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

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.

You can file jointly in the year of your spouse's death (unless you remarry). However, after the year of death, you file as single, so your tax rate may go up even if your income may be lower. Depending on your specific situation, this issue may leave you with a significant tax burden.

Something else to consider, especially as you're reviewing your long-term planning with your spouse now, is how does the death of a spouse affect taxes on your estate?

• Typically, estate taxes are due within nine months of a spouse's passing.
• In 2023, the estate tax exemption is $12.92 million per person, an increase from $12.06 million in 2022.

You may need to determine if you need to file an estate tax return or if you (and/or the estate executors) want to file an estate tax return to take advantage of your spouse's unused exemption. In some cases, you may claim unused exemptions for up to two years.
If you're planning on selling your home after your spouse's passing, the home sellers exemption that avoids taxes on capital gains will apply for two years after the death.

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.

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 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 2023, that limit is $21,240.
  

Your deceased spouse's IRA savings are distributed based on whom they designated as a beneficiary. This is why it's critical to keep beneficiary forms up to date and review them after significant life changes.

Suppose you inherit a traditional IRA from your spouse. In that case, you generally have a few options, such as:

• Take a lump-sum distribution.
• Establish it as an inherited IRA. Here the required minimum distributions (RMDs) are based on when your spouse passed, as laid out in the SECURE Act.
• Roll over the account into your IRA, where you can take RMDs based on age.

However, pay attention to specific RMD rules unique to spouse-inherited IRAs. Some of these change in 2024 due to the passage of the SECURE Act 2.0.

• As the surviving spouse, you can still roll over an IRA, treat it as your own and take RMDs once you reach the required beginning date, which increases to 75 over the next decade.
• You may also decide to be treated as your deceased spouse for the RMD rules and use their age to delay withdrawals. This method might benefit you if they were younger than you when they passed.

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

• Receive a lump-sum distribution.
• Treat it as your own IRA by designating yourself as the account owner. In this case, you don't have to pay RMDs during your lifetime, but you must meet withdrawal qualifications to take out money tax-free.
• Roll it into your own Roth IRA.
• Roll it over into an inherited Roth IRA. Distributions either must begin the year after the death based on your life expectancy factor or all funds must be distributed at the end of 10 years following your spouse's death, without annual distributions.

If your spouse assigned a beneficiary for their savings in their will, they might have set their account as payable on death (POD) to a specific person. The bank releases funds to that person once it confirms your spouse's passing.

If your spouse passes without a will or a POD, your state appoints an executor, which may be a family member, to administer the needs of the estate. This includes paying debt and distributing remaining assets per local inheritance laws.

In most states, most of the remaining funds go to you and any children.

A spouse's death may present a reminder to review important estate documents and work with an attorney to make sure your will is up to date, including reflecting your wishes for beneficiaries and executor. If you have minor children, name 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.