Between rising health care costs, a volatile market and ever-greater longevity risk, women have plenty to worry about when it comes to retirement planning. Add estate plans, powers of attorney and other legal issues to the mix, and things can quickly get complicated.
These issues are particularly pertinent to remarried women and women whose husbands have been married more than once. Boomers have driven a record-high divorce rate among adults 50 and older, and their remarriages and blended families make clear wills and beneficiary designations all the more important.
It’s critical for any client to get their legal ducks in a row, of course, but given their tendency to outlive their husbands, the stakes are greater for women.
“What I find from my experience is that women do address these issues more diligently than men, perhaps because they want to take care of their families and not leave legal messes for their kids,” says Mela Garber, tax principal at Anchin, Block & Anchin.
How can a female client figure out which assets are hers, which belong to her stepchildren and which have yet to be accounted for? If she was the breadwinner, how can she best pass on her earned wealth to her heirs? And if her partner passes, who will take care of her in her eventual time of need?
While advisors can’t draw up the legal documents that address these questions, they can certainly help clients plan. They can also team up and create relationships with attorneys, accountants and other professionals who can act together on clients’ behalves.
Documents in order
“The estate plan is the most important thing any client with wealth can do,” says Kimberly Twombly, first vice president of wealth management at UBS Financial Services. “As advisors, we act as their CFOs, and it’s our job to make sure they get their documents in order and have the right conversations with their attorneys.”
To that end, a revocable trust is a great place to start.
“The reason I often recommend these is they provide certain benefits a will does not,” says Garber.
A trust’s assets may be controlled but not technically owned by the creator, and if the creator dies or becomes incapacitated, the trustee or co-trustee can step in, preventing a costly, drawn-out probate.
“I feel that, especially with today’s market volatility, this is an important tool for making decisions immediately,” Garber adds.
While wills don’t avoid probate, they can be useful for other purposes. Only a will can name guardians for children and leave instructions on how debts should be paid, for instance, and they’re cheaper and simpler to set up.
Important for advisors to note: Whether a client sets up a will or trust (or both), the allocation of the assets it assigns may impact its legitimacy. “Quite often, this is an issue with second marriages,” says Garber. A husband, for instance, might set up a trust from which his current wife is entitled to all income and principal, and from which the remainder passes onto his children from his first marriage when his current wife dies.
“These types of trusts are quite often subject to litigation and present a challenge for money managers,” says Garber. “It’s important to structure the portfolio in such a way to benefit the current beneficiary – your female client – and take into account the future beneficiaries – her stepchildren.”
While some couples don’t make these decisions until after one has passed, they delay at their peril. Wills and even trusts that haven’t been recently updated tend to generate litigation, particularly in families with children from multiple marriages.
Mixed marriages aside, a lack of preparation or an open-ended “I love you” will can also leave a widow in a tough spot. “It’s very hard for a woman to make financial decisions within the first year of her husband’s death,” says Garber. “Very often kids other others start asking the mother for gifts, and it’s very hard to handle when she doesn’t even know whether she has enough to support herself.”
The bottom line: prepare thoroughly, prepare early, and bring couples together before either falls ill. “It’s extremely important for both husband and wife to be part of the estate planning process,” says Garber.
While they’re ideal for most forms of property, trusts can’t contain IRAs, 401(k)s or other retirement accounts while their owners are alive. Trusts can, however, be named as those accounts’ beneficiaries, as can spouses themselves.
Clients typically set their beneficiaries when they create their accounts, but once again, things can get dicey with divorce and remarriage.
“I’ve seen situations where a man remarries, divorces and forgets to the change the beneficiary on his IRA,” says Garber. What happens after his death depends in part on state law, but in general, beneficiary designations override wills. Even a long-divorced ex could get the money.
What’s more, in cases where no beneficiary is named, an IRA defaults to the deceased’s estate, not their spouse. The widow will get the money, but since they’re not the designated beneficiary, they’ll have to take the full distribution within five years – and pay all of the resulting taxes. As long as the couple updates their forms, however, the widow can stretch distributions over her life expectancy and leave the remainder to her heirs.
Just as important are the beneficiary designations on pensions and life insurance policies, the proceeds of which are not part of the estate. Unless the named beneficiaries are dead – or none are named – the payouts bypass probate and go directly to the person on paper.
Health care and long term care
Female clients also need to consider long-term care, incapacitation and the effects they may have on their estates. More than 70 percent of nursing home residents are women, yet 81 percent of women don’t discuss long-term care with their children, and only 44 percent talk it over with their spouse.
But Medicare doesn’t cover all those costs, however, and Medicaid will only kick in once a client has spent down most of their assets. There are legal strategies that allow clients to transfer assets before receiving Medicaid coverage, but like insurance, a favorable outcome requires advanced planning.
Assets aside, clients must also consider what they’ll do – and who will help them – if they become incapacitated.
“We as females are generally the caregivers, and clients often wonder who’s going to take care of them,” says Twombly.
The most important documents here are the living will and durable power of attorney. The former spells out a client’s wishes regarding end-of-life care, while the latter designates an agent to speak on their behalf. Whether the agent is a friend, family member or lawyer, it’s an admittedly uncomfortable conversation that you should nevertheless encourage clients to have sooner rather than later.
Ultimately, these issues will require the help of at least one lawyer, but there’s an important role for the advisor to play.
“Financial advisors know when somethings changes in the family, and they can always keep an eye on their situation and make sure documents reflect those changes,” says Garber.
In addition to the money manager role, advisors can bring together professional teams to benefit their clients.
“A majority of the time, you’ll need an attorney, accountant and financial planner, and it’s unrealistic to expect one person to understand the complexities of all three disciplines,” Garber adds. “It’s very important to have that team working together so the clients gets the true benefits of each professional service.”