Helping widow

[Shredder]

My best friend died last week unexpectly at age 49, today I was over to see his widow to discuss what to do next. I'm no expert, but do well with my meager funds, and she trusts me and I don't want to screw this up. I have not called for any info yet, and thought I'd post here first. I have a few questions from our esteemed panel.
1) how long does she have to transfer his 401K in his name to hers
2) will the 401K be taxed? she does not plan a roll over into her IRA
3) will his life insurance settlement be taxed? It's in MI
No will was made but everything like house and cars in both of their names. Some of the other issues, like dealing with his former employer I'm good at since we worked together. She will get a small pension and health insurance for 6 months. And not surprising long lost realtives that happen to work at A G Edwards have come calling. (she's leary)I'm with Vanguard, but his 401K is with Fidelity and she is used to and comfortable there so I leaning toward advising her to stay with them, and keep it simple. Am I covering everything?

Shredder

[FinanceDude]

Quote:

Originally Posted by Shredder My best friend died last week unexpectly at age 49, today I was over to see his widow to discuss what to do next. I'm no expert, but do well with my meager funds, and she trusts me and I don't want to screw this up. I have not called for any info yet, and thought I'd post here first. I have a few questions from our esteemed panel. 1) how long does she have to transfer his 401K in his name to hers 2) will the 401K be taxed? she does not plan a roll over into her IRA 3) will his life insurance settlement be taxed? It's in MI No will was made but everything like house and cars in both of their names. Some of the other issues, like dealing with his former employer I'm good at since we worked together. She will get a small pension and health insurance for 6 months. And not surprising long lost realtives that happen to work at A G Edwards have come calling. (she's leary)I'm with Vanguard, but his 401K is with Fidelity and she is used to and comfortable there so I leaning toward advising her to stay with them, and keep it simple. Am I covering everything? Shredder

I'm sure Martha will be along shortly to help on the legal stuff. However, with no will, she needs the advice of a CPA and attorney.

Most plans don't MAKE you take the money out, but it would be in her best interest to roll it to an IRA, so she has control. Fidelity themselves could help her roll it from his plan to one of their IRAs very easily. They might let her keep the funds if they are decent ones.

This is a traumatic time for her and you. My condolences on your friend passing on MUCH too young. I would be careful not to get TOO involved in the estate, even though obviously you care and want to help. As a spouse, there is no problem with the assets going to her, of course. However, there could be tax implications because they had no estate plan and we therfore unable to use HIS unified tax credit exemption.

Those "long-lost" relatives are real pieces of work.........

[Walt34]

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Originally Posted by FinanceDude Those "long-lost" relatives are real pieces of work.........

It may not be up to the "long-lost" relatives. I am not an attorney but I was administrator of my mother's estate, and that has a steep learning curve. Fortunately she had a will.

Without a will in MD the state decides who gets what portion and that is written into law. My understanding is that this is not negotiable unless the relatives voluntarily waive their rights. In some families that's not an issue, but in others....

Your friend needs to talk with an attorney. Soon.

[Martha]

I am so sorry on the loss of your friend. Way too young.

Just a few thoughts, with no knowledge of Michigan law:

Odds are she will have the choice of keeping the 401k as a "beneficiary account" (which I believe stays in the name of her deceased spouse, but I am not absolutely sure) or she can rollover into her own IRA. Either way, given that her husband had not yet begun distributions she doesn't have to start distributions now, but can wait. Since so much is going on, she might want to wait on making a decision on the 401k. I am not aware of any deadlines for making decisions regarding the 401k.

Anything she inherits will not be subject to estate tax. However, when she begins to take distributions on the 401k or rollover IRA she will pay income taxes as she withdraws money.

As the spousal beneficiary of the life insurance, there shouldn't be an estate tax on that asset either. Nor should there be income tax. The life insurance company will require a certified death certificate before paying out the benefits.

It will be pretty simple to transfer the house and car into her name. Each state is a bit different, but generally you only have to file a death certificate to transfer the house.

Even if everything is joint, she should talk to a lawyer and make sure everything that needs to be done gets done. No big rush but she should do so before making important decisions. For example, she might need to have the house appraised to establish a new basis for her husband's share.

She also should be able to purchase health insurance for a longer period of time under COBRA (up to 36 months) if his employer had more than 20 employees and isn't a governmental or other exempted entity. The employer must provide a COBRA rights notice.

[Shredder]

Thanks Martha, today she is picking up the death certificate copies from the funeral home and paying them. She has not got a "packet" from the insurance co yet, they are sending her the paper work she needs. She also wants to buy another house. They just moved up where they live for his job , now whe wants to go back home. So I believe she wants to cash out of his 401K, but is only 48 yr old. When the dust settles I don't think she will need all of it, especially when their current house sells (they have lookers this week) I will sit down with her to find out what will work for her, maybe a partial withdraw and partial rollover can work. She does plan on going back to work, she has his health insurance for 6 months then cobra is an option, but she hopes to be working by then. She told me she does not want a lawyer, I'm leaning towards just at the very least have one look over her plans. So far though things are going smooth. I see my role just as helping her know her options and helping set up pension deposits, money markets accounts, and holding her hand. Her son and daughter have been great and help as well but live some distance away, and are leaving soon. Thanks again.........shredder

Quote:

Originally Posted by Martha I am so sorry on the loss of your friend. Way too young. Just a few thoughts, with no knowledge of Michigan law: Odds are she will have the choice of keeping the 401k as a "beneficiary account" (which I believe stays in the name of her deceased spouse, but I am not absolutely sure) or she can rollover into her own IRA. Either way, given that her husband had not yet begun distributions she doesn't have to start distributions now, but can wait. Since so much is going on, she might want to wait on making a decision on the 401k. I am not aware of any deadlines for making decisions regarding the 401k. Anything she inherits will not be subject to estate tax. However, when she begins to take distributions on the 401k or rollover IRA she will pay income taxes as she withdraws money. As the spousal beneficiary of the life insurance, there shouldn't be an estate tax on that asset either. Nor should there be income tax. The life insurance company will require a certified death certificate before paying out the benefits. It will be pretty simple to transfer the house and car into her name. Each state is a bit different, but generally you only have to file a death certificate to transfer the house. Even if everything is joint, she should talk to a lawyer and make sure everything that needs to be done gets done. No big rush but she should do so before making important decisions. For example, she might need to have the house appraised to establish a new basis for her husband's share. She also should be able to purchase health insurance for a longer period of time under COBRA (up to 36 months) if his employer had more than 20 employees and isn't a governmental or other exempted entity. The employer must provide a COBRA rights notice.

[W2R]

Quote:

Originally Posted by Shredder She also wants to buy another house. They just moved up where they live for his job , now whe wants to go back home. So I believe she wants to cash out of his 401K, but is only 48 yr old.

Often it is wise not to make any huge financial decisions so soon after one's spouse's death, when one is still on a huge emotional rollercoaster and when bad decisions can so easily be made.

If moving is the right thing to do, it will still be the right thing to do in a couple of years. Just something she might want to consider.

[FinanceDude]

Quote:

Originally Posted by Shredder She also wants to buy another house. They just moved up where they live for his job , now whe wants to go back home. So I believe she wants to cash out of his 401K, but is only 48 yr old. When the dust settles I don't think she will need all of it, especially when their current house sells (they have lookers this week) I will sit down with her to find out what will work for her, maybe a partial withdraw and partial rollover can work. She does plan on going back to work, she has his health insurance for 6 months then cobra is an option, but she hopes to be working by then. She told me she does not want a lawyer, I'm leaning towards just at the very least have one look over her plans. So far though things are going smooth. I see my role just as helping her know her options and helping set up pension deposits, money markets accounts, and holding her hand. Her son and daughter have been great and help as well but live some distance away, and are leaving soon. Thanks again.........shredder

I'd slow down the big decisions like selling a home for a few months. It's stressful enough losing a spouse, making decisions while in an emotional state generally end poorly.

I don't know the details of why she is considering this, but cashing out his 401K is the LAST thing I would do. She still would pay taxes on the withdrawal, and probably a 10% penalty although I need to check on that. She COULD do a 72T distribution and take equal amounts to avoid the penalty.

Being that her husband's 401K is probably a decent nest egg, I would NOT sell out...........

[Shredder]

She is dead set to sell her house, but in todays market, who knows how long that will take. I hope she puts off buying another house for a while as well. I'm going to suggest renting if she just has to get out right away. She's in a area with few friends and away from her kids, and her husband died in the house, so she wants out.
I agree with using the 401K as a last option, not first. What I have found on his/her 401K is there are exceptions to get around the penalty, due to death, but not the tax on distributions and she can do partials. The insurance and 401K are going to take a while and that is probably a good thing as she won't be able to do lots of things too quickly...shredder

Quote:

Originally Posted by FinanceDude I'd slow down the big decisions like selling a home for a few months. It's stressful enough losing a spouse, making decisions while in an emotional state generally end poorly. I don't know the details of why she is considering this, but cashing out his 401K is the LAST thing I would do. She still would pay taxes on the withdrawal, and probably a 10% penalty although I need to check on that. She COULD do a 72T distribution and take equal amounts to avoid the penalty. Being that her husband's 401K is probably a decent nest egg, I would NOT sell out...........

[LOL!]

My sister asked me to review her finances when her husband died earlier this month. She knows next to nothing about cooking, cleaning, shopping, home maintenance, and finances. My BIL had a financial advisor who can help my sister for a fee. My role was to vet the advisor who is a CFP, CPA and has a law degree. I am glad that there is a professional with a fiduciary responsibility to help my sister. I would not want to be on the hook for giving direct advice, but do not mind giving a thumbs up or down to the advisor's advice.

I would encourage your friend to seek professional advice even though she does not want to use a lawyer. Certainly for my sister, I think going slow and getting paid-for help at a reasonable price is the best way to go. Also, I will never be liable for anything that she does or does not ultimately decide to do.

[igsoy]

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Originally Posted by Shredder I agree with using the 401K as a last option, not first. What I have found on his/her 401K is there are exceptions to get around the penalty, due to death, but not the tax on distributions...

Well, if there is a way around the penalty due to death, then the ordinary tax might not be too bad. He died so early in the year, there will not be much of his income on their joint return, and you said it might take her 6 months to get working again. If she just takes out enough to live off of for that time, then she will be in a fairly low tax bracket, even after the withdrawal. If she sits tight and takes the withdrawal in a year or so, she would be filing single and be in a higher bracket.

Of course, ideally, she would just get the insurance money soon enough and have that to use and be able to leave the 401k alone. It does seem like renting might be the best thing for the first year.