How do I plan for the death of my spouse? When my spouse dies, what happens financially? Will my Social Security income be cut when my spouse dies? Should I take a lump sum distribution from a pension when my spouse dies? Will my taxes go up? Can I avoid capital gains taxes? Should I remarry? What insurance do I need? What type of experts should I consult when my spouse dies?
By James L. Cunningham Jr., Esq.
The loss of a spouse can be a devastating event that brings emotional pain, grief, and an overwhelming sense of loss and change. What we’re going to talk about here is something else—the potentially life-altering financial issues.
Without proper planning, a surviving spouse could be forced to sell the family home, liquidate long-term investments, or incur excessive, avoidable taxes. A retired spouse might even need to return to the workforce just to get by.
It’s astonishing to me how many couples overlook this critical aspect of financial planning. They can be meticulous and dedicated to all elements of their economic strategy—except preparing for the possibility of losing a spouse.
Key Takeaways from This Article
- A surviving spouse may live a very long time after the death of a spouse. This requires planning.
- Think about your finances and Estate Planning not in terms of a single calendar year, but in much longer time frames. Think 5 or 10 years — or more.
- Seek out appropriate experts. Assemble your A-Team of experienced professionals.
- Review your estate plan annually. Review it with your A-Team every three years or when a loved one dies, marries, divorces or is born.
What Happens When the Death of a Spouse Is “Out of Order”?
Too often, spouses die “out of order.” Dying “out of order” happens when a caregiver spouse dies before the incapacitated spouse. This is not an uncommon occurrence.
In fact, this happens about 60% of the time.
Who then cares for the sick spouse? Who pays for the care? How is that care paid for? Who manages the household finances? Often, there’s no plan at all.
A savvy estate planning lawyer will help you anticipate these blind spots and plan for them to minimize impact. CunninghamLegal provides comprehensive Estate Planning legal services, including advanced tax and business planning. Please consider contacting us for a complete look at your situation.
How Should I Prepare for the Death of My Spouse?
Preparing financially for the anticipated or unanticipated death of a spouse may feel uncomfortable, callous, or even morbid, but it’s simply the right thing to do for your family.
In this guide, I’ll hit the critical financial topics surrounding the death of a spouse. These include social security, pensions, income taxes, remarriage considerations, life insurance, estate planning—and we’ll talk about assembling the right team of professionals.
By the end of this article, you should have a clearer understanding of the steps you should take now to protect yourself and your loved ones from financial hardship in the future.
The broader estate planning issues related to surviving a spouse, and the subject of estate planning in general, are covered elsewhere on our website. Please also check out our many other articles and webinars on these subjects.
The bottom line? While both spouses are alive, mindfulness, wise counsel, and preparation are essential to avoiding sub-optimal outcomes for those who survive.
What Happens When One Spouse Outlives the Other by Many Years?
Couples often imagine growing old together and passing away within a short time of each other. It is true that sometimes a surviving spouse will “die of a broken heart,” but the data indicates that one spouse typically outlives the other by many years—sometimes by decades.
According to a 2019 research paper titled “The Life Expectancy of Older Couples and Surviving Spouses” by the National Bureau of Economic Research, a woman will, on average, outlive her spouse by 12.5 years. Sorry guys, but a man will outlive his spouse by only 9.5 years.
For the surviving spouse, especially if they are less financially savvy or poorly prepared, this can be a period filled with financial uncertainty and instability.
In our estate planning practice, it’s common to see couples who are diligent about setting up their finances for retirement and Estate Plans with Wills and Trusts. Yet, even among well-prepared couples, the specific planning needed for one spouse to survive financially in the absence of the other is often incomplete or wildly underestimated.
The last thing a grieving spouse who recently retired wants to hear is, “You’ll need to either sell the house or get a job.” I’d like to say this is rare, but it’s not.
Able and Baker: A Cautionary Tale
Here’s a simple example of how a lack of planning can have an enormous impact on a spouse.
Able and Baker are newly retired and enjoying their golden years. They rely on two Social Security checks, investment income, and rental income from a property that Baker co-owns with Baker’s mother, Mabel, as joint tenants. Baker assumes she’ll outlive Mabel and inherit the property, so she doesn’t prioritize estate planning.
Unfortunately, Baker passes away unexpectedly at age 63, “in the wrong order.” In this instance, it is the child passing away before the parent.
Baker’s Social Security check stops, and the rental income ceases because Mabel, as the surviving joint tenant, now owns the rental property outright.
After Baker’s death, Able’s annual income drops from $100,000 to $52,000, forcing Able to sell his home and relocate to a lower-cost area.
This situation could have been avoided with better planning, such as addressing the possibility of Baker pre-deceasing Baker’s mother Mabel, properly structuring ownership of the rental property, ensuring that survivor benefits were correctly documented, and having a more robust Estate Plan.
Understanding Social Security Benefits After Someone Dies
Social Security is one of the cornerstones of retirement income for many couples. The rules governing Social Security benefits after a spouse’s death are complex, and understanding them is essential. Even if it’s just the basics!
When one spouse passes away, the surviving spouse generally receives the higher of the two Social Security checks that the couple had been receiving. The other, lower social security benefit stops. For example, if your Social Security benefit is $2,000 per month and your spouse’s is $1,500, your total benefits are $3,500. After the death of your spouse, you would generally continue receiving your own benefit of $2,000, but the $1,500 check would stop. That’s a 42% drop in Social Security income for the household.
This drop in income can be substantial and needs to be planned for. Additionally, the timing of when to claim Social Security benefits plays a crucial role in maximizing what you receive. Delaying benefits until age 70 can result in a higher monthly payout, but it may not always be the best choice, depending on your overall financial picture and health. This does require a “breakeven” analysis based on age.
The “breakeven” age for delaying Social Security benefits is the point at which the total amount you receive by waiting surpasses what you would have collected if you started earlier, generally between ages 78 to 82. When you delay from age 62 to 70, you lock in a higher monthly benefit, but you miss out on several years of payments, making it critical to weigh whether this strategy makes sense for you. Factors like your health, family history, and overall longevity are key. If you expect to live longer than the average person or are in excellent health, waiting may be a smart move. On the other hand, if you need the income earlier to cover expenses or have concerns about your life expectancy, taking benefits sooner—despite a lower monthly check—could be the right choice. Understanding these nuances is essential to making a sound financial plan.
In addition to timing, another important consideration is whether your spouse had non-traditional employment that may affect Social Security benefits. For example, public sector workers in certain states may have reduced Social Security benefits due to pension offsets or something called the Windfall Elimination Provision (WEP). Understanding how these factors interact with your financial situation can help you plan more effectively.
Social Security is a surprisingly complicated topic. We generally recommend consulting a Certified Financial PlannerTM specialist who focuses on this area of retirement planning.
Pensions: Lump Sum vs. Monthly Benefits After Someone Dies
Pensions can provide a guaranteed income stream in retirement, and they often come with choices that can have long-lasting impacts.
When planning for retirement, one of the biggest decisions is whether to take a lump-sum payout from a pension or opt for a lifetime monthly benefit. This decision can become even more complex when factoring in survivor benefits for a spouse.
If you opt for a monthly benefit, it’s essential to determine whether there is a survivor benefit and what percentage of the original payment your spouse would receive. Common options include 50%, 55%, 75%, or even 100% of the original benefit continuing to the surviving spouse. Without this survivor benefit, the pension income may cease upon your death, leaving your spouse without that income source.
On the other hand, a lump-sum payout provides you with more control over the funds and can be rolled over into an IRA for continued growth. However, the trade-off is that the money could be exhausted if not managed prudently.
The choice between a lump sum and a monthly benefit is highly personal and depends on many factors like your health, life expectancy, investment comfort, risk tolerance, and other income sources.
Making a Big Mistake with a Pension After Someone Dies
Consider this real-life example. Charlie, a retiree from the University of California system, had the option to take a $900,000 lump sum or a $9,000 per month pension. Charlie opted for the monthly pension. Unfortunately, Charlie passed away after just two payments. Charlie’s family received no further payments, as the survivor benefit was not selected. Had Charlie taken the lump sum and rolled it over to an IRA, those pension funds would not have been lost and could have benefitted Charlie’s family for decades to come. Hindsight is 20/20.
Will My Tax Bracket Change After the Death of My Spouse?
After a spouse’s death, the surviving spouse will typically move from filing taxes jointly to filing as a single person the year after the death of the spouse. The tax brackets for single filers are more compressed, meaning you hit higher tax rates at lower income levels compared to when you were filing jointly.
So, yes, a surviving spouse will often see their taxes go up.
For example, let’s assume a married couple has a combined income of $100,000. When filing jointly, their tax liability may be manageable. However, if one spouse dies, the surviving spouse would be taxed as a single filer on that same $100,000, potentially pushing them into a higher tax bracket.
This increase in taxes, combined with the loss of one Social Security check, can significantly impact the surviving spouse’s financial situation. Talk to a CPA and a Certified Financial PlannerTM about how you might mitigate this tax hit. CunninghamLegal has income tax strategies for those in the highest tax brackets, generally those earning more than $500,000 per year.
RMDs from IRAs Following the Death of a Spouse
Required Minimum Distributions (RMDs) from IRA accounts are another important consideration after the death of a spouse—and can be a highly complex topic. In fact, let me strongly suggest that you get professional help in understanding and planning the proper use and distribution of retirement accounts like IRAs after the original owner passes away.
At age 73, you must begin taking RMDs from non-Roth IRAs. These distributions are taxed as ordinary income. If your under-73 spouse passes away and you are over 73 and inherit their retirement accounts, the amount of money subject to RMDs might increase substantially. This would result in higher mandatory distributions and a higher tax bill for you.
Proactive tax planning strategies, such as Roth conversions for IRAs, can be helpful in reducing future tax burdens. By converting traditional retirement account funds to a Roth IRA during years when your income is lower (such as early retirement years), you can potentially save on taxes in the long run.
While you’ll pay taxes on the converted amount now, Roth IRAs are not subject to RMDs and distributions are tax-free, which can be a significant advantage later in retirement. But the rules on Roths can be confusing—again, get professional advice before making any moves.
Delta and Echo: Managing “Too Much” Wealth
Here’s a hypothetical that illustrates the importance of expert advice on IRA accounts.
Delta and Echo are in their 60s, with Delta holding a $7 million IRA. When Delta dies unexpectedly, Echo inherits the IRA, but now faces a significant tax challenge.
At age 73, Echo will be forced by law to take required monthly distributions (RMDs) from the IRA totaling $280,000 per year, far more than she needs, which will be taxed as ordinary income.
Echo meets with their team – financial advisor, estate planning attorney, and tax professional – to develop a strategy.
They decide to start Roth conversions right away, moving funds from the traditional IRA to a Roth IRA over several years.
Remember, Echo is in her 60s, so she has several years before she must begin taking RMDs. While this Roth conversion strategy increases Echo’s taxable income in the short term, it reduces Echo’s future RMDs and provides a tax-free income later in retirement.
Again—a complex maneuver that requires professional assistance to do properly.
Should I Remarry after the Death of My Spouse? Does Remarriage Affect Social Security?
Remarriage later in life after the death of a spouse is increasingly common, but it comes with significant financial considerations.
For starters, getting remarried before the age of sixty can impact Social Security benefits you may have been receiving based on your deceased spouse’s earnings. Specifically, if you remarry before age sixty, you may lose those benefits, which can be a major financial blow.
If you are a widow or widower and you remarry after age sixty, you may still be eligible for benefits based on your deceased spouse’s Social Security record, but it’s essential to understand the rules and how they apply to your situation.
Additionally, remarriage can impact pension survivor benefits, inheritance rights, and even the tax treatment of your estate.
For some couples, depending on which state you live in, becoming registered domestic partners instead of getting legally married is a viable alternative.
In California, for example, registered domestic partners have the same rights as married couples for state purposes, but this arrangement does not affect Social Security or certain federal benefits. This option allows couples to enjoy many of the legal protections of marriage without jeopardizing existing financial benefits.
Bottom line? Age matters. Remarrying matters. And you should not try to figure out these issues alone.
If you are considering remarriage, I strongly advise you to consult both a qualified estate attorney and a CPA on how to do it properly—or whether to remarry at all. If you are in California, you may wish to set up a call with CunninghamLegal to discuss your situation.
Updating Estate Plans, Beneficiaries, and Trusts Before a Death
Proper Estate Planning is crucial in ensuring your wishes are carried out and your surviving spouse is financially secure. Many problems with an existing plan cannot be fixed after one spouse dies.
Every married couple should consider working with a qualified Estate Planning lawyer to craft and maintain their estate plan. A good lawyer like those at CunninghamLegal will work through the difficult issues with you:
- Contemplation of remarriage and other potential scenarios after the death of a spouse.
- Consider prenuptial agreements or trust structures that you can set up to help safeguard your assets and protect the interests of your children and other loved ones.
- Plan and facilitate open conversations with your spouse and maybe even your adult children to provide peace of mind and ensure that your wishes are carried out after death.
- Update beneficiary designations on retirement accounts, investment accounts, and insurance policies to ensure they pass smoothly to the intended beneficiaries.
- Ensure good record keeping and instructions for a surviving spouse.
There’s nothing generic about this kind of planning. All these issues and many more require highly specific solutions for your personal situation. Contact us at CunninghamLegal to get started on the important work of reviewing your estate plan.
Example of a Hidden Trap in an Estate Plan: AB Trusts
Older estate plans may include an outdated variant of the “AB Trust” structure. This older version of a structure was designed to minimize estate taxes by splitting assets into two Trusts upon the first spouse’s death. The “A” Trust is the surviving spouse’s half of the assets that are for the surviving spouse, and the “B” Trust is the deceased spouse’s half of the assets, typically held for the benefit of the surviving spouse.
While this structure made sense when the estate tax “exemption” or ability to leave a certain amount of assets free of death taxes was much lower, it can now lead to unnecessary capital gains taxes because assets in the older “B” Trusts do not receive a stepped-up cost basis when the surviving spouse dies. As a result, many families pay more in taxes than they would if they had a more modern estate plan. You can learn more about the AB Trust issue here.
At CunninghamLegal, we fix outdated trusts all the time. Set up a call to discuss your situation.
Cost Basis Adjustments: A Key Tax Strategy After a Death
The death of a spouse in a community property state like California can have a significant tax advantage when it comes to cost basis. Cost basis is the value used to determine capital gains when an asset is sold.
For example, if you and your spouse bought a property years ago for $100,000 and it’s now worth $500,000, the $400,000 increase in value would be subject to capital gains tax if you sold the property. The “depreciation” of the rental is also subject to taxation as well, albeit at the slightly higher federal rate of 25%.
However, when a spouse dies, the cost basis of community property is “stepped up” to its current market value.
In our example, after the death of your spouse, the property’s cost basis is “adjusted” to $500,000, and you sell it for $500,000, no capital gains tax would be owed. This step-up in basis can apply to real estate, stocks, and other investments, providing significant tax savings.
It’s essential that assets are properly titled to qualify for the step-up basis. Property held as “joint tenants” does not receive this “full adjusted cost basis” treatment.
For example, if you own property jointly with your spouse, you may lose out on half of this tax benefit. Proper estate planning and regular reviews of asset titling can help you maximize the tax advantages available to you.
Will the Surviving Spouse Need Long-Term Care Insurance?
As we age, the likelihood of needing long-term care increases, and the cost can be substantial. Your likelihood of needing long-term care is influenced by several factors, including your life expectancy, health history, and the availability of a spouse or family member who could assist with care. If you believe your risk is higher, it might be wise to explore coverage options while you still qualify. We have a webinar on long-term care insurance which we urge you to review.
Should You Have Life Insurance?
Life insurance can play a vital role in financial planning for couples. But life insurance is not a simple topic, and it’s easy to make mistakes that show up only after many years, or when you are gone.
You should consider consulting with a Certified Financial PlannerTM and a lawyer before making decisions about life insurance—rather than relying solely on the advice of a person whose sole objective when they wake up in the morning is to sell another life insurance policy. As the old saying goes “If all you have is a hammer, everything looks like a nail.”
Your issues are likely more complex than you first realize. We have more information in our webinar on “Life Insurance—Getting It Right and Getting It Wrong.”
Working with Professionals: Assembling Your “A-Team”
The most important advice in this article is simple: don’t try to figure all this stuff out alone.
Properly managing the financial implications of losing a spouse requires the expertise of several professionals who can provide trusted advice and work together to create a comprehensive plan. No one professional can give you the whole picture.
I call it assembling your “A-Team.”
It’s important for you to review your estate plan annually with your estate lawyer, and then review it with your full A-Team every three years or when a major law changes. Here are the key players you should have on your financial A-team:
Certified Financial PlannerTM
A Certified Financial PlannerTM (CFP) is a professional who can help you manage finances through a comprehensive approach. This approach covers investments, retirement planning, tax strategies, and more. CFPs often collaborate closely with trust and estate lawyers to ensure your financial and legal plans work seamlessly together. This can help you structure assets efficiently, minimize taxes, and plan for the smooth transfer of wealth.
For example, a CFP can help you evaluate whether it makes sense to take a lump sum pension payout or opt for monthly payments. A CFP can help you determine the best time to claim Social Security benefits and recommend Roth conversions to reduce future tax burdens.
It’s important to note that some financial advisors may have a bias toward recommending options that allow them to manage your money, such as a lump sum payout instead of monthly payments from a pension. Be sure to weigh their advice against your own comfort level, risk tolerance, and long-term goals.
Estate Planning Lawyers
A specialized estate planning lawyer or estate planning attorney is essential for drafting and updating your Will, Trusts, and other legal documents. They ensure that your estate plan is legally sound, reflects your wishes, and is optimized for tax efficiency.
Estate planning laws change frequently, and what worked ten years ago may no longer be the best approach today. Regular reviews with an estate planning attorney can help you stay current with the latest laws and regulations.
Tax & Accounting Professionals
Accountants and tax advisors are crucial when planning for income taxes, Roth conversions, and capital gains strategies.
They can project how your tax situation will change after the death of a spouse and recommend actions you can take now to minimize future tax bills.
Coordination between your tax professional, estate planning attorney, and financial advisor is key to ensuring that your tax strategies align with your overall financial plan.
What Time Frame Should a Financial Plan Cover?
One of the biggest mistakes people make is thinking too short-term when planning for their financial future. While it’s natural to focus on minimizing taxes and optimizing income for the current year, true financial security requires a much longer view. Think in terms of five-year increments, decades, or even longer. Ask yourself questions like:
- What will my income look like 10, 15, or 20 years from now?
- How will my tax situation change as I transition from working to retirement to RMDs?
- If my spouse passes away, how long might I live alone, and what will my financial needs be during that time?
Taking this long-term view allows you to plan for various contingencies and ensures that you won’t be caught off guard by changes in your financial situation.
What We Do
The lawyers and staff at CunninghamLegal help people plan for some of the most critical times in their lives; then we guide them when those times come.
Make an appointment to meet with CunninghamLegal for Corporate and Tax Planning, Estate Planning, and much more. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call (866) 988-3956 or book an appointment online.
Also, many clients tell us they find our free legal webinars incredibly helpful and informative. We cover a wide range of issues related to Estate Planning, as well as retirement, taxes, Trusts, probate, living in California, asset protection, and many other topics.
You also may enjoy my bestselling book, Savvy Estate Planning: What You Need to Know Before You Talk to the Right Lawyer.
We look forward to working with you!
Best, Jim
James L. Cunningham Jr., Esq.
Founder, CunninghamLegal
