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Why should I care to leave money behind when I’m gone?

Why should I care to leave money behind when I’m gone?

June 08, 2023

Not so long ago a friend of mine passed away. I was not their financial advisor nor was I doing their tax returns. 

They knew I could provide both services but never asked me any questions.  So I had to assume that if they didn’t ask any questions they didn’t want any help, or they had someone helping them already.

However, with great sadness it’s come to light that they did not have a good plan in place and no one helping them and now the surviving spouse is in a very bad financial situation for the rest of their life.

Spouse 1 retired some years in the past and had access to a traditional pension plan.  As with many of those types of plans when you retire you have to make decisions as to how you would like your retirement benefits to be paid out after you retire.

There are usually a variety of choices ranging from you get paid as long as you live and nothing after that, to receiving lower monthly payments but a surviving spouse gets payments until they pass and a variety of other options depending on how your plan is written.  Each choice usually has a different monthly payment amount associated with it.

In this case and for reasons that will never be known, Spouse 1 that just passed had apparently chosen the option to get payments for as long as they lived with no continuing payments to the surviving spouse. 

That probably resulted in the largest monthly payments compared to other options and might have even made sense from a health standpoint at the time that decision was made in the past.

However, some years into retirement, Spouse 1 developed cancer and recently passed away.  

No more pension payment income to Spouse 2 for the rest of their life.

To make the importance of this choice even more critical is that they had refinanced their mortgage later in life to take advantage of lower interest rates and there is still a mortgage to be paid even though Spouse 2 no longer gets that pension check to provide funds to make the mortgage payment because of choices made by Spouse 1 years earlier.

Spouse 2 has one half the income available when both were alive, but even with Spouse 1 passing, the expenses did not drop 50%.   Some expenses decreased such as food, clothing and personal care, but large expenses such as a mortgage and utilities are still there.

Fortunately for Spouse 2, the child that is intended to inherit the house after both parents pass has the financial ability and willingness to step up and provide funds for the mortgage so that the house does not get foreclosed on and Spouse 2 becomes homeless or forced to rent for the rest of their life.

What’s your long-term plan? 

Did you refinance a few years ago to take advantage of lower interest rates but now have a mortgage that doesn’t mature until years after you retire?

If you are married what happens if one of the income streams goes away while there are still large financial obligations for the surviving spouse?

Have you looked at your financial spending now and compared it to if either of the income streams stops and how the surviving spouse can or cannot make ends meet after the first one of you to pass goes?

Are you approaching retirement and haven’t done a financial forecast into your first few retirement years for where the money will come from for those long-awaited travel plans and also that mortgage still being paid off?

I am now their tax and finance guy so starting to get some insights into the family finances and what could have been had different choices been made.   As is common in many families, one person handles most of the finances and the other one is happy to let it be handled.

In this case Spouse 1 handled all the finances and the tax return and Spouse 2, the surviving spouse did not have a clue where to start or what to do.   Is that the situation in your family?

Have the parents talked to the children old enough to understand finances what the plan is if one or both parents suddenly are gone? 

Is there a trust in place to help survivors know how to settle your finances?  If you have minor children do you know for sure which household they will grow up in and have you set aside finances to ease the financial burden on that family perhaps even funding their college that you won’t be around to pay for?

Has your financial advisor talked through these issues including the tax consequences of these deductions and choices since these financial decisions very much include tax planning and whoever does your tax return may only be doing the annual compliance tax filing and offer no actual planning services.

If too many of the answers to these questions is No, then perhaps its time we start talking so I don’t find out about these after it’s too late to actually put a plan in place.  Hope is not a plan.

The information in this and other articles is intended to be educational in nature only.  Not tax, legal or investment guidance for you specifically.  Each person’s situation is unique and you must seek appropriate professional guidance that can address your unique situation.