Outline:
Losing a partner is a deep emotional loss, often leading to a second challenge: financial confusion involving legal complications and unexpected tax issues. From being excluded from assets to dealing with a “widow’s penalty” that may increase tax rates, the transition from a partnershipManaging finances on your own can lead to possible expenses.
The Wall Street Journal sought guidance from financial advisors and other professionals on methods to help secure agrieving spouse is prepared for the road ahead.
Surprise debt
Survivors are frequently taken aback to learn that their late partner had personal credit card debt, noted Chris Bentley, the founder of Wings for Widows, a nonprofit organization that assists individuals with financial matters following the loss of a spouse.loss of a partnerBentley remembered a widow who discovered a $5,000 balance on a store card under her husband’s name.
Bentley recommended that the widow inform the creditor about the passing, and the company decided to settle the debt. He mentioned that creditors frequently find it more economical to cancel minor debts rather than go through the official probate procedure.
In numerous states, if a credit card is solely in one spouse’s name, the surviving spouse is typically not legally required to settle the debt. However, regulations differ: In “community property” states like California and Texas, Bentley explained that spouses could be responsible for debts accumulated during the marriage, even if they did not personally agree to them.
Locked out of accounts
Assets that belong exclusively to the deceased must go through probate—the legal process of confirming a will—before they can be passed on to a surviving partner. In certain areas, this procedure can last over a year, preventing the spouse from accessing essential funds.
Avi Kestenbaum, an estate planning attorney based in Mineola, New York, has witnessed situations where surviving spouses were required to take loans from their children to cover everyday costs, even though they possessed a significant estate.
To prevent these delays, Kestenbaum suggests:
Revocable trusts: Assets placed in these do not require probate. Joint ownership: Property or accounts owned jointly are automatically transferred to the surviving owner. TOD/POD designations: Including “Transfer on Death” or “Payable on Death” on bank and investment accounts enables immediate transfer. Individual liquidity: Each spouse should have sufficient funds in their own separate account to cover several months of expenses.
Invisible credit records
Some widows are taken aback to discover they have minimal or no personal credit history, according to Carla Adams, a financial advisor based in Lake Orion, Michigan. If one partner managed all credit accounts and loans, the surviving spouse may seem nearly invisible to credit agencies—despite having substantial household assets.
Since credit systems monitor personal borrowing instead of family assets, this absence of a record can create challenges when trying to refinance a home loan or get approved for a credit card.
To prevent this, both individuals should ensure they have active credit listed under their names, Adams stated.
New budgets
Melissa Estrada, a financial advisor based in Calabasas, California, recently assisted a widow who was taken aback by her monthly expenses. Since her late husband handled all the financial matters, she hadn’t been aware of the true cost of their way of life—including insurance, car payments, housing, children’s tuition, and other smaller regular expenses like subscriptions.
After performing the calculations, she understood that preserving the lifestyle she had with her spouse would necessitate a major adjustment: going back to work, greatly reducing her and her children’s expenses, or a combination of both.
She is now required to manage a financial crisis while also assisting her children in dealing with their sorrow,” Estrada stated. “She’s striving to keep them all afloat.
To prevent unexpected surprises following the passing of a partner, Estrada suggests that couples meet each month to go over their financial matters. If one spouse is unwilling to engage with the details, it becomes even more crucial for the other spouse to maintain thorough records for the surviving partner, she mentioned.
Higher tax brackets
Another adjustment that many people don’t expect is transitioning from submitting taxes together as a married couple to doing so as a single person, according to Elliott Appel, a financial advisor based in Madison, Wisconsin.
Even if a single Social Security benefit ceases upon death, individuals who receive survivor pensions and are required to take minimum distributions from other retirement accounts might end up in a higher tax bracket, he explained. This scenario is referred to as the “widow’s penalty.”
A person who has lost a spouse can typically file as “married filing jointly” for the year their partner passed away. If there are dependents, the surviving partner may be eligible to file as a “qualifying surviving spouse” for up to two years after the year of death.
Appel also converses with victims aboutRoth conversions, which may lower distributions and tax obligations.
Write to Veronica Dagher atVeronica.Dagher@wsj.com