The death of a spouse can be one of the most devastating events in an individual’s life. Not only must surviving spouses cope with the emotional, mental and physical turmoil of their crushing grief, but they will also face a tsunami of legal and financial decisions, including the responsibility to pay their bills, keep the lights on, settle their spouses’ estates and protect their own financial futures. Rather than attempting to tackle these activities independently and run the risk of making irreversible decisions that can cause irreparable damage, widows and widowers should reach out to their professional financial advisors for help.
Thankfully, many of the items on a widow’s to-do list of required tasks do not have to be completed right away. In fact, it’s a good idea to put off making any major decisions until you are in the right state of mind to do so and have the benefit of your trusted advisor’s counsel.
Following is a list of the top five things widows should consider, with the help of their financial advisors, sooner rather than later after a spouse passes away.
Develop a Strategy for Receiving Survivor Benefits
Widows may be entitled to receive deceased spouses’ retirement benefits and proceeds from life insurance policies. However, the strategy employed to claim those benefits has a broad range of legal, tax and financial implications.
For example, surviving spouses may begin claiming Social Security survivor benefits at age 60, but doing so would result in a significantly lower benefit than waiting until they reach full retirement age of 66 or 67. Similarly, widows have several options when inheriting an IRA and 401(k) retirement plan from a deceased spouse. This includes rolling inherited plans into their own accounts and allowing those funds to continue to grow tax-free, or, depending on the widow’s age and the spouse’s age at death, there may be a requirement to withdraw a portion of those assets and pay taxes on those amounts.
Assess your Current Financial Situation
Financial advisors can be a tremendous resource in helping widows understand their financial picture by reviewing current and potential sources of savings, income, and fixed living expenses. They can help develop a budget and implement tax-efficient strategies for improving immediate cash-flow needs and investing and repositioning investment portfolios for future growth. Moreover, a financial advisor can help survivors get their individual estate plans in order, helping to ensure their assets are properly structured, and they have named agents to make important financial and legal decisions on their behalf if they can no longer do so.
Understand Capital Gains and Tax Basis of Inherited Assets
Tax basis determines whether a sale, exchange or other disposition of property will result in a gain or loss based on the difference between the original cost to acquire the property and fair market value (FMV) on the date of sale. In general, sales of highly appreciated assets will yield a profit that results in a taxable gain. However, U.S. tax laws allow inherited assets to receive a step-up in tax basis to the FMV on the date of the original owner’s death, thereby eliminating appreciation and taxes on any potential profits the original owner would have recognized from a sale. Therefore, surviving spouses can inherit highly valued assets and immediately sell them free of capital gains tax, or they may hold onto those assets and pay tax only on the appreciation that occurs after their spouse’s death.
Another tax benefit provided to widows is the ability to sell a primary home and exclude from taxation up to $250,000 of capital gain resulting from the sale when they file tax returns as a single individual. However, special care should be taken to time the sale of a primary residence in the year a spouse passes away so that the surviving spouse can receive the benefit of the higher $500,000 exclusion that comes with filing tax returns as a married couple filing jointly.
Recognize the Impact of New Laws on Your Existing Strategies
Married individuals who inherit an IRA from a deceased spouse have several options. They may roll over those funds into their own IRAs or keep them as inherited IRAs subject to required minimum distributions (RMDs) rules based on their birth dates. Alternatively, they may take a lump sum distribution or lifetime payout and immediately pay the income taxes on that amount.
However, when couples are not legally married, the partners who inherit IRAs from non-spouse decedents must withdraw all assets from those accounts within 10 years of the original owners’ deaths. This requirement can drastically increase the surviving partners’ taxable income over the 10 years and result in a substantial amount of plan assets going to the IRS. Individuals should consider alternative strategies to minimize the future tax impact of inherited IRAs on their non-spouse beneficiaries.
Remember to File All Relevant Tax Returns
When a spouse passes away, the surviving widow can file a federal tax return for that year as a single individual or as a married couple that can receive the benefit of higher deductions, provided they do not remarry in the year of their spouse’s death.
In addition to filing a final tax return for decedents, surviving spouses may also have responsibilities to file both estate income tax returns to report any income above $600, as well as estate tax returns when the value of a decedent’s estate exceeds the federal estate tax exemption, which for 2024 is $13.610 million for individual taxpayers or $27.220 million for married taxpayers filing joint returns.
About the Author: Kathleen Marteney, CRPC®, is a financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with PWA Securities, LLC (PWAS). She can be reached at (800) 737-8804 or via email at info@provwealth.com.
Provenance Wealth Advisors, 200 E. Las Olas Blvd., Nineteenth Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
Kathleen Marteney is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC..
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
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Updated June 7, 2024