How to Handle Finances after Spouse Dies

POSTED ON: August 12, 2021

The death of a spouse is one of the most difficult things imaginable. Besides the emotional toll, surviving spouses typically confront financial issues, which often trigger tax-related questions and consequences. Some of them are fairly straightforward, while others can be tricky.

How to Handle Finances after Spouse Dies

Surviving spouses shouldn’t make any major financial changes immediately but should reassess their finances from a tax perspective.

Yahoo Finance’s recent article entitled “The Financial Effects of Losing a Spouse” explains that the loss of income after a spouse dies has tax implications. For example, if a decrease in income means the surviving spouse is required to use funds from a retirement account, taxes may be less than initially thought because, if you have lower income, you may be in a lower bracket. Less income could also mean that the surviving spouse now qualifies for certain tax deductions or credits that have income limits or phase-out rules.

A surviving spouse will have a new filing status. A joint federal tax return is allowed for the year the deceased spouse dies, if the surviving spouse did not remarry. The qualifying spouse status may be an option for two more years, if there is a dependent child. After that, a surviving spouse who does not remarry is required to file as a single taxpayer, which usually means less favorable tax rates and a lower standard deduction.

Inheriting a traditional IRA can also impact the surviving spouse’s taxes after a spouse dies, but first, an inheriting spouse can be designated as the account owner.  If so, he or she can roll the funds into their own retirement account or be treated as a beneficiary. That decision will affect required minimum distributions (RMDs) and ultimately the surviving spouse’s taxable income. As either the designated owner of the original account or the owner of the account with rolled-over funds, the surviving spouse can take RMDs based on their own life expectancy.

If the third option of remaining the IRA’s beneficiary is selected, the RMDs are based on the life expectancy of the deceased spouse. Most people either roll [an inherited IRA] into their own IRA or at least they transfer it into an account in their name. Consolidating makes things much easier to manage. The third option may be wise if the surviving spouse is at least 72, but the deceased spouse was not. In that case, the RMDs from the inherited IRA are delayed until the deceased spouse would have turned 72.

A surviving spouse also gets a stepped-up basis in other inherited property after her spouse dies, if the assets are held jointly between spouses. In Lousiana, a community property state, both the decedent’s share and the surviving spouse’s share gets a stepped up basis if the property was owned at least 50% by the decedent spouse.  If an asset was owned solely by the decedent as his or her separate property, the step up is 100%. Any separate property of the surviving spouse receives no step up in basis.

As far as estate taxes, there is an unlimited marital deduction as well as this year’s $11.7 million estate tax exemption. If the deceased spouse’s estate does not reach that, the surviving spouse should still file Form 706 to elect “portability” of the deceased spouse’s unused exemption amount.

One of the best times to structure an estate and asset protection plan is after a spouse dies.  There is a certain window of opportunity to structure assets at this time that you may have never thought possible, even if you are a middle income client.

BOOK A CALL with Ted Vicknair to discuss how to handle finances after a spouse dies and about structuring your finances and estate plan after the death of a spouse.

Reference: Yahoo Finance (July 16, 2021) “The Financial Effects of Losing a Spouse”

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