Financially Preparing for the Loss of a Loved One

January 25, 2018 · Written By William Reynard, CFP®

When a spouse or family member passes away, you’ll face numerous financial and legal matters during an emotionally trying time. Even if you’ve always managed your family’s finances, you may be overwhelmed by the extensive list of what needs settled in the weeks and months following your loved one’s death.

From navigating life insurance claims to understanding estate taxes, death raises many complex financial issues. For this reason, advisors strongly encourage advance planning to minimize additional strain. Depending on your stage of life, financially preparing for the loss of a loved one may take different forms, but don’t assume that it’s ever too early to start.

Planning Essentials

The most common preparation is to be adequately insured with life insurance benefits that will fund your lifetime needs and goals. You’ll want to purchase enough coverage to replace income or pay for services your spouse provides for the family, such as childcare or other housekeeping duties.  You also need life insurance to help cover the debts that would fall onto someone else after death.

While many people don’t start thinking about life insurance until their late thirties, bear in mind that the younger you are when you purchase your plan, the more money you’ll save over time, since younger buyers receive lower rates. As a result, most financial advisors recommend buying young and selecting a life insurance plan with the longest possible term (e.g., buying at age 25 and selecting a plan with a 40-year term). When assessing how much coverage you need and when it’s the right time to purchase, consult a financial planner that will ask the right questions and provide advice that is catered to your unique circumstances and concerns.

Of course, your circumstances may change over time—perhaps at age 25, you did not anticipate having four children by age 40. When reality pans out to be different from your expectations, revisit how much life insurance you now require.  It’s rarely advisable to cancel an existing policy, especially if you purchased it at a young age and secured a low rate.  Often times, it’s more sensible to keep your existing plan and simply add a new plan to increase the overall value of your life insurance.

It’s also never too early to ensure the essential estate planning documents are in place. These may include an advanced health care directive, which states your wishes for medical care, and a durable health care power of attorney, which names someone to make medical decisions on your behalf should you become unable to do so.  A financial power of attorney will also outline who has the ability to make your financial decisions should you pass away or become incapacitated.

Additional Planning

To avoid surprises and financial hardships in the event of death, couples and close family members need to be open and transparent with each other about their finances early on. It’s imperative that one’s intended beneficiary has a copy of their life insurance policy, knows the steps to take and how to contact members of their legal and financial support teams.  Better yet, the beneficiary should be actively involved in meetings with the estate and tax attorney, tax-preparer and financial planner long before their loved one passes away.

Your advisor can help you compile a checklist of short-, intermediate- and long-term financial matters that will need to be addressed following a death. This includes everything from managing lingering debt to handling final wishes outlined in your loved one’s will.  Your advisor can also entertain possibilities of altered goals and various financial decisions ahead of time.  For example, in the event of your spouse’s death, should you sell the house, leave your current job, etc.?  This will help you understand the impact of each of your options and help you better prepare to execute challenging decisions when the time comes.

Debt After Death

Given the prevalence of credit in our society, most people now leave at least some debt behind when they pass away, even if it’s just a small amount of credit card debt. Fortunately, most credit card debts are either insured or paid out of the deceased person’s estate. However, the surviving spouse will still need to contact credit card companies of the deceased to indicate that they have passed away. In some cases, it may be required to provide proof (e.g., a death certificate) to close the account. Do bear in mind that if spouses hold a joint credit card, the account cannot be closed; the surviving spouse will now be solely responsible for any remaining debt.

Taxation Considerations 

Estate taxation is a complex issue that few people could or would want to navigate without the help of an experienced tax professional. One reason is because most inheritances are considered taxable income by the IRS. In more than twenty U.S. states and districts, additional taxes apply at the state level. Moreover, while death benefits offered through life insurance policies are usually tax exempt, there are exceptions to this rule. Retirement benefits left to a beneficiary, however, are generally treated as taxable income.

To avoid leaving your loved one with a sizeable tax burden, consider preserving your Roth IRA, if you own one, throughout your lifetime. Your financial advisor can help you explore other exemptions that may assist in lowering the tax liability you leave behind.

Alerting Credit Bureaus 

As we’ve witnessed from the recent Equifax data hack, fraudsters are always on the prowl when it comes to compromising personal data. Sadly, identity thieves often target the recently deceased.

To ensure no one assumes your deceased loved one’s identity to obtain false identification papers or commit frauds, financial advisors recommend that you contact all three major credit bureaus (Equifax, Experian, and TransUnion) as soon as possible to alert them of your spouse’s death.

When faced with a tragic loss, it’s important to surround yourself with people you trust—family, friends, support groups, professionals—who can offer support and advice that’s in your best interest. A Certified Financial Planner (CFP®) can work with you to develop a financial plan well in advance of the death of a loved one, helping minimize the stress and uncertainty of an unfortunate situation.

As Senior Lead Advisor for JFS Wealth Advisors, Bill has over 17 years of experience helping his clients and their families attain financial freedom by tailoring holistic strategies to build and protect their wealth.  If you have questions relating to this or other financial planning topics, contact Bill at breynard@jfswa.com.