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 financial futures. Rather than attempting to tackle these activities on their own and running 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, widows do not need to complete all the items on their to-do lists right away. In fact, it is 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 actions widows/widowers should consider with the help of their financial advisors soon 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 any life insurance policies. However, the strategy one employs to claim those benefits has a broad range of legal, tax and financial implications.
For example, a surviving spouse 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 the full retirement age of 66 or 67. Similarly, widows have several options to consider when inheriting IRAs and 401(k) retirement plans from a deceased spouse, including rolling the inherited account into their own accounts and allowing those funds to continue growing 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 to help widows understand their financial picture by reviewing current and potential sources of savings, income and fixed living expenses. They also can help develop budgets and implement tax-efficient strategies for improving immediate cash-flow needs, 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 the proper structure of their assets and the designation of trusted agents to make important financial and legal decisions on their behalves if they are no longer able to do so on their own.
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, it is critical to time the sale of a primary residence in the year a spouse passes away so that the surviving spouse can benefit from a 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
The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed at the end of 2019 eliminated the concept of “stretch IRA” distributions for non-spouse beneficiaries of decedents’ individual retirement accounts. Previously, these beneficiaries could stretch out withdrawals from inherited IRAs over their lifetimes and benefit from continued tax-deferred growth. However, this is no longer the case.
Effective Jan. 1, 2020, non-spouse beneficiaries must withdraw all assets from inherited IRAs within 10 years of the death of the original owners. Because this change in the law could drastically increase taxable income over the 10 years and result in a substantial amount of plan assets going to the IRS, widows should consider alternative strategies to help reduce the future tax impact on their heirs.
Remember to File All Relevant Tax Returns
When a spouse passes away, the surviving widow has the option to 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 he o she does not remarry in the year of the 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 2023 is $12.92 million for individual taxpayers.
About the Author: Kathleen Marteney, CRPC®, is a financial planner with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. She can be reached at (800) 737-8804 or via email at firstname.lastname@example.org.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Kathleen Marteney is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. Provenance Wealth Advisors and Berkowitz Pollack Brant Advisors + CPAs are not registered broker/dealers and are independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. The information contained in this report has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investments mentioned may not be suitable for all investors. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Posted June 15, 2023