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How does the death of a spouse affect taxes & financial assets?

Serious mother listening to daughter.
FG Trade/Getty Images/iStockphoto

No one is fully prepared for the death of a spouse. Whether the death followed a period of illness or it was sudden, you're likely experiencing a myriad of emotions. And as you work through that pain, you likely aren't thinking about how to handle your household finances or annual taxes.

However, you'll have to answer some important—and timely—financial questions in the months following the death of a loved one.

How does the death of a spouse affect taxes?

You can file jointly in the year of your spouse's death (unless you remarry). After the year of death, you will be filing as single, so your tax rate may go up even though your income is lower. Depending upon your specific situation, this issue can leave you with significantly more of a tax burden.

Also, consider: How does the death of a spouse affect taxes on your estate? You'll need to determine whether to file an estate tax return, and the exemption for that is $12.06 million of income for 2022, according to the Wall Street Journal. You (and/or estate executors) might choose to file an estate tax return to take advantage of your spouse's unused exemption. Typically, estate taxes are due within nine months of a spouse's death, but you can choose to claim the unused exemption for two years in certain cases.

It's also important to pay attention to the calendar if you plan to sell a home. Married joint filers can get a $500,000 exemption on the appreciation of a home if it's sold within two years. Those filing as single only get a $250,000 exemption.

How does the death of a spouse affect financial assets?

While taxes are the most complex financial consideration you'll need to work out, it isn't the only one. The death of a spouse can affect Social Security benefits, IRA funds, savings accounts and estate assets. You'll need to review each of these.

Social Security benefits

After your spouse passes away, you're entitled to survivor benefits through Social Security if you're at least 60 years old and have been married to the deceased for at least nine months.

There are a few exceptions to these qualifications, including:

  • If your spouse's death was accidental or occurred in the line of U.S. military duty, there's no length-of-marriage requirement.
  • If you're disabled and the disability occurred within seven years of your spouse's death, the age requirement drops to age 50.
  • If you're caring for children from the marriage who are under 16 or are disabled, there's no age requirement.
  • If you're below full retirement age and still working, you could be affected by the Social Security earning limit. (In 2022, that limit is $19,560.)

IRA funds

Your deceased spouse's individual retirement account (IRA) savings will be distributed based on whom they designated as a beneficiary. This is why it's critical to keep beneficiary forms up to date. For example, if you remarried but didn't change the beneficiary, whoever is listed will receive the benefits regardless of your marital change.

If you inherit a traditional IRA from your spouse, you generally have four choices:

  1. Treat it as your own IRA by designating yourself as the account owner.
  2. Treat it as your own by rolling it over into a traditional IRA in your own name.
  3. Treat yourself as the beneficiary rather than treating the IRA as your own.
  4. Receive a lump-sum distribution and get all the assets distributed to you at this time.

Like traditional IRAs, with a Roth IRA, it's important to make sure beneficiary forms are up-to-date.

You generally have three options as a surviving spouse with a Roth IRA:

  1. Treat it as your own IRA by designating yourself as the account owner.
  2. Treat it as your own by rolling it over into a Roth IRA in your own name.
  3. Receive a lump-sum distribution and get all the assets distributed to you at this time.

Savings accounts

Your spouse likely assigned a beneficiary for their savings in their will. It's also possible they set their savings account as "payable on death" (POD) to a specific person. Upon confirmation of your spouse's passing, the bank will release any saved funds to that designated person.

If, however, your spouse dies without a will and/or without a POD, your state will appoint an executor. This will be state specific and a family member can petition the court to act as the executor of the estate. This person will use your spouse's savings to pay any creditors and then distribute the remaining money in accordance with local inheritance laws. In most states, most—if not all—of the funds will go to you and any children.

Estate assets

A spouse's death is a good time to look at important estate documents and work with an attorney to ensure that your own will is up to date and reflects who you want as executor, and who your beneficiaries are. If you have minor children, make sure you have named a legal guardian to take responsibility for their well-being in the event of your death.

While it's uncomfortable to discuss (or even think about) death, it's wise to be prepared if the worst were to occur to yourself or a loved one. Consider talking with a financial advisor for advice and guidance. These professionals can help ensure you have the necessary paperwork in order, the correct beneficiaries assigned and more.

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Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

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