John and Susan called me to discuss an important matter that catches many people unaware. “I’m considerably older than Susan,” John said. “We live very well, and I want to make sure she’s financially secure if I die first. Also, I want to make sure she isn’t overwhelmed by financial details.”
Susan looked a bit glum. “It’s true that John runs the household finances, and very well. But it can’t be all that tricky, can it?”
I offered a two-word answer: “It can.”
John and Susan are fortunate that they have considerable assets — but they are complex. Both John and Susan have assets of their own from prior to their marriage, as well as those accumulated together. These assets include two homes, investments, several pensions and annuities. Leaving their assets — and their well being — subject to risk is the last thing they want to do. So where to begin?
To start, I congratulated John and Susan for acknowledging the potential problems that could crop up. Many couples don’t want to face the fact that one of them will die before the other. Often, the surviving spouse is a woman who has left financial control to her husband (although it can also work the other way).
Thinking they’d better not challenge fate, the couple does nothing to prepare. Then when a spouse does pass away, the survivor’s emotional wounds can be deep. This makes it difficult to deal with practical — and often complex — financial issues.
“Engaging in estate planning now,” I said, “is really important. Here’s how to approach it.”
First, know what assets you have. Put together a list of all your accounts and advisors with all their contact information, plus user IDs and passwords for online accounts. Give a copy to adult children, your advisor, your attorney and/or a trusted friend.
A good tip: each year at tax-preparation time, go through and update your documents and list together. Also make sure both of you participate in meetings with your advisors, so you both have relationships with these important professionals.
Then decide how much cash flow will enable either of you to live as you want. Where will the money come from? Most likely, you’ll have a number of income streams. Start with Social Security benefits. If both of your receive them, the higher benefit will continue and the lower will be lost. “Probably a minor part of our cash flow,” John said.
“Yes,” I responded, “but Social Security is still important in a world as unstable as ours, particularly if you want to leave substantial assets to your children.”
Then there are pensions. The highest benefit will be based on the participant’s lifetime. But not all pensions are the same. Many have a minimum 50 percent spousal benefit. Some don’t.
“It sounds so complicated,” Susan said.
“Simplify,” I advised. Consolidate your accounts — bank, brokerage, credit card, loans, insurance and retirement. Then review your estate plan. Make sure it reflects your current wishes in terms of beneficiaries, trustees, executors, charitable giving and attorneys-in-fact for power of attorney. As for beneficiaries, the primary should be your spouse unless there’s some compelling reason against that. Important: Before naming a trust as your beneficiary, consult with an estate-planning attorney.
There could be other complicating factors: For example, many spouses have separate assets and/or beneficiaries. Since California is a community property state, a second marriage like John and Susan’s might produce joint earned income and thus community property, as well as separate property. Make sure the survivor can put his or her fingers on exactly what actions are necessary for each group of assets. A revocable living trust can help.
Finally, if you feel that one spouse or the other will be unable to function as an executor or trustee, appoint a contingent executor or trustee. Children most commonly serve in this role. Occasionally, this produces a conflict of interest and nasty fights can follow.
If you’re uncertain about whom to name, choose another individual in addition to a child or children. Preferably there should be an odd number of trustees with majority rule required for decisions. Or consider a professional fiduciary — someone legally bound to put your interests first.
“I feel better,” John said at the conclusion of our meeting. “Me, too,” Susan added, “but there’s a lot to do.”
I gave them two thumbs up. “Working together, we’ll take it one step at a time. And better now than later.