How Does Losing A Spouse Trigger Financial Issues?

Financial issues for surviving spouse
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Surviving spouses are often left to navigate financial issues.

Your spouse recently died.

Your world has changed because that relationship cannot be replicated.

Although it pales in comparison to the loss of your best friend, you also may have financial security.

According to a recent Yahoo! Finance article “The Financial Effects of Losing a Spouse,” surviving spouses often face unanticipated financial issues and responsibilities.

Financial issues for surviving spouse are to be expected.
Surviving spouses should think about their futures to avoid financial issues.

Some may be fairly simple such as taking up payment of bills.

Others can be downright daunting.

Within the first year, it is advisable to avoid making any major changes.

Even so, it is helpful to evaluate how the death of your spouse will impact your financial responsibilities.

What should you consider?

Tax implications.

When your spouse dies, your household income will drop.

To supplement this loss, you may need to begin withdrawing from retirement accounts.

Although a change in finances may mean lower income taxes, distributions from traditional IRAs and 401(k)s are taxable.

Depending on your income, you may qualify for certain tax deductions.

Filing status.

If you do not remarry within the same year your spouse died, you may be allowed to file a joint federal tax return.

If you and your spouse have dependent children, you may be able to keep the status for a couple of more years.

Among the unanticipated financial issues for many of those widowed, one is the eventual shift to single filing status.

The deduction and tax rates are less favorable for singles than for couples.

Traditional IRAs.

When you inherit a traditional IRA from your spouse, you have several options available to you.

These include rolling over the funds into your own retirement account, being designated as the account owner, or being treated as a beneficiary.

Your choice will affect your taxable income and required minimum distributions (RMDs).

If you rollover the funds or become the designated owner, the RMDs will be based on your life expectancy.

By choosing to be the beneficiary, the life expectancy of your deceased spouse will be used to calculate RMDs.

Often people elect to have the account rolled over or transferred to their own name.

Carefully considering your options is important so you do not create financial issues for yourself in the future.

Stepped-up basis.

Did your spouse leave you property?

If your assets were held jointly in a “separate property” state, then the half owned by the spouse will receive a step-up in basis.

If your spouse solely owned the asset, the whole property will receive a step-up in basis when you inherit.

In states with community property, the entire property will receive a step-up in basis if at least half of the value was included in the gross estate of the spouse.

If you want to sell your home, you may benefit from a special rule.

For a single person, $250,000 of gain from the sale of a principal residence will be free from taxes under certain conditions.

For a couple, the exemption is $500,000.

As a surviving spouse, you may claim the $500,000 exemption if you sell the house within two years and do not remarry during this time.

Federal estate tax exemption.

At this time the federal estate tax exemption is $11.7 million.

As the surviving spouse, you should file form 706 to elect “portability” for the unused portion of the exemption for your spouse.

How does this help you avoid financial issues?

It protects your exemption if the federal exemption is lowered.

Working with an experienced estate planning attorney can help you avoid common financial issues faced by surviving spouses.

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

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