“Father Time catches up with us all.” – Steve Nicol
Unfortunately, I see the need for this list too often…
Checklist for surviving spouses:
Review step-up on the basis of inherited assets. Spouses who are the beneficiaries of taxable accounts may have their cost basis “stepped up” once the owner passes. This means the current market value becomes the new tax basis for the beneficiary. For example, let’s say the decedent purchased property for $25,000 and the property still had a tax basis of $25,000 at the time of the decedent’s death. If the property at the time of death is worth $100,000, the beneficiary’s stepped-up tax basis in the property is $100,000. If the decedent had sold the property for $100,000 just before death, the taxable gain would have been $75,000. Now, though, with the beneficiary getting the benefit of the stepped-up tax basis, the beneficiary can sell the property for $100,000 and there will be no taxable gain.
Remember a capital gain is the money you make by selling an asset for more than the tax basis (which is typically the amount you paid to purchase the asset).
If an asset is owned jointly, the beneficiary can get 50% of account assets stepped up. This can save thousands of dollars in taxes when the asset is eventually sold.
File Form 706 and elect portability. Each spouse is able to pass assets (up to a certain value) to beneficiaries without triggering estate taxes – this is called the “estate tax exclusion.” When a spouse (we’ll say it is the husband) passes away, his widow can add the unused portion of her husband’s estate tax exclusion amount to her own. This election to transfer a Deceased Spousal Unused Exclusion to a surviving spouse is known as the “portability election” and it can result in significant estate tax savings, especially if the couple’s combined assets exceed $5 million.
Here is an example. Let’s say a husband dies with assets valued at $4 million. His widow elects the lifetime exclusion and elects portability, so the husband’s $4 million is allocated to his estate. With this being so, even if the exclusion amount decreases during the widow’s lifetime, she is locked in, because she elected portability.
Estate attorneys usually file form 706, but it is crucial this is double-checked. If not, some assets can be subject to state inheritance and estate taxes. Form 706 needs to be filed within 9 months of death.
Take the deceased spouse’s RMD before year end. If an IRA owner dies after age 72, it is the responsibility of the surviving spouse to take the deceased spouse’s required minimum distribution (RMD) in the year of the death. Failing to do so can result in a 50% penalty! Also, if the surviving spouse is over 72, that survivor will have to take her own RMD in addition to the RMD of the late spouse. These two RMDs can increase the tax burden. This result might be avoidable if the surviving spouse “disclaims” the IRA assets (see below).
If the surviving spouse is younger, it may make sense to roll the husband’s IRA into her own name, thereby lowering RMD amounts or at least delaying them until she turns 72. If the surviving spouse is under age 59.5 and needs the income from the IRA, it may be best to keep the IRA in the name of her deceased husband, as a beneficiary IRA. This way, she is able to withdraw money from the IRA without a 10% early withdrawal penalty.
Notify the Social Security Administration of the death. What many people don’t know is that the person has to be alive for the whole calendar month to be entitled to a Social Security check. If a person dies on the last day of the month, any social security received for that month must be returned to the Social Security Administration.
Roth conversions. In the year your spouse dies, you can still file “married filing jointly.” You can use this time to do things like make Roth IRA conversions. Be sure to check with your CPA to ensure you consider all options. As a single person, your tax bracket is not nearly as forgiving as they were when “married filing jointly” (MFJ). In 2022, $250,000 of income is in the 24% tax bracket for MFJ, but in the 35% tax bracket for a single filer.
Disclaim IRA considerations. If the contingent beneficiaries (ex. children) are in a lower bracket and the surviving spouse does not need the money, it may make sense to disclaim the assets. This means the spouse does not claim the assets as her own — instead they go directly to the contingent beneficiaries. This highlights the importance of putting thought into the naming of primary and contingent beneficiaries.
Concluding Note: I have been called many times to rush to do plans for new clients where the husband is terminally ill and the wife needs immediate guidance in preparing for the death. Sometimes we can plan in time. Sometimes we cannot. Want to know a sure-fire way to make sure your spouse is going to be ok? Begin the planning process early and involve your spouse in it!
On the lighter side, going out of town next week to see the Masters golf tournament, then will be on vacation for a week in Mexico. Will try to relax and spend time with my family. Knowing me, I will work early in the morning. Stay tuned for pictures!
Hope all is well with you and your family,
Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA Riverbend Wealth Management.
This content is developed from sources believed to be providing accurate information and provided by Riverbend Wealth Management. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Riverbend Wealth Management, Stratos Wealth Advisors, LLC and its affiliates cannot guarantee that the information herein is accurate, complete or timely. Riverbend Wealth Management, Stratos Wealth Advisors, LLC and its affiliates makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consultant an attorney or tax professional regarding your specific situation.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate you should consult with a qualified tax advisor, CPA, financial planner or investment manager.