The loss of a spouse has profound emotional and financial consequences. Planning for this possibility is vital for your financial stability— even after your partner is gone.
Changes to your income are inevitable after a spouse dies. Knowing the surviving spouse rules regarding Social Security benefits, retirement accounts, and estate assets can help you anticipate the financial disruption and prepare a plan responding to your new situation.
Social Security survivor benefits. The surviving spouse gets to keep the larger of the two benefit checks the couple was receiving, or would have been receiving. This rule could cut your benefit in half if both you and your spouse were receiving roughly the same monthly amount. Social Security also pays a one-time death payment of $255, which falls woefully short of funeral costs. The Social Security Administration publishes extensive guidance for surviving spouses (1).
Retirement accounts (2) Unless a surviving spouse has renounced the deceased’s 401(k) or IRA, the widow or widower inherits these accounts tax-free. Required minimum distributions may change, depending upon the relative ages of the spouses and the surviving spouse’s choices. Private pensions that pay joint and survivor benefits will continue to make monthly payments, but the amount depends on the plan’s payout options. Check with the employer to verify the plan’s details.
Life insurance. Generally, you don’t pay taxes on the death benefit proceeds from a life insurance policy.3 However, you must report any interest you receive as taxable income. Unlike qualified retirement accounts, spouses are not guaranteed to be the beneficiary of life insurance policies—they must be so-named in the policy. Depending on how the contract is structured, you can choose between a lump-sum payout or an annuity.
Taxes. Filing as a single person can put you into a higher tax bracket (the so-called widow tax) and affect your taxes in a few other ways (4). You may qualify for retaining the joint filing tax rates for a few years following your spouse’s death (5). The deceased’s estate that transfers to the surviving spouse will not be taxed, but any other portion that exceeds the estate tax exemption may be subject to a 40% tax (6). Generally, a surviving spouse is entitled to some or all of the deceased’s probate assets. Still, the presence or absence of a will or trusts can complicate the process, and probate law, including elective share rules, vary by state.
Plan now for the future. You can take many actions now while you and your spouse are alive. Life insurance, tax planning, estate planning, and benefit-claiming strategies are all part of the mix. Contact me to address this critical topic at your earliest convenience. Together, we can help cushion the financial blow that can often follow the loss of a spouse.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. LPL Financial and Cavanaugh Financial Group are separate entities.
This material was prepared for John Cavanaugh and does not necessarily represent the views of the presenting party or their affiliates. This information has been derived from sources believed to be accurate. Please note—investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
(1) ssa.gov/benefits/survivors/ifyou.html (2) investopedia.com/articles/personal-finance/120715/what-happens-retirement-accounts-if-spouse-dies.asp [5/2/21] (3) irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds (4) forbes.com/sites/bobcarlson/2020/12/21/the-onerous-widowers-penalty-tax-and-how-to-avoid-it/[12/21/20] (5) investopedia.com/terms/q/qualified-widow-or-widower.asp [12/21/21] (6) nerdwallet.com/article/taxes/estate-tax [12/6/21]