A Financial Guide To Keep More Of Your Spousal Inheritance

When a spouse passes away, the financial implications can be overwhelming, especially for those unfamiliar with estate planning or tax rules. Spousal inheritance planning is a critical topic to safeguard their wealth and ensure a smooth financial transition during a challenging time. Here’s what you need to know to navigate this complex process effectively.

The Basics of Spousal Inheritance

Spouses typically benefit from favorable inheritance rules, but these rules vary depending on asset types, estate planning documents, and state laws. Key considerations include:

1. Ownership Structures: Property owned jointly with right of survivorship usually transfers to the surviving spouse without going through probate. However, assets titled solely in the deceased spouse’s name may require probate, unless a valid beneficiary designation or trust is in place.
2. Step-Up in Basis: When inheriting assets, such as appreciated stocks or real estate, the surviving spouse may receive a “step-up” in basis. This means the asset’s value resets to its fair market value at the date of death, potentially reducing future capital gains taxes when the asset is sold. If you’re in a community property state, both halves of the property may qualify for this adjustment, offering additional tax benefits.
3. IRA and Retirement Accounts: The surviving spouse can often roll over the deceased’s IRA into their own, allowing for continued tax-deferred growth. Recent updates under SECURE Act 2.0 provide options for spouses who are older or younger than the decedent to tailor Required Minimum Distribution (RMD) rules to their advantage. I delve deeper into that in “Keep More Spousal Inheritance from Roth IRA and IRA”

Key Steps to Take After a Spouse’s Passing

1. File for Social Security Survivor Benefits: If your spouse paid into Social Security, you may be eligible for survivor benefits. The timing of your application can impact the amount you receive, so it’s essential to plan strategically.
2. Update Ownership and Beneficiary Designations: Review and update titles for real estate, bank accounts, and other assets. Ensure beneficiary designations reflect your wishes for life insurance, retirement accounts, and investment accounts.
3. Address Medicare IRMAA Surcharges: If your income exceeds certain thresholds, you may face increased premiums for Medicare Part B and Part D. A spouse’s death is considered a “life-changing event” by the Social Security Administration, and filing Form SSA-44 can help reduce these surcharges.

Common Pitfalls to Avoid

1. Delaying Estate Plan Updates: Many people neglect to update their estate plans after a spouse’s passing. Ensure your will, trust, and powers of attorney reflect your current wishes.
2. Ignoring Tax and IRMAA Implications: A sudden change in marital status can impact your filing status and tax brackets. You may also face an IRMAA adjustment too. Work with a tax professional to understand how these changes affect your overall financial picture.
3. Overlooking Digital and Other Non-Traditional Assets: From cryptocurrency wallets to online accounts, ensure these assets are inventoried and accessible to your heirs.

External Resources for Guidance

• IRS Publication on Estate and Gift Taxes: Offers detailed information about federal estate tax rules.
• Social Security Administration’s Survivor Benefits Guide: Learn more about eligibility and application requirements for Social Security benefits.
• SECURE Act 2.0 Highlights: Stay informed about recent changes to retirement account rules.
• James Brewer’s Forbes Article on Sudden Wealth Events: Provides practical advice on managing unexpected financial changes.

Closing Thoughts

Navigating spousal inheritance requires a combination of financial knowledge and careful planning. Taking proactive steps to manage taxes, update estate plans, and leverage survivor benefits can ease the financial transition. Consulting with professionals such as financial advisors, tax experts, and estate attorneys ensures you make informed decisions that align with your long-term goals.

Remember, financial planning is not a one-time task but an ongoing process that adapts to life’s changes. Whether you’re a Baby Boomer planning for retirement, a Gen Xer managing your peak earning years, or a Millennial starting to build wealth, understanding the nuances of spousal inheritance is an essential part of your financial journey.