Navigating Finances After the Loss of a Spouse: Key Steps for High Networth Individuals
The loss of a spouse is an emotionally challenging time, and amid the grief, it’s important to address financial matters that can have lasting implications for your future. While there is no easy way to prepare for the emotional toll of losing a loved one, taking proactive steps to manage the financial aspects can help secure your own financial well-being.
In this article, we’ll cover several key financial steps to take after your spouse passes away, including how to manage the step-up in basis on non-qualified accounts, filing IRS Form 706, and appraising your home at the date of death (DOD).
1. Understanding the Step-Up in Basis for Non-Qualified Accounts
One of the significant financial benefits available after a spouse passes away is the step-up in basis for certain assets, specifically those held in non-qualified accounts (such as brokerage accounts, real estate, or other investments outside retirement accounts). This adjustment can substantially reduce capital gains taxes when you sell these assets in the future.
What is Step-Up in Basis?
The basis of an asset is essentially the original purchase price for tax purposes. When you sell an asset, you are taxed on the difference between the sale price and your basis (known as capital gains). The step-up in basis allows you to adjust the value of inherited assets to their fair market value on the date of death (DOD) of your spouse, reducing the taxable gains.
How the Step-Up in Basis Works:
● Example: If you and your spouse purchased a home for $200,000 and the home’s market value at the time of your spouse’s passing is $500,000, the step-up in basis would adjust the value to $500,000. If you later sell the home for $525,000, you would only owe capital gains taxes on the $25,000 increase (rather than $325,000 based on the original purchase price).
● In community property states, the entire property typically gets a full step-up in basis. In non-community property states, only the deceased spouse’s half of the property gets the step-up, which can result in a partial adjustment.
By taking advantage of the step-up in basis, you can minimize capital gains taxes when you sell any inherited investments or real estate.
2. Filing IRS Form 706 for Estate Taxes
If your spouse’s estate is substantial, you may need to file IRS Form 706 (United States Estate Tax Return) to report the value of their estate and calculate any estate tax liability.
What is Form 706?
IRS Form 706 is used to determine the federal estate tax due on estates that exceed the estate tax exemption. In 2024, the federal estate tax exemption is $12.92 million per individual. If your spouse’s estate exceeds this exemption, any value over the threshold is subject to estate tax.
Even if your spouse’s estate falls below the exemption threshold, it may be beneficial to file Form 706 to claim the portability election, which allows you to transfer your spouse’s unused estate tax exemption to yourself. This can be especially valuable if your own estate may exceed the exemption in the future.
When to File Form 706
● The estate tax return must generally be filed within nine months of your spouse’s death, although you can request a six-month extension if needed.
● Filing Form 706 also helps document the step-up in basis on assets, which can protect you in case of future IRS inquiries.
If you’re unsure whether your spouse’s estate requires filing Form 706 or if portability applies to your situation, consult with your tax advisor or estate attorney to ensure you’re making the most of available exemptions.
3. Getting Your Home Appraised at the Date of Death (DOD)
When your spouse passes away, one of the most important steps in managing their estate is obtaining an accurate appraisal of your home as of the date of death (DOD). This is crucial because the appraised value on the DOD will be used to determine the step-up in basis and, ultimately, your capital gains tax liability if you sell the home in the future.
Why Appraisal is Necessary
● The appraisal determines the fair market value of the property on the DOD, which is essential for calculating the new stepped-up basis for tax purposes.
● Without an accurate DOD appraisal, you may face difficulties in determining the correct amount of taxable capital gains when you sell the home.
How to Get Your Home Appraised
● Contact a certified appraiser who is experienced in performing estate-related appraisals. The appraiser will assess the home’s market value as of the DOD, providing you with an official valuation.
● Keep detailed records of the appraisal, as you’ll need this documentation for both estate tax filings (if applicable) and future tax purposes when selling the property.
Pro Tip: If your spouse owned additional properties, such as vacation homes or rental properties, you’ll need to have each of these appraised as well.
Additional Steps to Take After a Spouse’s Passing
While the step-up in basis, Form 706, and home appraisal are critical financial considerations, there are several other steps you should take after the loss of a spouse:
Update beneficiary designations: Ensure that your beneficiary information is up to date for any retirement accounts, life insurance policies, and bank accounts.
Review estate planning documents: Work with your estate attorney to update your will, trust, and other estate planning documents to reflect your current situation.
Assess your cash flow needs: The loss of a spouse can change your household’s financial situation. Review your cash flow needs, including any changes to income, Social Security benefits, or required distributions from retirement accounts.
Consult your financial advisor: Managing your finances after a spouse’s passing can be overwhelming. Your financial advisor can help you develop a strategy that incorporates these key considerations, ensuring that your financial future is secure.
Final Thoughts
Losing a spouse is never easy, but addressing the financial aspects early on can help you protect your assets and make informed decisions for the future. From taking advantage of the step-up in basis on non-qualified accounts, to filing IRS Form 706, and obtaining a date of death appraisal for your home, these steps are critical to ensuring your financial well-being.
At LA Wealth Management, we are here to guide you through the complexities of managing your finances after the loss of a spouse. We can help you navigate estate planning, tax strategies, and long-term financial decisions with compassion and expertise. If you need support during this difficult time, please reach out to us for personalized guidance.
Information provided should not be considered as tax advice from GWN Securities, Inc. or it's representatives. Please consult with your tax professional.