When your spouse dies, your world changes. It goes from “we” to “me” in a heartbeat.
If you were used to dividing up the chores, such as cooking, cleaning, cutting the grass or changing the air filter on your refrigerator or HVAC unit, these tasks may now fall on you alone.
And the truth is, this new reality falls on women far more than it does on men since the average woman outlives a man by five years — age 81 to age 76 — according to the latest Centers for Disease Control (CDC) figures.
Compounding the situation, many widows who may not have fully participated in their marriage’s financial decisions may now have to grapple with a number of critical financial decisions to ensure they can continue to survive economically.
It would be totally understandable, of course, to put off these decisions as you deal with your loss — indeed conventional wisdom counsels that a surviving spouse not make any major financial decisions during the first year of grieving — but delays can also be costly.
The fact is, many financial rules and regulations have a timetable all their own. Rather than ignore them, try to familiarize yourself with these financial areas, so that when you need to act, you won’t be starting from scratch. Otherwise, you could be putting your financial future at risk.
Social Security Benefits
If a widow is over age 60 at the time of her spouse’s death, she may be entitled to survivor benefits based on her husband’s Social Security record.
Between age 60 and her full retirement age, she will be eligible for a percentage of her spouse’s benefit. At her full retirement age, she will receive 100 percent of her spouse’s benefit.
There are other factors to consider. For example, if the widow, based on her work record at full retirement, anticipates a larger benefit than her spouse’s benefit, she can apply for the survivor benefit at 60 (or later) and then apply for her own benefit at full retirement age, or later.
“Later” is an important qualifier to keep in mind because if the widow can delay applying for her work benefit up to age 70, she can increase her benefits by about 8 percent each year.
For a person to receive a surviving benefit, she must be unmarried or have remarried after age 60. Consequently, were a widow to remarry before turning 60, she would be ineligible for survivor benefits.
One other important point to remember. If the husband was receiving a Social Security payment at the time of death, the widow must immediately notify the agency to stop payments. If the payments continue to arrive in the mail, she must not cash them. If they’re sent via direct deposit, the widow should open a separate account where the money can be held until it can be returned.
If the deceased spouse had traditional IRA accounts on which his spouse was named as the beneficiary, age again will come into play.
If the widow is younger than 59 ½ and needs to access some of the IRA funds, she has the option to transfer the IRA into an inherited IRA account. Such a move will permit her to withdraw some funds from the IRA without incurring a 10 percent early-withdrawal penalty. The assets withdrawn are taxed as ordinary income.
By taking the inherited option, she can also delay taking IRA distributions until December 31 of the year her husband would have turned 70 ½.
There’s no downside to transferring her spouse’s IRA into an inherited account if she is younger than 59 ½. When she reaches 59 ½, she can simply roll it into her IRA and withdraw from it, as needed, without the 10 percent penalty.
Conversely, if she rolls her deceased spouse’s IRA directly into her IRA account before age 59 ½, she would pay a 10 percent penalty on any funds withdrawn before age 59 ½. But once the funds were transferred to her account, she can postpone taking any distributions until 70 ½, the age when required minimum distributions (RMDs) are required.
If a deceased spouse had a defined benefit pension plan, with survivor benefits, the widow may be able to choose between receiving a lump-sum payout or a lifetime annuity. Because of potential tax implications, this would be a good time for the widow to consult with an accountant, attorney or financial planner.
Handling a Reverse Mortgage
If the widow is listed as a co-borrower on a home with a reverse mortgage, she can remain in the home for as long as she likes, as long as she continues to pay property taxes, homeowners insurance and the costs of maintaining the home. Any proceeds that the married couple were receiving from their reverse mortgage also continue.
If the widow is listed as a non-borrowing spouse on the reverse mortgage contract, she too is generally protected from displacement after their borrowing spouse dies, but the rules and regulations regarding this important protection are largely based on when the reverse mortgage was taken out.
HECMs taken out on or after Aug. 4, 2014:
The nonborrowing spouse may remain in the home after the HECM borrower dies—and the loan repayment will be deferred—so long as the non-borrowing spouse:
- Is married to the borrower at the time of the loan closing, and remains married to the borrower for the duration of the borrower’s lifetime
- Discloses spousal status at origination and at closing
- Is named in the loan documents
- Has occupied, and continues to occupy, the property securing the HECM as his or her principal residence
- Establishes legal ownership—or another ongoing legal right to remain in the home—within 90 days of the death of the last surviving borrower, and
- Meets and continues to meet all of the obligations, such as the payment of property taxes, homeowners insurances and costs associated with maintaining the home, described in the loan documents
If the nonborrowing spouse fails to meet any of the requirements, the loan becomes due and payable.
HECMs taken out before Aug. 4, 2014:
The nonborrowing spouse may remain in the home after the HECM borrower dies if the lender agrees to assign the mortgage to HUD, which will then defer repayment of the HECM, as long as the nonborrowing spouse:
- Is married at the time of the HECM extension and at the borrower’s death
- Resides and continues to reside in the property as a principal residence, and
- Obtains marketable title within 90 days of the borrower’s death or the ability to remain in the property for life.
- Meets ongoing property tax, homeowners insurance, and home maintenance obligations
If a HECM is ineligible for assignment or a lender chooses not to assign the loan to HUD, then the loan becomes due and payable.
Although the non-borrowing widow may be able to remain in the home, under the provisions explained above, all reverse mortgage loan proceeds, including a reverse mortgage line of credit, end with the death of the borrowing spouse.
Final Words of Advice
Conventional wisdom often speaks of not leaping into any financial decision after the passing of a loved one.
Some tax laws, however, may run counter to this usually sage advice.
For example, surviving spouses may exclude $500,000 of home-sale profits from taxes if they sell the house within two years of their spouse’s death, as long as they owned and lived in the house two of the five years before the spouse died.
If more than two years have passed, then no more than $250,000 of the profit is tax-free, possibly exposing you to the payment of more taxes than if you had known the IRS deadline.
This IRS rule may be offset by laws governing community property in your state, but the point is, you need to know the rules, or if you don’t, consult a trusted accountant, attorney or financial professional who does, in order to protect your interests in a timely fashion.