Client Scenario: Managing Wealth After the Loss of a Spouse
Client Scenario: Managing Wealth After the Loss of a Spouse
Gaining Confidence in an Unfamiliar Situation
Sarah, whose husband passed away unexpectedly, was at a loss. Sarah had not been involved in managing the family’s finances. Her husband didn’t have a financial advisor and she had no idea what resources were available to her and her children. It took several years for this single mother to begin the process of taking ownership of her finances. Once she did, Sarah was quickly overwhelmed. Sorting through stacks of unopened mail, original stock certificates and seemingly endless amounts of paperwork, Sarah, who liked to be in control, felt very much out of control.
During her initial meetings with Strategic Wealth Partners (SWP), Sarah was introduced to her team. SWP aimed to instill confidence and control in Sarah by educating her about her options.
As Sarah became more open to discuss her situation, SWP listened carefully. SWP was able to identify issues important to Sarah, which helped her to set goals guiding the approach to her complex situation.
- Maintain Sarah’s lifestyle without having to return to work
- Protect Sarah’s children in the event that something were to happen to her
- Organize and effectively manage Sarah’s assets
- Budget for Sarah’s children’s college expenses
Before budgeting and other planning could begin, a SWP Financial Planner worked to sort and organize paperwork stored throughout Sarah’s house. SWP’s review of Sarah’s assets revealed an investment portfolio valued at approximately $4 million.
Sarah had never budgeted her expenses and had trouble visualizing the importance of budgeting. It just seemed like a hassle to her. Over time, SWP was able to convince Sarah of the need to budget her annual expenses and projected college costs for her three children.
Understanding the Importance of Budgeting
After working with Sarah to create a line-by-line budget, together Sarah and SWP estimated her annual spending to be about $150,000. SWP used this figure to present Sarah with a sensitivity analysis, illustrating the significant impact of seemingly minor changes. SWP’s goal was to help Sarah visualize the impact of spending, saving and the importance of maintaining a budget. SWP aimed to bring Sarah a sense of control of her wealth and knowing that her annual expenses and children’s college had both been accounted for.
This tool is used to illustrate the impact of changes in spending and portfolio earnings on wealth over time. If Sarah continues to spend the estimated $150,000 per year indefinitely, her capital may run out around age 90. However, by reducing spending to $125,000 per year, her portfolio may very well support her well past that age.
After the trauma of losing her husband at a young age, Sarah was understandably worried about her children if something were to happen to her. She wanted to know that her wishes would be carried out and more importantly, that her children would be cared for.
Proper Execution of Estate Documents
SWP worked with Sarah’s estate planning attorney to advise on establishing a will, revocable trust and powers of attorney. SWP also assisted by reviewing Sarah’s accounts so that her assets were properly titled. The revocable trusts were established to ensure that assets would not have to pass through the lengthy probate process. SWP worked with Sarah and her attorney on estate documents, with a goal that her children would be secure, and wouldn’t be left with a disorganized financial situation.
Sarah was not employed and therefore had no “earned income.” However, as a homeowner, she had expenses such as mortgage payments and real estate taxes that qualify as tax deductions. Between these deductions and claiming her children as dependents, SWP identified that Sarah had negative taxable income of $25,000.
Collaborating with Sarah’s Accountant
SWP worked with Sarah’s accountant to create taxable income and to use it to offset the $25,000 of negative taxable income. By moving $25,000 from the client’s tax-deferred IRA to a new Roth IRA, taxable income was created to offset her deductions. Sarah’s assets in the Roth IRA have the potential to now grow tax-free indefinitely. And since there is no difference in tax payment between zero and negative taxable income, her tax bill was still zero.
Assuming Sarah continues to convert $25,000 per year from her regular IRA to her Roth and that both accounts earn 7% per year, after 15 years the Roth IRA will comprise about 25% of the retirement assets. This $700,000 account will not be subject to taxes at withdrawals, regardless of tax rates at that time.
SWP partnered with Sarah to help her during an overwhelming, emotional situation. SWP believes its high-touch service approach helped build a strong connection between her and her SWP team members while addressing her long overdue mission to resolve her financial issues.
By creating three “buckets” for her portfolio – a taxable trust, tax-deferred IRA and tax-free Roth IRA – SWP strives to help Sarah achieve her goals of maintaining her lifestyle, protecting her children, effectively managing her assets and budgeting for the children’s future.
Strategic Wealth Partners (“SWP”) is an SEC registered investment advisor with its principal place of business in the State of Illinois. The case study described herein is included for illustrative purposes only and no portion of this writing is to be interpreted as specific investment advice, a testimonial or endorsement of SWP’s advisory services as it is not known whether the client referenced approves of SWP’s services. Investing involves risk, including the potential loss of principal, and investors should be guided accordingly.
Past performance of investments is not indicative of their potential future performance. Reading or utilizing information in this presentation, or contacting or responding to our offices or Registered Investment Advisers does not create an advisory relationship of any kind. An advisory relationship can be established only after the following two events have been completed: (1) our thorough review with you of all the relevant facts pertaining to a potential engagement; and (2) the execution of a Client Advisory Agreement.
Date published: 3/22/2017