Social Security benefits are just one of many changes happening when a spouse dies. A recent article in Barron’s, “A Spouse’s Death Brings a Financial Jolt. How to Prepare,” explains what can be done before and after the death of a spouse to protect the surviving spouse.
The surviving spouse receives the higher of the two Social Security benefits. The survivor also receives a one-time death payment of $255.
The surviving spouse may be able to use the higher married couple filing jointly tax bracket. However, check with your accountant to be sure. Unless the surviving spouse is qualified as a widow or widower, they will file as a single taxpayer the following year. The standard deductions are lower, and thresholds for tax brackets are reduced.
Be prepared for healthcare premiums to rise. Medicare premiums are tied to income, and while couples pay the standard premium of $174.70 up to income of $206,000, single people pay it only up to $103,000. If the decedent was working and health care came through their employer, the surviving spouse may need to access COBRA or buy health insurance on the open market, an expensive proposition.
Not all deaths are foreseeable. However, one spouse will almost always die before the other, so planning is necessary. Couples should review their estate plans, named beneficiaries, and trusts every three to five years.
Some strategies should be done while both spouses are still living. Converting some or all of traditional IRA accounts to Roth accounts is one technique to consider. Pre-tax IRA or 401(k) accounts are moved to after-tax Roth accounts when both spouses are living and take advantage of higher standard deductions and generous tax brackets, compared to when filing as a single.
The sale of a primary residence becomes costly when one spouse has died. When a couple sells their home, they receive a joint $500,000 capital gains tax exemption. When a single person does, the exemption is halved, making the home sale far less profitable.
Estate planning attorneys may advise clients to be cautious about significant decisions while grieving their loss. However, steps must be taken before death or in the calendar year after death to protect the surviving spouse.
Here is an example. For a couple where the wife was diagnosed with pancreatic cancer, stocks with large capital gains were moved out of a joint account into an account in the wife’s name only. Upon her death, the husband inherited the stocks, receiving the equities at their current value.
In another scenario, accumulated capital losses were used to offset gains in a trust brokerage account following the death of the husband. Capital losses typically expire upon the death of the investor, but spouses can use those losses during the same calendar year. The revocable trust was revised, and the highly appreciated assets were sold, taking advantage of the losses.
When there is a diagnosis of a serious disease, or someone is not recovering from an illness, the time to review the entire estate and plan accordingly becomes more pressing. Talk with an experienced estate planning attorney to keep your estate up to date and discuss possible strategies to be considered if and when a spouse becomes seriously ill.
These are not easy conversations to have. However, taking care of these issues before the death of a spouse can make life easier for the surviving spouse and can, in many cases, make the unhealthy spouse aware that they are taking good care of their surviving spouse.
Reference: Barron’s (Oct. 5, 2024) “A Spouse’s Death Brings a Financial Jolt. How to Prepare.”
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