This article is the third in a three-part blog series related to financial items to consider if your spouse passes away. Today we’re focusing on issues related to taxes, investments, and assets. In Part 1 we discussed estate settlement issues, and Part 2 addressed insurance and cash flow issues.
Undoubtedly, the loss of one’s spouse comes with uncertainty. As you adjust to the new normal, we’d encourage you to surround yourself with a support team that will help ease the stress of your loss. Let family and friends share your grief and hold you up in your sadness. Likewise, let trusted professionals come along beside you and provide guidance as you make financial decisions. Whether you’ve recently experienced the loss of your loved one or you and your spouse are planning now for the inevitable, perhaps the following questions will give you some direction.
Did you and your spouse own your home?
Married taxpayers who file jointly can sell their home and exclude the gain up to $500,000 if they meet certain criteria. Single taxpayers can only exclude $250,000 of gains. However, if your spouse passed away, you may still qualify for the full $500,000 gain exclusion if the home is sold within two years of your spouse’s death and other conditions are met. If you talk to a tax advisor, he or she could review the specifics with you. That’s true for this particular issue and for many of the issues below. Navigating tax rules is tricky, so lean in to the expertise of a qualified tax expert.
Did you own property jointly with your deceased spouse?
When someone inherits property (like real estate or an investment that isn’t within a retirement account), often times they receive a “step-up” in basis on that property. Cost basis is a figure used when calculating how much capital gains tax is owed on the growth of an asset. Bottom line, a higher cost basis will usually mean a lower tax bill in the future. So receiving a step-up in basis is a good thing.
If you and your spouse live in a common property state, you might receive a step-up in basis on the entire value of the property. In other states, including Nebraska, it depends on how the asset was titled. If your spouse was the sole owner and listed you as beneficiary, you might receive a step-up in basis on the entire thing. If you owned the property jointly with rights of survivorship (a common way to own property jointly in Nebraska), you might get a step-up in basis on just half of the value.
There are more complexities that we won’t cover here, for example, if you owned the property as tenants in common, and whether you use the date-of-death or alternative valuation date when settling the estate. Discuss the specifics with an estate planning attorney and tax advisor.
Do you need to confirm that all of your spouse’s prior income taxes have been paid?
Contact the IRS and the state taxing authorities to check on whether any back taxes are due and make any necessary payments.
Did your tax filing status change?
You can continue to file as Married Filing Jointly in the year your spouse passes away.
Do you have a dependent child?
If so, you may still be able to use the Qualifying Widow(er) tax filing status for the two tax years following the year your spouse passed away.
Did your spouse have stock options, grants, or restricted stock units?
The rules related to these assets are quite complex and might even vary from one stock agreement to the next. The specifics of how these assets will affect you is beyond the scope of this article — and frankly beyond the expertise of us here at Flagstone. We encourage you to consider how these assets will impact your tax liability and cash flow planning with the assistance of a qualified tax advisor.
Has the change in circumstances altered your investment objectives or risk tolerance?
When it comes to deciding how risky your investments should be, a sound decision considers your broader financial plan, your sources of income, your need for high (or low!) investment returns, your spending goals, your time horizon, and your personal appetite or tolerance for risk. Any or all of these things might have changed with the passing of your spouse. With the help of a financial planner, reassess whether your investment mix needs to change.
For example, what if your spouse had a pension that covered your expenses? Now you no longer have that income, so you’ll need to start to withdraw money from your portfolio. In that scenario, you might need to take less risk. What if your spouse was an emotional investor who reacted irrationally when markets experienced major ups and downs? Perhaps you can now afford to take some risk that was previously unwise. These are just two of several reasons you might want to change the level of risk in your portfolio.
Was your spouse a business owner?
If so, is there a plan to transfer or sell the business? Depending on the nature of his or her business, a well-prepared business owner might have a formal succession agreement. Such a plan outlines how a death would affect business ownership. You may need the assistance of an attorney to navigate the specifics of that agreement. If, however, no plan is in place, you may need to develop one with the assistance of an attorney. Again, the need for a succession plan depends on the size, complexity, and nature of the business.
Did your spouse have (or do you have) annuities or other illiquid assets?
It’s a good idea to review these types of assets to discover what options might be available. Talk to the insurance company to understand your options of what to do with an annuity. The characteristics of different annuities vary widely. We suggest you enlist the help of a fee-only financial planner (like us!) to help you make a wise choice once you understand what those choices are. Sometimes the death of a spouse ends up being an opportunity to get out of an otherwise illiquid annuity. Other times, it might be preferable to keep the annuity. It all depends on your overall financial picture and your objectives.
If you’re interested in talking through any of this—whether you’re an existing client or you’re curious about working with us—please don’t hesitate to contact us. For a free downloadable checklist of issues to consider when a spouse passes away, including other topics in this blog series, click here and enter your contact information.