EDITOR'S NOTE: This article was originally published in the March 2008 issue of Kiplinger's Retirement Report. To subscribe, click here.
The key to many successful marriages is a division of labor. Often one spouse assumes the role of the financially knowledgeable partner, responsible for investments, bill-paying and record keeping. More often than not, especially among couples 55 and older, it's the husband who manages the family finances, according to financial planners and other experts.
But a spouse who's in financial control does his partner a disservice if he doesn't explain the kinds of investments they have, the intricacies of retirement plans, and when bills are paid and income checks are due to arrive. A couple's carefully constructed plan could unravel if the financially astute spouse dies or becomes incapacitated and the other spouse is not prepared to take over.
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Financial planners and estate-planning lawyers share scenarios involving financial ignorance. For instance, when he retired, a husband took a higher monthly pension payment that ended at his death five years later; if he had taken a lower payout, his wife would have been covered for her life. She lost $150,000 in benefits and was forced to sell her house. If she had known this sooner, the two may have been able to make plans to avert such a drastic action.
Even an unexpected windfall can cause problems. One widow knew nothing about a $20 million life-insurance policy her husband left for her. Enter an adult son, who wanted to control the fortune for his mother and siblings, creating a lot of family tension. She and her husband could have planned for how she would handle the money, and what role, if any, their adult children would play in managing it.
Preparing an information binder may be the greatest gift you could leave your spouse. Mehmood Nathani, founder of Altius Financial Advisors, a financial-planning firm in Bethesda, Md., recommends dividing the information into five categories:
Assets. This category covers all investments, the amounts, owners and locations, such as banks and brokerage firms. Information on real estate holdings, their worth and the beneficiaries fall into this category. Also include a schedule of payments from annuities and passwords to Web-based accounts.
Liabilities. List all debts, such as a mortgage and car loans. The list would include the start date, the term of the loan, the interest rate, the size of monthly payments and when they are due, and the balance.
Insurance. List all policies, including medical, life, homeowners and disability. Include premiums and their due dates.
Estate plan. This includes the location of wills, trusts, powers of attorney and advanced medical directives, as well as contact information for the estate lawyer, executors and trustees.
Other relevant information. Note the location of the safe-deposit box and keys, and the contact information for any advisers. Include Social Security statements, tax returns, birth certificates and a description of pension benefits. Record any monthly income. List the monthly bills and whether they are paid automatically, online or by check.
Teaching the Financial Basics
This list is just a starting point. Sit down with your spouse and discuss what else he or she needs to know. For example, the spouse should know how to go about claiming unpaid bonus pay from your employer or how to recover any death benefits.
Keep a calendar of important financial dates. For example, certified financial planner Mary Malgoire, president of the Family Firm in Bethesda, Md., cites these key dates: providing tax information to the accountant in February, filing estimated taxes by the quarterly due dates, and taking the minimum required distribution from an IRA, if you are over age 70 1/2, by December 31.
One of her clients, a widow, learned the pitfalls of financial unawareness the hard way. After her husband died, the bank sent her his entire IRA balance, a distribution of $600,000. Says Malgoire: "She held on to it past the 60-day limit and then had to pay 30% of it in taxes. It was a costly mistake." Her husband could have told her not to close out the IRA, but instead to roll it into her own IRA.
The non-financial spouse should practice paying bills alone for a few months and reviewing statements from brokerage houses. "We try to work with both partners so that they both understand what they have and where it is, and what's going to happen to an asset if a spouse gets ill or dies," says Kathleen Kuehl, a financial principal at Lowry Hill, a financial-planning firm in Minneapolis.
Consider involving your grown children, so that there is family backup for questions, says Julia O'Brien, an estate-planning lawyer with Furey Doolan & Abell, in Chevy Chase, Md. She also warns seniors not to hire their own contemporaries to be their advisers without bringing in a younger person at the same firm for protection. "I hear all the time, 'My lawyer died and I don't know what to do,' " she says.
Of course, not all couples use financial advisers. In one case, the husband chose all stocks and bonds. He died recently, and his wife says she has no clue when the dividends or bond interest will arrive or how much they will be. She says the broker who her husband used to execute trades wants to manage her assets, but she's not sure that she can trust him. In cases like this, Nathani advises, the widow should "pay for outside hourly advice from someone who is objective, such as a fee-only financial planner." The financial spouse should line up that person during the education process.
Make sure each spouse has relevant documents if either becomes incapacitated. A spouse does not have automatic rights to an account if it is held only in the name of the other spouse. The healthy spouse would have to ask the court to be named the financial guardian, which could tie up money for weeks.
A case in point: A husband was scheduled for minor surgery, says O'Brien. Before his hospitalization, the couple went to a general lawyer, not an estate lawyer, to make a will. They failed to draw up a power of attorney for the wife. The man's surgery was botched, and he wound up in a coma and died. His paychecks had been directly deposited into his bank account, which the wife had no access to. To avoid this situation, O'Brien says that spouses should keep a joint account, with enough money to pay for several months' worth of expenses.
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