Michael Piper, CPA
Michael Piper, CPA, is in the St. Louis area and author of After the Death of Your Spouse: Next Financial Steps for Surviving Spouses. ObliviousInvestor.com
More than a million older Americans lose a spouse each year. And sadly, while still dealing with their grief, many of those widows/widowers are faced with hassles, stress and wasted time because they make financial mistakes that could have been avoided. It is easy to overlook details and deadlines for Social Security, taxes, retirement accounts and more, especially if the deceased was the one who took charge of financial matters in the relationship.
Bottom Line Personal spoke to Michael Piper, CPA, who has helped hundreds of surviving spouses, to find out about the most common mistakes he sees widows/widowers make and how to remedy or, better yet, avoid them altogether.
Mistake: Choosing the wrong “Survivor Benefits” claiming strategy. Widows/widowers can choose to collect their own Social Security benefits or their survivor benefits, which is the amount your deceased spouse was receiving at the time of death. If you are already age 70 by the time you become a surviving spouse, the choice is simple—select the larger of the two monthly benefits.
But if your spouse dies before you reach age 70, it requires some strategizing. Survivor benefits max out at full retirement age (66 or 67), while your own retirement benefits don’t max out until age 70.
So the question is whether it’s more advantageous to file for your spousal survivor benefits immediately while allowing your own benefits to keep growing until you reach age 70…or to file immediately for your own benefits while your survivor benefits keep growing until your full retirement age (66 or 67).
Example: A couple in their 60s had not started collecting Social Security yet. The 65-year-old husband died, and his 62-year old stay-at-home widow, who had a limited work history, needed money. Even though her survivor benefits would pay her more immediately, she would be better off waiting until her own full retirement age (66 or 67) to maximize the survivor benefit. In the meantime, she can collect her own reduced Social Security benefit, then switch to survivor benefits when she reaches her full retirement age.
Helpful resources: For more detailed information about survivor benefits, go to SSA.gov/pubs and select “Survivors” from the drop-down menu labeled “Topics.” OpenSocialSecurity.com is a free calculator to help people, including widows/widowers, decide their claiming strategies.
Mistake: Underpaying your withholding or estimated taxes in the tax year your spouse dies. In general, filers must send the IRS 90% of their total tax obligation for the year. This amount often is divided unequally between spouses.
What to do: You may need to increase the amount you send the IRS, or you will be at risk for penalties at tax time.
Mistake: Not taking advantage of joint-filing status for the tax year in which your spouse dies. In subsequent years, you must file as a single person, which offers less beneficial tax brackets and a lower standard deduction. Exception: If you have a dependent child, you may qualify to file as a “qualifying surviving spouse with dependent child” in the two years following the year of your spouse’s death. So even though your income may drop in the future, your tax rate actually may stay the same or even go up, a situation known as the widow’s penalty.
What to do: Consider accelerating income, for example from asset sales, to the year in which your spouse died. This can be advantageous because joint-filing rates and brackets still are available that year.
Mistake: Failing to take a post-mortem required minimum distribution (RMD) for the deceased. This is necessary if the deceased was required to take one by December 31 of the tax year in which he died. Many surviving spouses don’t realize that it becomes their responsibility as beneficiaries to take the RMD for the deceased. Otherwise, the IRS will charge a 25% penalty tax on the amount you didn’t remove from your retirement accounts when you were supposed to.
What to do: The good news is that the IRS now grants beneficiaries an automatic penalty waiver as long as the RMD is taken by the beneficiary’s tax-filing deadline. So if your spouse dies in December 2024, you would have until April 15, 2025, to take the RMD to avoid penalties (and as late as October 15, 2025, if you request an IRS extension).
Mistake: Failing to name new beneficiaries on an inherited IRA. This often happens when a deceased spouse already has named secondary beneficiaries on his/her IRA, typically the couple’s children. Don’t assume the secondary beneficiaries automatically become primary beneficiaries on the inherited IRA.
What to do: As soon as you inherit an IRA from your deceased spouse, name your own beneficiaries. Otherwise, upon your death, the IRA could go to your estate and then be distributed according to the instructions in your will. This also, in many cases, forces the IRA to be distributed over a shorter period than if it were left directly to designated beneficiaries, thereby often resulting in a higher tax rate paid on the balance.
Mistake: Not rolling over an IRA from your spouse into a new or existing IRA in your own name. Widows/widowers are allowed to make this rollover and treat the money as their own. It makes sense in most cases because it delays the need to make any RMDs until you reach your early 70s.
One big exception: If you are younger than age 59½, rolling the money into your own IRA, then withdrawing some of it, could trigger a 10% early-withdrawal penalty.
What to do: If you are under age 59½, retitle the deceased spouse’s IRA as an inherited IRA (not a spousal rollover). Once you reach 59½, you can transfer the assets of the inherited IRA into your own IRA.
MISCELLANEOUS
Mistake: Assuming that assets are jointly owned. Many surviving spouses discover that tangible property such as cars, real estate and even the deed to the family home were titled only in their deceased spouse’s name. This may have been done for simplicity’s sake if the deceased handled all the finances. But it can be a major hassle because those assets may have to go through probate and be distributed to you through the will before you can retitle them and take legal possession.
What to do: While your spouse is still alive, check that all assets are legally owned in both your names. Check the status of your “joint” credit cards as well. Reason: They can be shut down if your deceased spouse was the primary card holder who designated you as an additional authorized user.
Mistake: Filling out the death certificate incorrectly. Multiple death certificates are necessary to validate and confirm your spouse’s death for everything from insurance claims and Social Security to funeral and burial requirements to financial accounts. Errors on the death certificate can create complications and slow down legal and administrative actions.
Most common death certificate error: The full legal name of the deceased person is spelled incorrectly or incomplete. Example: Middle names often are excluded from the death certificate, either due to error or because the informant assumes that it’s unnecessary if the name wasn’t commonly used.
What to do: When providing details of the deceased’s name, make sure it’s consistent with the spelling of the name in his will. Also ensure the names of the next of kin (you and your children) are spelled consistently.
Other common mistakes: Wrong date of birth…incorrect medical information, such as the cause and date of death…wrong Social Security number.
Mistake: Not taking advantage of military burial–related benefits if your spouse was a veteran. For non-service-connected deaths, The US Department of Veteran Affairs VA provides a burial allowance of as much as $948…as well as $948 for a plot…and $231 for a headstone.
What to do: To find out how much in benefits you qualify for and to apply, go to VA.gov/burials-memorials or call 800-827-1000.
