In the midst of grief over a spouse’s death, the greatest comfort may be knowing the two of you planned for this and the remaining spouse will be comfortable financially.
Nobody wants to think about what would happen if their spouse passed away, but the fact is very few couples die at the same time. In 80% of cases, the wife will outlive the husband, according to the Census Bureau, so it’s particularly important that they are confident about their ability to live comfortably in that event.
Creating a Plan
The two of you need to have important documents, including your will, powers of attorney and healthcare directives saved in one place. Mail copies to your children and your executor. Put this information, along with passwords, pins and other important papers, in a single location. It could be a safe deposit box or an encrypted drive, for example.
Make sure both your names are on accounts, and that they’re titled appropriately. Keep beneficiaries, wills, healthcare directives and powers of attorney updated. Consolidate accounts as much as possible to simplify management.
Prepare for the likely “survivor’s penalty” after the death of a spouse, when Social Security income is cut and tax rates often double. We talk more about these events below.
Social Security
If your Social Security was the lower payment, you’ll need to file to start receiving your spouse’s benefit. The surviving spouse will only receive a single benefit from now on, which can have a big impact on finances. If the couple was used to getting $30,000 from one benefit and $25,000 from another, for example, the remaining spouse will only receive $30,000, instead of $55,000.
Taxes
The year a spouse dies, the remaining spouse can still file taxes jointly with their deceased spouse, unless they’ve remarried. But after that, they’ll most likely be using the “single” filing status, which includes a standard deduction for only one person and tax brackets that are half that of their previous filing status. This can be quite a shock, as your taxes may double even if your income is relatively stable.
Most often, a surviving spouse inherits their deceased spouse’s IRA, and required minimum distributions (RMDs) will stay about the same as before. But here, too, the new “single” tax brackets can heavily impact taxes due. In 2024, for example, a couple with a taxable income of $94,000 would pay up to 12% in taxes, while a single filer making that amount would be taxed at 22% marginal rate.
One way to minimize these impacts is to do partial Roth conversions. When IRA funds are converted, taxes are paid in that year for only the amount converted. It’s important to work with a CPA or tax professional to make sure the strategy works with your overall retirement plan.
“This is often best done over a number of years to minimize the overall taxes paid for the Roth conversions,” says George Gagliardi, a CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts.
Lastly, investors need to keep their asset ownership updated, especially on highly appreciated assets. The basis of an asset is simply the original cost. When a spouse dies, the remaining spouse receives a step-up in basis, changing the basis to the value of the asset when the spouse died. This can wipe out months or years of capital gains, which would otherwise be owed when the asset was sold.
“A missed step-up opportunity could mean higher capital gains taxes for the survivor,” says certified financial planner Edward Jastrem, chief planning officer at Heritage Financial Services in Westwood, Massachusetts.
Losing a spouse is a devastating event. Prepare your finances ahead of time so it’s one less thing the surviving spouse has to deal with when they are at their most vulnerable. Often the best way to do this is to use a trusted financial advisor or estate planner to ensure a cohesive plan.
This article is not intended to be a substitute for professional financial advice from a qualified financial advisor.
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Blog posting provided by Society of Certified Senior Advisors
