James was a carpenter foreman for the Chicago Transit Authority, earning a salary of $80,000. Considering Hutchins has nearly no debt to pay, except her monthly mortgage payment of $1,016 on the home she and her husband purchased 33 years ago, Hutchins can get by comfortably on her husband’s pension, widow’s Social Security benefits, a 401(k), and James’ $100,000 life insurance policy.
File Estate Taxes
In 2009 a federal estate tax of 45% will be applied to estates more than $3.5 million. In 2010 the tax will be repealed and in 2011, the law will change and a federal estate tax of 50% will be applied to estates more than $1 million. There are also local estate taxes which can be incurred on estates as low as $1 million currently. These amounts vary from state to state.Â “Although it may look like you don’t have a taxable estate and you don’t have to do anything, you do have to see an attorney,â€ stresses Douglass.Â It’s very easy to get past the $1 million exemption threshold once you continue to pass on real estate equity, 401(k) investments, and life insurance monies to the next generation. “Find out the tax laws in your state so you know what your rights are and don’t violate any tax laws,â€ says Harrine Freeman, author of How To Get Out of Debt (Adept; $19.95).
Invest Inheritance Monies
“What widows invest in depends on their age and whether they’re still working, but they want to put part of the money in something that is going to give them growth, whether that’s real estate or the stock market,â€ says Broussard.
While the ultimate plan is to invest the money, Robertson cautions that widows should not be rash in their investment decisions. Hutchins put her insurance payout in a high-yield checking account earning 4%. Robertson says this is the best thing to do for the first few months until a widow can assess her financial obligations and make unemotional investing decisions. However, “the focus is to never live off those dollars but to live off the interest, because the moment we consume the money there’s no more money to live on,â€ insists Robertson.
“Try to invest the face value of the policy conservatively where you can live off the growth,â€ says Haskins. To master this step, it’s best to take out as much insurance as possible in the early years of the marriage so you’ll have more to invest. Hutchins says she and her now-deceased husband took out $100,000 policies on each other in the 1970s, which was a huge amount at the time. Around 2003, the couple tried to increase the policy but opted not to because the premium was too expensive based on their age.
Update Your Estate Plan
“Widows must have an estate plan to properly transfer wealth to their children,â€ says Douglass. Hutchins has two living adult children, 29-year-old James, and 37-year-old Natasha. Hutchins also has a child who is deceased, Lucretia, who died at age 33 about five years ago. Although Hutchins and her husband had no estate plan or will in place as a couple, she says she plans to put one in place now for her children. “My husband and I always wanted to provide something for them. I know that I would want to leave something for my children and my grandchildren,â€ says Hutchins. In the interim, Hutchins has already changed the beneficiaries on her personal $100,000 life insurance policy to her children and three grandchildren.
This story originally appeared in the April 2009 issue of Black Enterprise magazine.