Navigating and reviewing a complicated estate plan after losing a partner may feel unnecessary to your client during such a tragic time. However, it’s important that the surviving spouse understand that there are important and timely decisions to be made regarding their family finances. Because it’s common for one spouse to handle their family’s tax and estate planning, the widow or widower may be left with a convoluted financial situation and a lot of questions.
Surviving spouses often assume that the estate plan was completed before their spouse’s death, and no further action is needed. However, estate planning should be perpetual: As your client’s circumstances and goals change, you should review their estate plans with them. Estate plans are complicated, often involving many facets of your client’s life, including planning for the handling of your client’s financial affairs in the event of incapacity and guardianship of minor children. This is where a financial advisor can come in—to help make an extremely difficult transition just a little bit easier.
Review the Whole Picture
Besides the emotional toll, surviving spouses typically confront complicated financial circumstances. At Tiedemann, when a client passes away, we review the decedent’s and survivor’s entire estate. In several instances, we’ve found incomplete beneficiary designations and incorrect titling of assets. In one situation, we discovered assets that the survivor was unaware of, which allowed for planning opportunities to transfer wealth tax-free. With the loss of a spouse's income, these kinds of discoveries can serve to ensure financial security for a surviving spouse.
Don’t Delay
When a spouse passes away, make sure the widow/widower understands that there are deadlines for making some decisions. Even amid grief, it's crucial for the surviving spouse to prioritize reassessing finances and reviewing the estate plan. For example, the surviving spouse may disclaim their interest in some of the decedent’s assets to allow them to transfer to other beneficiaries, but this must be done within nine months from the decedent’s death. This can be a powerful wealth transfer tool as it allows the surviving spouse a second look at the overall estate plan. The surviving spouse may also need to make a portability election on the decedent’s estate tax return to maximize the amount transferred estate-tax-free to the next generation. If the decedent’s plan didn’t include a revocable trust, it’s possible their estate will need to go through probate. However, there are time lines associated with probate as well.
Prepare for Legislative Change
As has been reported extensively, the Biden administration proposed significant changes to the estate tax regime, including a possible decrease in the exemption amount, removal of a step-up in basis and a reduction in certain wealth transfer strategies. While it appears that the proposed legislation may not make its way into the final spending bill, it’s likely some changes will occur at some point in time. As such, we believe it is essential for the surviving spouse to be engaged in the estate planning process now to ensure that the couple’s goals and intentions are met.
It’s important to take the long view when it comes to potential tax changes. While it’s important to be ready to react, it’s equally important not to overreact. Over the past few decades, federal taxes have been changed multiple times. The shifts tend to be incremental, rather than dramatic and weighed along with other factors, such as the outlook for inflation and the prospects for economic growth.
Building Trust Creates Lasting Relationships
From an advisor perspective, building trust is the key to helping widowed spouses navigate intricate tax and estate issues. History suggests that most surviving spouses end the engagement of the family’s wealth advisor soon after the death of the spouse, most often because the surviving spouse doesn’t have a bond with the advisor. It’s important for advisors to build relationships with both spouses to avoid this situation. Doing so puts the advisor in the position of the family confidant, assuring continuity for both the client and the advisor.
Steve Aucamp is managing director at Tiedemann Advisors.