Financial Steps to Take After the Death of A Spouse With Mike Piper (EP.98)

0:29We all need to make smart decisions with our money. to simplifying the task of investing, taxes, and retirement planning. Not only that, Mike has written a ton of books. He has 16 available on a variety of planning issues that I'll be sure to link to in the show notes at thelongterminvestor.com. But in this episode, I've invited Mike to discuss his latest book titled After the Death of Your Spouse, Next Financial Steps for Surviving Spouses. And as he states in the introduction of the book, the goal of his book is a modest one, which is just to introduce you to the most critical financial tasks you'll have to accomplish during this next phase of your life.

1:07And the goal isn't to turn you into an expert on each of the topics discussed. Now, it goes without saying that this discussion and Mike's book is financially focused. Neither of us has lost a spouse, but we've each worked with individuals who've lost a spouse and we've each experienced loss ourselves. So we realize that there are some tremendously important emotional and personal issues, but we simply aren't qualified to be discussing those. So I hope that our conversation can create some clarity on the more objective aspects of financial steps to take after the death of a spouse. With that in mind, here is my conversation with Mike Piper.

1:52Welcome to the Long-Term Investor. I am so excited to have fellow St. Louisan Mike Piper, author of The Oblivious Investor. Mike, thank you so much for joining me here today. Thank you. I'm excited to speak with you. For those in the audience who aren't familiar with your work, I'd love if you could just start us off with a little background on yourself. So I'm a CPA and I started the blog back in 2008. And the idea of it is basically the concept that you don't have to be super tuned into the market every day to be a successful investor. You can just tune it out and that's perfectly fine. And And in fact, it's usually advantageous to do that.

2:30Well, I certainly couldn't agree more with that. One of the things that's impressed me over time is just how many books you've written. It's truly incredible. And today we're going to focus on the latest one titled After the Death of Your Spouse, Next Financial Steps for Surviving Spouses. And curious, what inspired you to write on this topic? It was seeing it firsthand, actually, seeing the real life situations that people go through. Because when a person's spouse dies, pretty much by definition, that's one of the very hardest times in their life, if not the hardest, emotionally speaking. And the way our various systems are set up, right at that moment, that person has a ton of administrative to-do items basically just dropped in their lap at the time that they're least able to deal with it.

3:21To make things worse, there's also the fact that obviously in a lot of households, one of the two people, one of the two spouses will be the one who takes the lead on financial matters. And of course, about half the time, that's the person who dies first. And so then the surviving spouse, they're going through this incredibly difficult time emotionally and psychologically. There's a whole ton of administrative stuff they have to deal with. And they haven't had all the decades of experience built up in dealing with all these matters that the other person would have had. And so I just wanted to provide something that walks people through it in hopefully a simple and understandable way.

3:57Well, I think you did a really nice job. And I must admit, even as someone who does this for a living, I even felt a little overwhelmed when I was just looking at the immediate next steps that you had laid out really simply in each chapter. But when you look at all the different things, and I'm in a good state of mind, I was overwhelmed. And I do like that you broke it into immediate next steps and intermediate next steps. So I know sometimes when you get overwhelmed with any sort of task, the best thing to do is just take that first step. So how would you suggest someone in this situation get started?

4:34Well, really, it's two things that have to happen simultaneously. Number one is just getting death certificates. So we can talk about that. But that process, it takes a little while. You request them and then it's going to be some weeks before they actually show up. So while you're waiting on those, I think the other thing to do is really get yourself organized, basically create a filing system for all the different paperwork that you're going to need to keep and just start learning a little bit about the things you're going going to have to be doing over the next few months. Well, there was a suggestion that you had made early on in the book and then repeat throughout is to make sure to take notes and just to have a notebook so that you remember what you've started and where different things are in the process.

5:15And with something like death certificates, this was actually the first point in the book in which I got a little overwhelmed, was just realizing how many you need. And oh my gosh, this feels like a major incentive for people to simplify their financial lives earlier on before this situation arises. Absolutely. For sure, going to make it easier on your spouse if they outlive you. The fewer number of total accounts that you have, if you've got assets at Fidelity and at Schwab and at Vanguard and E-Trade and all those different places and seven different checking accounts, it's going to be a lot more work than if you've got one place where you've got your investment portfolio and another place where you've got your checking and savings accounts, and that's it.

5:53It's a big difference. This is a question and topic that wasn't addressed in the book, but I'm certainly curious to get your perspective on that's related is that I do feel like maybe there are some things that a couple who is living could do to make things easier on the surviving spouse. And this is even true if you are the surviving spouse that you could do to make easier on your heirs. And so simplifying, reducing the number of accounts seems to be an obvious solution. Are there any things that come to mind having written this book for the surviving spouse that made you think, gosh, there are some stuff you should do in advance of one of the spouse's passing?

6:34So absolutely. Number one is simplifying. Number two is making sure that the appropriate people know where to find all of the necessary information. This happens, unfortunately, often with married couples where one of them literally does not know where the assets are, what company they're with, because the other spouse handled everything. And so that's a tremendous challenge on the surviving spouse. So make sure that that person knows what companies hold the different assets, which insurance companies the insurance policies are with, but then also information about how to sign into these accounts.

7:09Where are all of the records from these accounts over the last several years? Where are the tax returns from previous years? All of those things. Just know that both spouses know where those are. And similarly, you brought up the surviving spouse preparing the kids or whoever it is for when they might need to resolve this estate, making sure that they know where to find all of this information. That's a big thing you can do. Simplifying is another big thing you can do. Another useful thing is the titling of accounts. So retirement accounts, for instance, IRAs, make sure that you name a beneficiary or beneficiaries because A, that is generally beneficial from a tax point of view relative to having it just pass your estate.

7:52But also B, it's simpler because those assets don't have to go through probate. They just go directly to the named beneficiary or beneficiaries. That applies to insurance policies also. That's not just life insurance. It's also annuities. And then other assets, so things that aren't insurance policies or investment accounts, you can have them titled in such a way that it would automatically pass to whoever you name as the other party. So you can own it as joint tenants with rights of survivorship. Certain property can be owned that way. And then it automatically passes to the other joint owner.

8:23Or for instance, with bank accounts, you can have payable on death set up so that it automatically passes to the named beneficiary. And that's going to simplify things. And for some of the things like IRAs, it's also beneficial from a tax point of view. Well, and I think you mentioned titling accounts, which stands out to me as one of the things that people don't do well after having put together estate planning documents. And they spend all this money and time trying to make sure that things move through their estate the way they want to, but then they don't actually fund the vehicles that they set up by titling the accounts correctly.

8:59And maybe a nice transition point is you do have a chapter on some of the estate planning things that a surviving spouse needs to tackle. Can you talk a little bit about those, both from the role of the personal representative, as well as what sort of things people ought to be thinking about updating in their documents themselves? So the personal representative, just to back up a step, that's the catch-all term. It includes the executor of the estate, or if there wasn't an executor, and so the court appoints somebody, that person's called an administrator. But whether it's an executor or an administrator, We refer to that person as the personal representative and their job is basically just to handle the administration of the estate.

9:38So from an estate planning point of view, that person doesn't really have a role because their role doesn't become applicable until it's no longer estate planning. It's now a state administration. But the surviving spouse, they will need to be updating their own estate plan in a lot of ways. So just like we talked about updating the beneficiary designations, because presumably, not necessarily, very likely, the named beneficiary on a married couple's retirement accounts is the other spouse. And so you'll want to pick new beneficiaries, including if you inherit any accounts from your spouse, you'll want to pick new beneficiaries for those accounts.

10:10Of course, the will needs to be updated. If there wasn't a will, that's absolutely time to create one. In the unfortunate case of the death of a younger person, the surviving spouse, maybe they have young children. Maybe they hadn't gotten around to creating a will yet. It's always important to have a will if you have kids, but now it just became even more important because you want to name somebody to care for your children. You want to pick that person. And so it's time to really get on top of that. So there's just a handful of tasks, basically, that the surviving spouse should do to update their own estate plan in addition to administering the estate of the deceased spouse.

10:45And shame on me for jumping ahead a little bit on the personal representative side. I'm glad that you gave it a simple definition. And this is actually a really daunting task in and of itself. And I think in most instances, when I see couples putting together a plan that they are each other's personal representative, but do you feel like there are cases where that shouldn't be the case? And if so, how would you go about advising someone on picking that personal representative, than executor of their estate? The most obvious example, of course, would be an older couple. If one of the two people has started to experience meaningful cognitive decline, if one of the two people has Alzheimer's, for instance, obviously they're not in a position to be serving as the executor, the personal representative of an estate.

11:31So you'll need to pick somebody else. That's the most obvious case. Another important case would be simply the person doesn't want to do it. You know that this is a task that they are simply uninterested in doing. They would much prefer that one of the kids or somebody else in the family or a professional handle those responsibilities. And that's okay. I think that's a wish that should be respected. Obviously, again, it's a hard time in that person's life. If they don't want to be dealing with this, don't make them. So I think those would be the two primary cases. Well, and I think if you are the surviving spouse updating your own estate planning documents, and you have a number of kids, there are sometimes some emotions that go into those choices as well.

12:13That I think I see some people not always really think through who is best equipped and organized and has the time and will be able to move through these different items. It's a lot of work. And the more beneficiaries you have, the more moving parts, the more thoughtful you want to make that choice. And I think a lot of the information that you cover in the book is wonderful on that front. I think once you get past those immediate steps, though, the intermediate term steps have a lot to do with financial planning, whether it's maximizing benefits or minimizing your taxes whenever possible. And I think one place that it might be nice to run through is Social Security.

12:54There seem to be quite a few considerations that go into what happened there after your spouse's death. You can kind of group this into two broad scenarios. There's scenario A with a younger surviving spouse, and maybe there's minor children. In that case, what you'll want to read up on, there's child benefits. So if you have a child who is under 18, or they are 18 and still in high school, then they can receive child benefits on their deceased parent's work record. And there's really no downside filing for those. So you usually want to file for them immediately. Then you might also be able to qualify for what's called a mother slash father benefit, which is if the child is younger than 16 or disabled, and that would be a benefit that you're receiving rather than the child receiving.

13:43Now that one, again, there's usually not a downside to filing for it, but if you're younger than your full retirement age, which you probably are if you have a minor child and you're still working, then we have the social security earnings test, which could result in your benefit being reduced or potentially eliminated. But those are the things you're going to want to look into right away. There's child benefits and mother slash father benefits. And on the other hand, the obviously more common scenario when somebody passes away is when they're more advanced in age. And then for the surviving spouse, there's two benefits they want to be thinking about.

14:17Number one is their own Social Security retirement benefit. And number two is their benefit as a surviving spouse. and the general strategy that they want to use in this situation is to figure out which of those benefits has the potential to grow to a larger amount. So survivor benefits max out at full retirement age, which is somewhere between 66 and 67 and retirement benefits max out at age 70. So you want to figure out what would my survivor benefit be at full retirement age? And what would my retirement benefit be at age 70? And then whichever of those two amounts is larger, you want to leave that benefit alone and let it grow to that larger amount.

14:59And you want to file for the other benefit as early as you can. So in the case of a survivor benefit, that would mean filing at age 60. Or in the case of a retirement benefit, it would mean filing at age 62. But the idea is file for the smaller benefit earlier, and the other larger benefit continue you to grow until it maxes out. There are some exceptions. Again, the biggest one is if you're still working, then you need to think about the earnings test, which usually means you should wait for the smaller benefit until your full retirement age or until you retire. So there's a little bit of additional complexity here, but usually the idea overall is you want to file for the small benefit and let the other benefit max out.

15:35Now you have a social security tool that you developed, right? Yes. Open social security.com. It's a calculator. It's free. should be pretty easy to use. Most people tell me, and you basically just enter in your information and it will recommend filing ages. And so for a surviving spouse situation like this, you would sell it marital statuses, widow slash widower, put in the applicable information, and it will determine for you which benefit you should file for earlier and which benefit you should allow to grow. It's a great free resource for people to check out. And I'll be sure to link to it in the show notes at the longterminvestor.com.

16:10One thing that a calculator isn't always readily available for that you talk about are the inherited IRAs, where I think there's really a lot of tax planning opportunities. Are there some mistakes that you feel like are really easy for people to walk into if they're not aware of the nuances there? So with an inherited IRA that you're inheriting from your spouse, the primary options as of right now are to continue to own it as a beneficiary, a spousal beneficiary, or you can just basically roll it into your own IRA. And then it's your own IRA as if it had been your own IRA to begin with. And if you roll it into your own IRA, then it's all the regular rules.

16:51So RMDs start at currently 72, but we're pushing that up. If it's a spousal, so an inherited spousal IRA, then there's a handful of differences in the rules. And one of the most important ones is that when you take money out of it, if it's a traditional IRA, it's going to be taxable, but it won't be subject to the 10 % penalty, even if you're younger than 59 and a half. And so a really important planning point for a surviving spouse who is younger than 59 and a half is that it often makes sense to leave this money in that inherited IRA account so that they can spend from it without the 10 % penalty if they need to.

17:28And then later, once they do reach 59 and a half, that's the time to think about rolling it over into their own IRA. That's the biggest mistake I see. And starting in 2024, we're going to have yet another option, which is act as if you are the deceased spouse, but that's not applicable yet. So we'll see exactly how the rules work out in terms of regulations and so on for that. Yes, the Secure 2.0 Act is going to bring a lot of interesting stuff to this sort of planning. And we're kind of getting deeper and deeper into some of the more complex issues. I think one area that I don't think people spend as much time thinking about as they should is just disclaiming assets altogether or partially.

18:11Could you go through a little of what it means when someone disclaims assets and when you feel like it maybe makes sense for a spouse to do so? The general idea of disclaiming is you're named as the beneficiary of whatever this asset is. And you're just saying, no, thanks. I don't want to inherit that. And so it goes next to whoever is next in line to inherit it. So that's a key point. Some people think that if they disclaim it, they get to pick who it goes to and no, you do not. So if it's an IRA, it's going to go to the contingent beneficiary or beneficiaries, similarly with a 401k or whatever.

18:44If it's an asset that's listed in the will, that specific asset might have a contingent beneficiary named, or if it doesn't, then it just gets lumped in with all the rest of the assets and gets distributed accordingly. There's a couple of reasons why people would want to do it. Sometimes number one, this is less common, but it does apply in some cases, is if they really just don't like how the deceased person distributed their assets. For instance, if you think that somebody got the short end of the stick, so to speak, and if that person is the contingent beneficiary, then you could choose to disclaim this asset and it would go to that person.

19:23And that could be preferable from a tax point of view relative to just taking it and giving it to them. The more common case that I see is tax planning. And basically the most common situation would be that you are the named beneficiary and we're talking about a tax deferred account. So if you inherit it and start taking money out of it, you're going to be paying taxes on it. And if you have a particularly high tax rate, then it's going to be paying a high tax rate on these distributions. Whereas perhaps the named contingent beneficiary or beneficiaries have a lower tax rate such that if you disclaimed it and they ended up getting it, they could take distributions from the account and pay taxes at their lower tax rate.

20:01And most often that would be the case if, for instance, we're talking about the children or the contingent beneficiaries and they're still early in their careers or haven't started their careers yet. That's when they'd be most likely to be able to take distributions at a lower tax rate. And that's when disclaiming would be more likely to be beneficial. And you don't have to disclaim everything. You can pick and choose and even do percentages. Absolutely. For any asset that can be divided. So IRAs, for instance, yeah, you can disclaim half of it or two thirds of it. And then you will inherit the amount that you don't disclaim.

20:32And then the contingent beneficiaries get the portion that you chose to disclaim. That's exactly right. And it's just examples like these where the multi-generation planning comes in and can be so effective and ultimately lead to a lower tax bill, not just necessarily for yourself, but for your entire family. And I think that that longer term view sometimes can get lost in the mix, in part because people don't know the rules, but also because they're not necessarily working with an advisor who's thinking about the different time horizons of different family members. And I think the last few chapters of the book are very financial planning heavy.

21:08And I'm obviously biased, as I'm sure you are to some extent, of the benefit of using a financial professional that acts as a fiduciary at all times is really, really valuable. I'm curious from your perspective, if you are trying to look for qualities in an advisor, whether that's to hire after your spouse has died or to hire before a spouse has passed, what are some of the things that you would suggest people look for? Number one, I do think it's important that they're a fiduciary. I always provide a caveat there though, which is that as I'm sure you've seen, the industry regulation of that fiduciary standard, it's not as strictly enforced as some of us might like to see.

21:51There are cases where people do have a fiduciary obligation to their clients, and then the advice that they give the clients is perhaps not in that client's best interest when you look at it from an honest point of view. So you still have to be careful. Just because someone has a fiduciary obligation to you does not necessarily mean that they are going to honor that fiduciary obligation. But nonetheless, it's better to work with a professional who does have that obligation. So that's thing number one to look for. The second thing to look for is simply their experience and expertise. Financial planning is a really broad field.

22:22I think it's a lot broader than people outside of the field recognize. One person simply cannot be an expert in every single subtopic within the financial planning world, just like in the medical profession. A gastroenterologist is not going to do your heart surgery. They're not even going to think about doing it. They're going to refer you to somebody else. So same thing in financial planning. Every financial planner has some areas where their knowledge is stronger and some areas where it isn't as strong. And so either A, find an individual who their skills and expertise match up very well with what you need, or working with a larger firm where they have a broader range of professionals can be advantageous there.

23:07And then the third thing that I always say is to just pay attention to compensation. Basically, every compensation model has conflicts of interest. There's no way around it. But if you want somebody who's going to be providing you with ongoing advice, then a compensation model where you're an ongoing client, so you're paying assets out of management or a flat fee every year, and they're going to be proactively reaching out to you, that makes a lot of sense. Conversely, if you think you're somebody who just, you have do-it-yourselfer tendencies, and you really just want somebody to look into this one particular topic for you, then somebody who does short-term engagements like that is going to be a better fit.

23:43Neither one's better or worse. It's just one is a better fit for this type of person and the other is a better fit for that type of person. I love all three of those points that you hit on, particularly the first one that just because somebody is acting as a fiduciary by law or they're upheld to that standard doesn't mean that they are always going to be doing what's right or always have the expertise that you're looking for. And understanding compensation should definitely be one of those first meeting, first phone call questions that everybody asks. So Mike, I appreciate you sharing those things.

24:15We'd kind of referenced this earlier and I just referenced it again, that oftentimes I find that people either entering retirement or having recently retired will have one spouse who knows where everything is and they've made all the financial decisions throughout the course of their life. it dawns on them, I might need a backup plan here. You also mentioned something earlier about cognitive decline, which is never a fun topic to talk about, but I think we have to be realistic when you are taking care of something as important as your finances. Thinking of this backup plan scenario, what do you think about that approach for couples who are living?

24:53I would say it can be very important to have a professional in place to help in those situations. If that's the concern, I would say, though, don't just think about in your head who that person's going to be. Because then if your spouse has never met them, when the day comes, they're not necessarily going to want to work with that person because they don't know them from any other person. And they might end up working with somebody who is not the professional you would have chosen, suffice to say. If that's somewhere in your records that they don't know where to look for, they don't even necessarily know that that was the person you suggested.

25:26So engaging that professional now can make a lot of sense for that reason, to actually get your spouse on board with that professional. And for the other reason, if what we're concerned about is cognitive decline as opposed to your death, well, obviously, you have to deal with cognitive decline when you're not experiencing it. By the time you're experiencing it, you don't necessarily know you're experiencing it. You might, but at that point, you're not in a position to deal with it very well. So it's important to actually engage this professional in advance, in my opinion, if that is the goal.