How Spousal Planning Creates Greater Confidence in Retirement with Nick Nelson – Ep 111

As couples approach retirement, their biggest question is typically whether they’ve saved enough to cover their expenses and enjoy the retirement they’ve worked so hard for. But what happens when one spouse passes away? The decisions you make today will undoubtedly affect the surviving spouse’s income, taxes, investments, and overall financial security.

In this episode, SHP Financial co-founder Matthew Peck is once again joined by Nick Nelson, VP of Advisory Solutions, to discuss why spousal planning is such an important (and often overlooked) part of retirement planning. They explain why both spouses should be involved in the financial planning process and how preparing in advance can provide greater confidence and continuity when the unexpected happens.

Ultimately, spousal planning is about preparing for the difficult questions before you’re forced to answer them under duress. Matt and Nick share how planning ahead can provide greater confidence that both spouses understand the plan, know what to do when the unexpected happens, and have the right people in place to help guide them through it.

In this podcast interview, you’ll learn:

• Why both spouses should understand the basics of their financial plan.
• How Social Security and pension decisions can affect a surviving spouse.
• Why expenses may not decrease significantly after one spouse passes away.
• How losing a spouse can dramatically change your retirement tax strategy.
• Why inherited IRA decisions require careful planning for surviving spouses.
• How beneficiaries, trusts, and proper account titling can help avoid costly mistakes.

Resources

• IRMAA
• SECURE Act

Inspiring Quotes

• “If one spouse is more involved with the finances, that advisor makes both spouses feel involved, hears concerns on both sides, and answers questions because doing that creates a stronger plan, creates a stronger bond, ensures long-term goals are met.” – Nick Nelson

• “Taking the time to not make an emotional decision, mourn, reassess the plan over time, work with that advisor to figure out what does my lifestyle looks like moving forward, I think is so important.” – Nick Nelson

• “If you don’t have an advisor that understands all of the different angles, then you truly don’t have a plan. It’s not comprehensive, and things will fall through the crack.” – Matthew Peck

[INTERVIEW]

Matthew Peck: Welcome, everyone, to another edition of SHP Financial’s Retirement Roadmap podcast. I’m your host today, Matt Peck. The topic that we’re going to be discussing today is spousal planning, which at first you might think, “What exactly is spousal planning?” I mean, here you are, you’re a financial advising podcast, and I understand what investment planning and tax planning and things along those lines, that kind of is pretty, at least pretty… You’d understand the fact that it’s there. But spousal planning and all the factors and the family factors and the emotional factors and the decisions that you have to make is a huge part of financial planning because not only does it take the household from going into retirement, but then about looks beyond, looks to see what happens next if a spouse were to pass, and all of the impacts that come from there, impact on income, impact on taxes, impact on probate and inheritance.

So, it goes on and on and on. So, we couldn’t think of a better expert or insight than Nick Nelson, a recurring guest. You probably know him already. You’re probably like, “Oh my God, yes. Yes, Nick is on the phone. Shut up, Matt. Bring him on.” And without much further ado, Nick Nelson, welcome back to the show.

Nick Nelson: Thanks, Matt. Appreciate it. Good to be back. Good to be back on the podcast. And I think today’s topic is one that often does get overlooked, but it’s also very powerful, so looking forward to getting into it.

Matthew Peck: Now, was this inspired because of Scarlet? Because I’m not sure if all the listeners know, but we’re very, very proud to share the news that Nick Nelson welcomed baby number two to the Nelson family

Nick Nelson: Yes. Yes, she was born in June. Everyone’s doing well. We’re super happy and grateful. So, I would say that maybe was a little bit part of it, Matt. I’m not going to lie. I think about it all the time now, being a family, then people you have to take care of. And myself, obviously with my job and everything, I’m more involved in the finances. Lexy, my wife, is not so much interested in the finances. So, I like to think I’m still young and I have a lot of years left. However, if something did happen to me today, I can tell you, personally, that would be a worry for me. Would she know how to access all of our information, all our accounts? Would she know what even to do next or where to start?

I’m not sure she would, and I think it’s so important to work with families to help get them there so that there isn’t that stress and lack of confidence if something catastrophic does happen

Matthew Peck: Yeah. Well, so okay, so let’s just start with the basics. So, how would you define spousal planning, and why is it so important to you?

Nick Nelson: Well, when someone passes, as we were saying, it’s super emotional. It’s very emotional. And the last thing that people like to think about is money and finances a lot of the time. So, if we can help our clients kind of relieve some of that stress and make it so we can guide them, and so they don’t have to worry about, “Hey, are my bills going to be paid? What am I supposed to do here? How is my income going to continue as it’s been going?” Then to us, that’s doing our job, and I think that alone is a huge value add for working with advisors. And I’m sure, Matt, you have some clients that probably come to mind. A lot of times people might work with an advisor for that reason alone, just because they understand investments.

They feel good about things, but they’re getting older, and they’re like, “All right, I want to make sure my family’s taken care of, my spouse is taken care of. That’s a big worry for me. I want to find an advisor I can truly connect with, I can truly trust and help me get to that place.”

Matthew Peck: Yeah, because I’ll certainly use two words for you. I mean, number one is confidence, right? When we talk about a good plan, whatever the plan might be, but let’s just say an overall financial plan, it gives our clients the confidence to go into the boss to say, “Yes, I’m going to retire,” you know, to take that leap, because it’s a massive leap. I mean, you go from having working income. You go from having a routine. You go from having a purpose to a certain extent. You know exactly why you’re waking up every single day. Whether it drives you nuts or not, that’s a different story. And then you retire, and that’s a big leap for many of our clients. But when you have a good plan, then they have the confidence to do it.

And I’ll use that same idea in regards to spousal planning, right? Where it’s like, okay, if we’re asking questions like, okay, what Social Security are we going to take? And then what’s the impact on the spouse? Are you aware of the tax ramifications if something were to happen to you, and there’s only a single spouse remaining? Does everyone know where all the important documents are? I love that vault feature that we have on our platform that our clients have access to online and whatnot. But all of that just leads to confidence. It leads to confidence that, hey, I know that if something were to happen to me out of nowhere, that my wife or my husband is in, that it’s going to be as seamless as possible of a transition at that point, and that I’ve addressed all of these issues, right?

Like, I know what’s going to happen to my Social Security now because I do have a spousal plan, and I do have an advisor in place. And then the other word I was going to say is just continuity, right? Where, okay, I know that if I’m working with the right advisor who’s a fiduciary, they’re going to make sure that all of those decisions that we made at the beginning when we established the spousal plan get followed through all the way to the end, and that type of continuity is important.

Nick Nelson: Yeah, absolutely. And back to just like talking about what a good advisor does, upfront, which helps with the overall plan but also the spousal plan, is making sure that maybe if one spouse is more involved with the finances, that advisor makes both spouses feel involved, hears concerns on both sides, answers questions because doing that creates a stronger plan, creates a stronger bond, ensures long-term goals are met. And if something does happen, it helps relieve some of that stress because whoever that surviving spouse is, they know there’s a plan and they have an idea now of what’s going on. And they also feel like that advisor understands them as a person, which I think is also very important.

Matthew Peck: Well, and I was going to say, I mean, we absolutely insist that both spouses are involved in somewhat shape or form, right? And it’s tough, because the stereotype is that the husband does all the finance and the wife doesn’t. Definitely not all the case. I have plenty of clients where it’s the exact opposite, where the guy’s gone fishing, and the wife is handling everything. So, if we ever do step on stereotypes, be clear that is not the case, and we’re well aware of that. But we need to insist that they’re there, that they’re part of the process, they understand at least where everything is, and we certainly insist and make sure that all of our advisors are trained to speak to whichever spouse might not be super involved, right?

So, I’m going to go with the stereotype. Let’s just say it’s the wife of this situation. We want to make sure that every advisor is asking the wife to say, “Okay, yeah, the husband might be driving this conversation, but do you agree?” Are the priorities the same when it comes to legacy planning, like if we want to leave behind something for the kids? Do you agree with what the spending budget is? And do you agree with the risk amount? You know, things like that, and really targeting that spouse to make sure that they’re just as involved in the financial planning process, because it is so important at that point. So, these are all the reasons why a spousal plan matters. So, let’s get into a little bit into the block and tackle, and I’ll sort of break it up into two separate stages, right? Because there’s the establishment of the spousal plan,

And then there’s sort of like what happens afterwards when a husband or wife does pass away. So, where do you begin? Like, how would you say like, okay, a good spousal plan has these five elements. Like, what would those five elements be, or what are some of the elements of a good spousal plan?

Nick Nelson: Yeah. So, at the end of the day, you have to make sure first your overall plan, your current plan is up to date. Your advisor understands your income goals, your expenses, the risk tolerance on both sides like you’re just talking about. But then start to think about what income pieces that you have in place and how when someone passes, those income pieces are going to be impacted. There are various things there. The most common, and some might say the most obvious, is the impact on Social Security. So, when a spouse passes, both of those benefits do not continue. The larger of those two benefits will continue, but that goes back into what you were saying, Matt. It’s like our decisions today actually impact our spousal plan down the road.

Because let’s think of it this way: if you have two spouses, one has a much larger Social Security benefit, it could make sense in certain cases to defer that benefit as part of the larger spousal plan so that that benefit will be maximized and continue on for that surviving spouse, especially if there’s differences in longevity and age and health or things of that nature.

Matthew Peck: Well, it’s a great point. Sorry to interrupt. It’s a great point because I think very often, we’ll have folks that will come in, and they’ll say, “All right, Matt, don’t worry, I already did my, break…” We call it a break-even analysis, right? And what a break-even analysis is, for all of our listeners, is to say, “Okay, hey, if I take Social Security at 62 or 65 or 67, when do I break even? Like, is it better for me to have taken it at 70 versus 67? And at what point do the benefits outweigh each other,” right? And we’re able to pinpoint if you’re just looking at the financial impact, we’d say, “Okay, if you delay it until 70 and then you live until 84,” I’ll say your break-even age is 84. So, how do you want to bet? What’s your longevity? Do you want to bet that you’re going to live beyond 84? And then people make a decision based on their Social Security.

Nick Nelson: Yeah

Matthew Peck: So, at times, people will come into the office, they’ll say, “Matt, I appreciate the fact that you guys do a break-even analysis, but I feel pretty good. I did my own.” I’m like, “Oh, that’s good. I can dig it. I’m into the stuff.” Then I’m like, “But wait a second. What’s the impact on your spouse?” And they’ll say, “Oh, well, right.” And then suddenly it’s a whole new conversation because, all right, let’s take that break-even analysis and let’s see, obviously, not only to what your spouse’s benefits are, but let’s play the morbid game, right? Like, if you pass away, if you take it here and pass away there, then what? And so forth and so on.

Nick Nelson: Yeah, it’s just understanding the impact. And obviously, claiming Social Security benefits, there’s a lot of other factors into that too. Like, we like to look at it in a more of a comprehensive way versus in a vacuum. So, you want to look at the impact on your portfolio if you do take it earlier versus later. Say, if you defer, what are you going to have to distribute from your portfolio? What’s the impact on taxes deferred, deferring that investment for compound growth? Things like that. So, that’s one thing that there’s a lot of things that go into it. But I think the spousal aspect of Social Security benefits is something that’s often overlooked and shouldn’t be, because it’s a big part of most spousal plans.

Matthew Peck: So, just for all of our listeners, tell us exactly what happens with Social Security, right? You just said it quickly, but just to make sure everyone knows what the impact is when whoever passes away.

Nick Nelson: Yeah. In a basic example, the larger of the two benefits will continue to that surviving spouse. So, say that maybe who was older had the larger benefit, and who was younger has the smaller benefit. The older spouse passes away. Basically, they’re going to take the younger person’s benefit and then bump that up to basically equal that larger payment, and that’s going to be the payment that continues. So, if someone has $40,000 a year coming in and the other has 20, the one passes away, $40,000 will continue, but that’s a $20,000 reduction in income that’s coming in into their plan, which obviously creates an income gap that then needs to be filled with other strategies or assets.

Matthew Peck: Well, even before we get to the income gap, because this impacts when both spouses are living, there’s also when to take Social Security is going to get impacted on the fact that there’s spousal benefits, right? So, we’re talking about the widow benefit, and the widow benefit gets the bump up or the higher check is the one that lives on. But there’s also the spousal benefit where you could potentially get 50% of the check, or of the higher income earner, right? So, explain that part.

Nick Nelson: Yes, correct. So, if one person has a smaller benefit, then as long as their spouse has triggered Social Security, they can get up to 50% of their benefit as long as they take at full retirement age. If you take it before full retirement age, that younger spouse, it won’t be the full 50% of the benefit. However, if you take it at full retirement age, it will be. So, that’s another factor in regard to the spousal plan, but that would be an impact while both are still alive versus after one were to pass away.

Matthew Peck: Yeah, but that’s exactly my point, is the fact that spousal planning is while both are living.

Nick Nelson: Correct, yes.

Matthew Peck: And then also what happens when you pass away. And that’s a great example. Spousal benefit’s going to impact your income plan right now while living, and then widow benefit, and the choices that you make will impact the income plan after the spouse passes away.

Nick Nelson: Absolutely. Yep.

Matthew Peck: All right. And then there’s also pensions. And the impact on the pension. So, I mean, walk our listeners through some of the decisions that are there.

Nick Nelson: Yeah. So, with pensions, they’re a little bit less frequent and seen a little bit less than they used to be. However, we still run into various clients that do have pensions, and we have to make a decision what is the best option. You might see option A, B, C, lump sum versus 100% joint survivor, 50% joint survivor, and that goes back into that overall plan, but also the spousal plan and understanding what’s going to continue on to that surviving spouse. And you do have to factor in things like longevity, health, age differences, things of that nature, also projected income gaps to make the correct decision there.

So, I think a lot of people, before they think about it a little more deeply and more comprehensively, they’re like, “All right. I want to maximize the payment. I want the largest payment out of this pension. I’ve worked so hard my entire life. I’ve put so much money into this program. I want the single life option. It’s going to give me the most amount of money up front.” And that could make sense as long as there’s a plan on the back end for the surviving spouse, but oftentimes somewhere in the middle also could make more sense, so you’re not getting that huge income gap that you’re used to living off of when one spouse does pass away. And that kind of leads into the conversation of budget and expenses.

I think a lot of people like to think, “Okay, if I’m living by myself, I’m going to spend less money,” and that’s not always the case. And one reason for that, too, is the tax side of things. Obviously, you’re filing jointly. You’re in a little bit better tax bracket. One spouse passes away, that’s going to move you to a single filer. You’re going to be basically paying a little bit more in taxes in terms of rates. And then on top of that, lifestyles don’t tend to change maybe as much as people think. So, that’s a big piece of it, too, is revisiting that budget, revisiting those expenses, and making sure that that’s aligned as well around these decisions, so when you’re looking at pension, Social Security, factoring all those various things in.

Matthew Peck: Well, I was going to say, and I absolutely want to spend some time obviously on the taxes. Absolutely want to go back to that and to make sure that our listeners understand the difference or the significance of married filing jointly versus filing as a single taxpayer. But to go back to the impact of budget and lifestyle, right? And to what I was mentioning a little bit earlier about confidence, I enjoy having those conversations with both spouses while obviously both still living, to say, “Hey, Mrs., what do you think that you would do if your husband were to pass away?” And let’s play that, again, play that death game. It’s not a lot of fun, but also, it’s a fact, right? And I say this, it’s like no one gets out of this alive, right?

So, you have to face it, and then you have to have these conversations, and lifestyle again is one of them. And so, when I first meet clients, I’m having that conversation to say, “Okay, if either one of you were to pass away, what would you do?” And sometimes we have some spouses that say, “I would sell this house immediately, and I couldn’t wait to downsize.” We have other spouses that say, “No, this is exactly where I want to be. This is exactly where my friends are. And nothing would change, or as little change as possible.” Anecdotally, we certainly tell or advise when the actual event happens, don’t do a thing, right? And grieve. You need to take that time. But having that thought experiment to say like, “Okay, how would things change? In your mind’s eye, how would that look?”

And very often people, when they stop to think about it, they’d say, “Oh, wait, yeah, I probably wouldn’t dramatically…” Unless one of the husband or wife has some seriously high spending behavior, budget-wise doesn’t really change, especially if they’re going to stay in the same house. You’re still paying the same real estate taxes. You’re still paying the mortgage if there is one. You’re still paying the same utilities. Maybe food goes down a little bit, but usually you’re going out to eat a little bit more, right? All of those different factors. So, I would say no matter what happens, when we do plan, we don’t plan, not all the time obviously, but in general we’re not planning to say, “Okay, hey, if I pass away, we’re going to cut your expenses in half.” Like, no, when we project out on their income plan, we assume that their income never change, or I’m sorry, their expenses and their needs never change, death or no death.

Nick Nelson: Yeah, absolutely. And obviously every situation is different, but that’s why, as you said, taking the time to not make an emotional decision, mourn, reassess the plan over time, work with that advisor to figure out what does my lifestyle look like moving forward, I think is so important.

Matthew Peck: Well, and sorry to interrupt. And that’s where I finally got to my point, “Oh, right, I didn’t make it. Now I got it.” It goes back to the confidence aspect, right? To be like, “Okay, hey, my advisor had this conversation with me before these types of events happened.” So, I have the confidence to say, “Okay, I faced it.” Not to say it’s going to solve all the grieving or whatnot, but you’re going to have a lot more confidence to say, “Look, my advisor and me, we took a look at the plan, and it was still maintained and was able to sustain the loss of a spouse.” And that’s just confidence. That’s confidence to enjoy your lives together because you know that when that day comes, hey, that spouse is going to be taken care of. And that is such a powerful feeling for a husband and wife. Regardless, you’re going to want your loved ones taken care of. And when we can give them that confidence, when the planning, when we take a look at all these different aspects and able to share that with them, ah, it just, yeah. It makes you happy, man.

Nick Nelson: It really does make a huge difference. And if you’re listening to this and you’re kind of thinking to yourself, “Should I be doing more in regards to a spousal plan? Should I be talking to my advisor more about this?” Even if you don’t have an advisor, kind of ask yourself, or even ask your spouse, “Can you explain the basics of our financial plan? Do you have a rough understanding of our finances?” And if the answer to that question is no, that’s okay, but it also presents an opportunity to have more robust conversations around things like this and/or schedule that meeting with your advisor and sit down with them and be like, “Hey, I know we talked about this three years ago, but it’s really just coming to the forefront in my mind right now. Can we go back, revisit this plan, and at the end of the day, make sure that my wife or my husband feels really confident about what we’re doing?”

Matthew Peck: No, absolutely. So, yeah, again, that’s why I just love doing what we do, and proud of, obviously, what the planning that SHP offers. Okay, so back to the actual, again, nitty-gritty. So, we figured out what the income difference is going to be, or we talked about it, you know, talked about Social Security and pension and budget and lifestyle and whatnot. You mentioned taxes. I stopped you. I’m like, “Cool out. Let’s talk about taxes later.” Nick, that time’s come.

Nick Nelson: Taxes, yeah.

Matthew Peck: Let’s talk about the impact on taxes. What is that difference between married filing jointly to single? And why is that such an impact? And how does that impact RMDs and all the other features that go into tax planning?

Nick Nelson: Yeah. So, when we build income plans, Matt, one thing we do look at is the tax impact. So, say you’re right now you have both spouses, you’re filing jointly. We’re going to look at those tax brackets and be like, “Okay, what is a tax-efficient withdrawal strategy for your plan?” And what I mean by that is where should we actually pull from in terms of assets? A lot of our clients, they have post-tax assets, they have qualified assets pre-tax, and also some Roth assets. And often what we’ll do is we’ll use our planning software and these different decisions around how this stuff is factored in and figure out what is the best tax strategy alongside your income plan.

So, sometimes it is taking more heavy from IRA, sometimes it’s taking a lot heavier from post-tax because we’re purposefully staying under a certain tax bracket. But you can go much more in depth on that and say, “Oh, let’s also look at IRMAA,” which is income-related monthly adjustment amount for Medicare Part B. So, you don’t want to pay that penalty, obviously, if you don’t have to. All those things add up to your budget and your expenses. So, what changes when one spouse passes away is we have to reevaluate all of that, because now you’re filing single, so everything is basically bumped up in terms of those brackets, and you could be paying a pretty, you know, up to 10%, 12% more in some cases on your taxes as a result of that if the income plan is not reevaluated and adjusted.

The good thing is, if you have an advisor, that’s what we do. We’ll reevaluate that income plan and say, “Hey, if we stay on this current path, that’s going to increase your IRMAA by over $100 a month moving forward down the road, of course, because it looks back. But at the same time, you’re going to pay another 10% to 12% on your money coming in. We need to reevaluate this. This is no longer efficient.” And then that, of course, piles on top of the expense and the budget conversation too, to revisit that and make sure we’re also not taking out money that we don’t need, because then you’re taking away compound interest, long-term growth, and you could be paying more on taxes on money you don’t need to be. So, all these factors kind of tie together to make sure that that plan’s going to be best for you moving forward.

Matthew Peck: Yeah. And so, I mean, it has to, right? Because think of it this way, back to the whole idea of the sort of like the widow tax, right? We were just talking about budget. We were talking about how, let’s just say, you’re spending $150,000 a year in retirement, when now if there’s only one single individual there still paying $150,000 of income or budget needs, well, the tax brackets are basically cut in half. You lose half the deductions. You lose half of some of those age 65-year-old deductions. I mean, everything sort of just gets cut in half. But if you’re still spending the same, right? So, now you’re paying married, filing jointly, paying on $200,000 versus a single on $200,000 in order to net the 150 is like almost I wouldn’t say double of the taxes, but it’s a significant increase. It’s a significant penalty that the widow or widower has to stomach.

And so, that’s why, as you were saying, we’re aware that this is going to happen. And so, okay, let’s take a look before, while both spouses are here. Okay, let’s take advantage of the higher tax brackets to consider things like Roth conversions, knowing that IRMAA is always lurking, right? We got to obviously be aware of that penalty because if we don’t take action now while both spouses are alive, we just know we’re setting ourselves up for failure or for much higher taxes if we don’t.

Nick Nelson: Yeah, couldn’t agree more, Matt. So, I think you’re kind of getting the idea at this point. There’s so much to do even before a spouse passes away in terms of to prepare and put yourself in the right place, but there’s also a lot to do after it, too. So, one thing that comes up often is people will ask us when someone passes away, “What do I do? Like, how do I get this money into my name, and what are my options to do so?” That’s also a critical decision as well when it comes to spousal planning because spouses have some unique options, a little bit more flexibility than, maybe, say, a non-spouse would have, as an example. I think through this podcast, if you’re a listener, you’ve heard us talk about the SECURE Act a little bit, most recently the SECURE Act 2.0, which changed how accounts, especially qualified and pre-tax accounts, were inherited, right?

So, now you have to factor that into your decision. So, if you’re a non-spouse, in most cases, there are some exceptions, you have to distribute those assets down in 10 years. Being a spouse to spouse, you have more flexibility. As I was saying, you’re what’s considered an eligible designated beneficiary. That’s kind of language that they incorporated through the SECURE Act, which makes it so you do not have to distribute your assets over 10 years. You do have some more flexibility there. But you still have options, and basically what those options are is you can take an inherited IRA, keeping that money out of your name, basically in your deceased spouse’s name as an inherited account, or you can roll those into your own IRA, which is a unique feature of being a spouse. The benefit of moving it to your own IRA is simplicity for management.

It’s going to be your own account. You don’t have to worry about two different calculations for RMDs and things of that nature. And when that makes sense, yeah, that’s a great route to go. But you need to understand the other options and the impact. So, one example that I think could be a mistake that people could make, if you’re that younger spouse, especially if you’re under 59 and a half, and let’s say you move that into your own IRA, but you need to access that money, now you have a 10% penalty on accessing that money that maybe you weren’t aware of. But if you keep it in the inherited account, you can actually access that money without that 10% penalty. It’s still obviously taxable, but that’s super critical when making those decisions.

And then you can look at it on the flip side too, Matt, where if you’re older and you already are taking your RMDs, and say your younger spouse passed away and you don’t need that money, it might make sense not to roll that over into your own IRA because then you’re forced to take required minimum distributions that you don’t need, which as we talked about before, takes away from compound growth, and it creates additional taxes that you have to pay. So, every situation is different, and I think you kind of are understanding it’s more complex than just moving it into your own name. But hopefully that gets the point across like working with an advisor you’ll help make those right decisions and not just say, “Hey, I don’t care. I want it in my name. I just want it as simple as possible,” because that can lead to a mistake

Matthew Peck: And I think what I would point out there specifically is IRAs, which IRAs, 401(k)s, all this pre-tax dollars, a lot of people that are entering retirement, a majority of their assets are in these pre-tax IRA dollars, right? Everything that you’re just explaining right there is all wrapped up in this IRA money. Like, what to do with this? Should I do a Roth conversion, and when should I do a Roth conversion? And what’s the impact there? And if I don’t do a Roth conversion, what’s the impact on the RMDs when I get of age at that point? And what about my income needs in between? And now you add on that additional feature of inheritance, especially with the spousal plan on the IRA money.

And I think it just shows the complexity of what we do, right? Whether it’s the spousal plan or really anything that we do, it’s like you have to look at it from all of these different angles. You have to understand what all of your different options are, because as you said at the beginning, Nick, I mean, everyone’s situation’s different. And so, whatever that combination of options, combinations of withdrawals and spendings and withholdings and Social Security options and lifestyle. I mean it’s all specific to each client’s situation. But if you don’t have an advisor that understands all of the different angles, then you truly don’t have a plan. It’s not comprehensive, and things will fall through the crack.

And again, when you feel that things are falling through the cracks, A, you don’t want it to happen at the wrong time, but, B, back to my word about confidence of knowing that, okay, if you know that everything has been, all the Ts are dotted, and all the Is are crossed. Have I got that right? Nope. Ts are dotted, wait.

Nick Nelson: Close.

Matthew Peck: Well, you know what I’m saying.

Nick Nelson: I know what you’re saying. Yeah.

Matthew Peck: Is dotted, Ts crossed.

Nick Nelson: There you go.

Matthew Peck: Then that’s the confidence that you get going into for both you and your spouse at that point. Now, and I kind of want to not, and morbidly by no means, but talk a little bit about that, about the inheritance specifically. Because now we talked about tax planning. We talked about the impact of income. The importance of beneficiaries. And so, what happens at settlement when the husband passes away, the wife passes away? What happens with the surviving spouse? How difficult is that process? Anything that you want to share with our listeners there?

Nick Nelson: Yeah. Well, it can be difficult if you’re not properly set up for that. If you have individual accounts that do not have beneficiaries, the home’s another good example. We were talking about this before, Matt. Hopefully this isn’t your situation, but you were saying if my home was in my name, there’s a chance that that would have to go through probate, because it’s not properly titled in both names or through a trust, which would be even better. So, those things can come up, and those would be huge headaches for that surviving spouse. The probate process can be very lengthy, and it can be very expensive, and nobody wants to deal with that. But the good news is that can be avoidable by properly setting up beneficiaries.

And a lot of our clients, too, that we have trusts, revocable trusts, or even sometimes layers on top of that to ensure that things don’t go through probate and assets are distributed as they should be. So, what we do with a lot of our clients who do have estate plans and work with attorneys is we’ll then coordinate with those attorneys, work alongside those attorneys to make sure that the distribution of assets are done properly, and there are no mistakes that are made on their behalf. In certain cases, the tax impacts, if the assets are not distributed in the correct order and the correct ways, can also be pretty enlightening and open up and be like, “Wow, I did not know I was going to pay 40% on that money.” So, you have to be super careful of that too.

And also, then that’s why we work with attorneys, right? We’re not attorneys. We’re not going to tell you, “Hey, you have this trust. This is where the assets should go,” but we are going to help facilitate that process, execute on that process, and make sure that everything is where it needs to be.

Matthew Peck: And I’ll just say as part of that, that beginning part of the plan, beginning part of the spousal plan versus the after, it is so crucial during the beginning part of developing this spousal plan of a beneficiary review. Let’s take a look at every single one of your accounts. How is it titled? Who are the beneficiaries? Can it be joint-owned or joint tenancy with rights of survivorship, tenants in common? Is there a trust in place? Has the trust been funded? I mean, that happens before. That’s clearly part of the before piece of the planning because, obviously, once someone passes away, then that’s it, right? You’re stuck. And so, for anyone that has an advisor or is looking for one, just make sure that those questions are being asked, or certainly ask yourself those questions too.

It’s like, have I looked at my beneficiaries recently? I mean, it’s such a simple thing, right? But everyone gets around to doing it because it’s tedious, and whatnot, and you got to track it all down. So, I just really wanted to emphasize that part.

Nick Nelson: Yeah, and there’s also little things on top of that too, like step-up in basis as well. There are opportunities for those types of things depending on how assets are owned. And those are things, again, that’s going to save you money in taxes and make your plan that much more efficient. And you just made me think of something kind of funny. My team might think, or our team might think it’s not funny, but for every review meeting that we have, even if it’s a client that’s been here for three, four, five, six years, we still review beneficiaries to make sure that nothing is missing, and that if there are changes, those are applied. And more importantly, like you said, Matt, that trust funding is properly done.

A lot of people that we meet with for the first time, they might have a trust, which is great. It’s great that you have a trust, but a lot of times it’s not properly funded to the level that it should be, and if it’s not properly funded, it’s not going to do its job when one of these circumstances actually arise. So, those are those little pieces that good advisors do that we’ve baked into our process, and we just do repetitively over and over and over to make sure that nothing is, in fact, missed and a client’s not negatively impacted.

Matthew Peck: Just a simple, powerful, but mandatory thing that you need to do at that point. So, that’s why kind of I appreciate the spousal planning and how, again, it all factors into our five worlds that we talk about, you know, income, investments, tax, legacy, and healthcare. But you talked a little bit about basis. Go back to the cost basis thing. I think that was a good point. I want to kind of explain that a little bit because some of the opportunities that are there, I think sometimes get missed too. And so, just for our listeners, very quickly, cost basis is the difference between what you buy an asset at and then what it’s worth. And so, let’s say you bought a stock for $100 and now it’s worth $1,000, $100 is your basis, $1,000 is the value.

And then okay, now you have a $900 gain that you have to deal with. And there are a couple different ways of dealing with it, of course, and I’ll try not to get too far into the weeds. However, step up in basis and cost basis and adjusting those bases can happen at planning or can happen in regards to a good spousal plan. So, just give a good example if you can.

Nick Nelson: Yeah. So, to your example, Matt, right, let’s say you took that same example, and let’s say you sold that asset. You would owe taxes on the money that you made as a result of that sale. If you hold it for a year, you’re going to pay long-term capital gains rates, which are typically going to be 15%. It does go up to 20. It can be as low as zero, but most people kind of find themself in that 15% range. However, if you don’t sell that asset and you pass it on, if it’s an individually owned asset, you should be able to actually step that up to 100% of the current price at date of death. So, let’s say you had an asset you bought for $1,000. It’s now worth $10,000. Upon passing, you can actually create that new cost basis at $10,000. And then if you sold it, you wouldn’t owe any long-term capital gains at that point in time.

Now, that’s a very small, basic example, but let’s say it’s on a much larger scale and you bought an asset for $100,000, and now it’s worth $2 million. Think about the taxes that could potentially be applied in a situation like that. Now, with joint-owned assets, you’re not going to get a 100% step-up. You’re typically going to get half of that. But still, that’s still going to save you a lot of money in taxes on the back end. So, those little pieces that are factored into the spousal plan are so important. And I think for the average person, who’s going to think of that stuff? You know what I mean? Like, if you’re not advised and you’re not thinking about this and doing this stuff every day, how are you going to know to take that step-up in basis and not sell too early or whatever it may be? It’s a hard thing to do.

Matthew Peck: Yeah. And that’s why I really wanted you to explain. Thanks for that, Nick, because that’s exactly what I wanted you to do, was just explain the importance of it. And that’s just, again, one element out of the 50 that we’ve already talked about, right? Whether it’s the Social Security decisions, pension decisions, lifestyle decisions, RMDs, IRAs, taxes, cost basis, trust funding, all of these go into spousal planning. All of this boils down to, or falls under the title of spousal planning because it’s just you have to ask, okay, ask all of these questions now, then I’m going to ask all of these questions assuming one person has passed away and/or the other, you know, we’re going to play this game with the husband, and then we’re going to play this game with the wife, right?

So, you’re looking at the current scenario with all of these factors and complexities. Then you’re looking at these other two scenarios with all these factors and complexities, and okay, that’s great. That’s what we do every day. And now that you have looked at all of those three kind of main scenarios, now we have spousal plan planning or spousal plans in place because we have taken a look at that, approached it in the right and comprehensive way. And back to the word I was using, that’s what gives the confidence. That’s what gives the comfort to husband, wife, both, to know that I have looked at everything from all of those different angles.

So, we have a couple more minutes, Nick, but anything else that you kind of want to wrap up with as well, or anything else that you thought that I didn’t ask that I should have, and been a bad host? Like, “You were a terrible host, and you should have asked me this,” what would it be?

Nick Nelson: You’ve been great. But I want to finish on just two points. You mentioned it a little bit earlier, Matt, and that’s just the risk tolerance and the investment allocation a little bit. That I think is very important to be reassessed after someone passes, because think of it like this, especially if you have someone who is a little bit less financially savvy and they don’t review that, that allocation that they’re in might not be the best allocation for them to be in moving forward, and they’re not going to know how to reallocate a portfolio. There’s a lot that goes into that. Our investment committee here at SHP does so much. That’s all they do is analysis and research around these investments and different decisions alongside our advisors, of course. But that’s also an important piece too, because as you get older, risk changes, right?

Your time horizon changes, your needs change, and your allocation should change with that too. And I think it’s very hard for someone who’s not involved in finances to know how to reallocate that. So, I think that’s another point that is very important, and also a value add that advisors can provide.

Matthew Peck: Yeah, and certainly part of the after-spousal plan, right? Because here I was talking about the scenarios of the three when you initially establish it, but obviously after one passes, then you know what the eventual one is. But not only would it be looking at cost basis, making sure, helping to move assets from one account to the other account, taking advantage of the inherited IRA if recommended at that point. That’s just a great element or call it a risk profile or an updated risk profile at the end of a second spouse, when the second spouse or a spouse passes away. But this is great, Nick. Thank you so much for all the wonderful information. I know it’s kind of a little bit morbid as we talk about death and different things like that.

But at the same point, I mean, you spend some time. Actually, a recent client just did their 50th anniversary with their spouse, and it’s like you’ve spent a lot of time with him or her. This is something that’s just so necessary and so kind of just rewarding to know that you have done your obligation as a spouse, right? You’ve taken care of each other all the way through emotionally and through kids, if you were lucky enough to have kids, and different things like that. But a little bit boring. I guess only nerds like us really, really dig on it. Don’t get me wrong. We are talking taxes and RMDs and IRMAA and whatnot, right? But just the need for it, I can’t state that enough, the need for it for all of the married couples out there and to really kind of take it on home, right? So, you guys go enjoy your lives together. Let us do our work, and you can go with a bigger smile on the face.

Nick Nelson: Yeah, it’s not always a fun conversation, but hopefully we did hit the point on why it’s important. And I guess just to wrap it up, Matt, so if you’re talking to your spouse, and if you just ask them a simple question is like, “Would you just know what to do? Like, what’s the first step if something happens to me?” If they don’t know the answer to that, then that’s something that you should probably figure out together. And the answer to that could be as simple as you contact Matt at SHP and he walks you through with what to do next. And that’s where I think that value really is applied and really makes us feel good, and really just strongly about what we do for our clients.

Matthew Peck: Absolutely. So, for all of our listeners, that’s your next step, right? Go home, talk to your spouse, ask that question that Nick just asked, and I think you’ll all be better off for it. So, thank you all for listening, and stay tuned until next time.

[END]