Compass Asset Management Group

1. Update your financial accounts.

When you lose a spouse, you’ll likely need to change the registrations on any financial accounts that are owned jointly. Such ownership changes typically require certain documentation.

If you’re widowed, you need to provide your financial institutions with copies of your spouse’s death certificate in order to shift accounts from joint ownership into your own name. In a divorce, changing ownership requires first determining how you’ll divide jointly owned assets. Usually this is through court orders and/or divorce agreements. Then securing any signatures guarantees or documentation required by your financial institutions will be needed to make the necessary changes.

Caution: Attention needs to be paid to the conditions and methods under which you divide assets or change ownership. Following the wrong advice could result in significant tax burdens. You should consult your tax or financial planner…not your broker.

2. Divide or roll over retirement assets.

Pension and retirement account assets have their own set of rules when it comes to changing ownership or splitting the assets.

Death of a spouse
Generally, upon the death of the account owner, retirement account assets will pass directly to the beneficiaries designated on the account. Some questions to consider in this case might be 1) Should you withdraw funds, 2) Should you rollover the assets into your own IRA or 3) Do you create a Beneficiary IRA or 4) Waive your right to the assets? The answers might not be easy. Do you need the money now? Will you be subject to tax and/or penalties? Will you be required to take a required minimum distributions? What will this do to your estate? Depending on your personal circumstances, the answers will be varied. It’s important to consult with a financial planner or accountant to evaluate your situation before making decisions.

The next critical issue to address here is updating the beneficiary designations on your own retirement accounts—such as 401(k)s, 403(b)s, and IRAs. Even if your will were to include your retirement assets, your beneficiary designations supersede them.

Divorce

Retirement assets are often split up as part of a divorce settlement through a qualified domestic relations order (QDRO). A QDRO is a legal arrangement that either recognizes an alternate payee’s right to receive (in this case the ex-spouse) or assigns to that alternate payee all or a portion of his or her former spouse’s retirement account balance and/or pension benefits.

IRAs are divided through a one-time distribution from one spouse’s IRA into the other spouse’s IRA, without income tax or early withdrawal penalties. But this must be a court-approved transfer; otherwise, the distribution is treated as taxable to the original account owner, while the spouse on the receiving end gets the money tax-free.

3. Re-evaluate your income and budget.

Chances are, when you’re suddenly single, you may be taking a cut in your income, so you may need to adjust your budget accordingly. Start by listing your essential expenses (housing, food, insurance, transportation, etc.) and your discretionary expenses (dinners out, vacations, clothing, etc.). Try to match reliable sources of income (salary, Social Security, pension, etc.) to your essential expenses and see where you might trim your discretionary spending.

If you’re near retirement or are already retired and fear an income shortfall, you might consider creating a regular source of income by focusing your portfolio on income producing investments or yield. This can turn your retirement savings into a source of predictable income that you can use to budget wisely.

4. Evaluate your insurance needs.

What you’ll have and what you’ll need for insurance can change dramatically when you lose a spouse through death or divorce. It’s important to take a careful look at all the different types of insurance that are available to see where you may need to adjust your coverage. Be sure to review:

Life insurance. If you are the surviving spouse and the beneficiary on your deceased spouse’s life insurance policy, you will typically receive the proceeds tax free. But if you are still caring for children, you may want to either purchase or increase your own life insurance coverage to make sure they will be protected in the event of your death.

If you divorce, remember to consider (1) changing the beneficiary on your life insurance if it is currently your ex-spouse, and (2) purchasing or modifying your coverage to adequately protect your children if either you or ex-spouse dies.

Health insurance. Even if your spouse carried your family’s health insurance coverage, you can continue to maintain it for a period of time, whether you are divorced or become widowed.

Through the Consolidated Omnibus Budget Reconciliation Act (COBRA), if you’re going to lose health benefits (because of death, divorce, job loss, etc.), you can continue coverage for up to 36 months—so long as you pay the premiums, which can be up to 102% of the cost to the plan.

Because COBRA coverage is expensive in many cases and doesn’t last indefinitely, you may want to check out other insurance options, whether through your own employer or by evaluating individual plans available through the Affordable Care Act (ACA).

Disability insurance. We all hope we will never need it, but disability insurance is one of the least understood and most useful ways of protecting ourselves and our loved ones. What if you were injured or sick and couldn’t go to work? Disability insurance is designed to protect you and your loved ones against lost income.

Long-term-care insurance. If you’re over the age of 50, you may want to consider buying long-term care insurance (LTCi) to help keep potential costs of nursing home stays and home health care from depleting your income resources if you become seriously ill or injured.

5. Review your credit.

When you’re suddenly single, your credit can be among your most valuable assets—so protect it wisely. After divorce or the death of a spouse, you may want to request a copy of your credit report to take inventory of all the accounts that are open in your name and/or jointly with your former spouse.

If you’re divorced, you’ll want to close joint credit accounts and shift to single accounts so that an ex-spouse’s credit score won’t affect your credit rating. If you’re widowed, contact all three credit bureaus (Experian, Equifax, and TransUnion) to let them know that your spouse has passed away, to keep others from falsely establishing credit in his or her name.

Unfortunately, a surviving spouse is often responsible for paying the deceased spouse’s credit card bills, whether these were joint or individual accounts. It’s always worth calling the credit card company, however, to negotiate better payment terms if necessary.

6. Maximize Social Security benefits.

Here’s some good news: Even if you’re now on your own, Social Security recognizes that you were once part of a married couple, and offers benefits to both surviving and ex-spouses. Widows and ex-spouses are generally entitled to 50% of their former spouse’s Social Security benefits, if those benefits would be greater than their own Social Security benefits.

As a surviving spouse, you can receive full Social Security benefits at your full retirement age or reduced benefits as early as age 60. A disabled widow or widower can get benefits as early as age 50.

If you’re divorced, you could be eligible for Social Security benefits, based on your ex-spouse’s record, if those benefits would be greater than your own retirement benefits. However, your ex-spouse must be eligible for Social Security benefits, and generally you must be unmarried and at least 62 years old. In addition, you must have been married for at least 10 years.

You can’t avoid the turmoil that comes with divorce or the death of a spouse, but recognizing how your personal finances might change could help you make thoughtful, rather than rushed, decisions and provide more solid financial ground as you transition to being single.