could live on in widowhood for many years. And again, these are just averages as we’re all familiar with friends and relatives who have outlasted a husband’s death for decades.
Without careful planning, widows can pay substantially more in taxes than they paid when they paid jointly with their husbands. Let’s illustrate with an example. Mary and Bob are in their mid-70s and are having the time of their life in retirement. They both draw a similar amount of social security benefits, they earn about $ 2,000.00 a year in interest from bonds, $ 3,000.00 a year in dividends from their mutual funds and they are both taking their required minimum distributions from their retirement accounts. They each have a will, they’ve made all their bank and taxable brokerage accounts joint so that the other spouse can claim the full account upon the death of one and they have each designated the other as their primary beneficiary on their retirement funds. At first glance, they have done everything absolutely right. If Bob passes in his sleep tomorrow, Mary’s income will stay approximately the same, barring no unforeseen bills or other circumstances. Whew!! But wait. Even though her income will stay the same, her taxes could increase significantly and impact Mary’s ability to finance the lifestyle to which she has become accustomed and the one Bob would have wanted her to continue. This is the “Widow’s Penalty”. Let’s say for argument, that Mary and Bob’s income during his last years was around $ 100,000. As a married couple, they would have filed jointly, paid their tax bill, and forgotten about it until April 15th rolled around the next year. If Bob makes Mary his sole heir, her income will still probably clock in at around $ 100,000. She, though, will be filing as a single person and her tax rate will be higher because of that one small fact.
Could this happen to you? Absolutely. Are you just out of luck? That’s a “hard no”. Intentional and deliberate tax and investment planning can help your family’s outcome become a lot happier than that of Mary and Bob. Just know that the sooner you start planning, the better the outlook for the surviving spouse’s future.
I’d love to have a conversation with you, hear your story, and share strategies that can help your family minimize the “Widow’s Penalty” and just plain lead you to better outcomes. Please call me at 563-949-4705 or email me at firstname.lastname@example.org.
Securities offered through J.W, Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered though J.W. Cole Advisors, Inc. (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.