A Financial Planner's Perspective: Written By Jacob Stewart, CFP®
Losing a spouse is heartbreaking. But what many couples don’t realize is that it can also bring unexpected tax burdens and financial complications, at exactly the time you’re least prepared to deal with them.
As a financial planner, I’m often asked:
“Is our estate plan enough to protect my spouse?”
The answer: Not always.
Let’s walk through the most important tax traps and planning moves every couple should consider now to ensure financial stability later.
Why Isn’t an Estate Plan Enough?
Estate plans are vital, but most focus on transferring assets, not managing what happens next. When one spouse passes away, the surviving spouse often faces:
- The loss of one Social Security benefit
- Potential increases in income taxes, especially on retirement distributions
This combination can result in paying more in taxes on less income, a costly surprise known as the Widow’s Penalty.
What exactly is the "Widow's Penalty"?
The widow’s penalty occurs when the surviving spouse’s tax status reverts from Married Filing Jointly to Single. This can increase their tax bill significantly for the following reasons:
· Higher Marginal Tax Brackets: A spouse’s income could fall into a higher tax bracket due to the lower income thresholds as a single filer. As of the time of this article, this could be compounded by the expected sunsetting of the pre-2018 levels in 2026.
· Lower Standard Deduction: Cutting the standard deduction in half (i.e. $30,000 for a married couple to $15,000 for single filers), may increase the amount of income subject to taxes.
What Does the “Widow’s Penalty” Look Like in Real Life?
Let’s break it down using 2025 tax rates:
Scenario 1: Both Spouses Alive (Married Filing Jointly)
- RMDs: $100,000
- Social Security (Spouse 1): $50,000
- Social Security (Spouse 2): $25,000
- Pension (Joint Life): $30,000
- Total Income: $205,000
- Tax Bill: $25,149
Scenario 2: One Spouse Has Passed (Surviving Spouse Files Single)
- RMDs: $100,000
- Social Security (Survivor Benefit): $50,000
- Pension: $30,000
- Total Income: $180,000
- Tax Bill: $30,167
Despite earning $25,000 less, the surviving spouse pays over $5,000 more in taxes. That’s a 20% tax increase.
How Can You Reduce Your Spouse’s Future Tax Burden?
Here are four smart strategies I often recommend:
1. Have You Analyzed Your Future Taxes - Not Just This Year’s?
Work with a tax-smart advisor to project how taxes might shift if one spouse passes away. Look at lifetime exposure, not just your current bracket.
2. Can Roth Conversions Help Lower Future Taxes?
Converting portions of your traditional IRA to a Roth IRA while both spouses are alive can reduce future RMDs and taxable income for the survivor. Bonus: Roth IRAs grow tax-free and have no RMDs for your spouse.
3. Are Your Investments Set Up to Maximize the Step-Up in Basis?
When one spouse dies, certain assets (like stocks or real estate) can receive a step-up in basis, meaning capital gains are wiped away. But this only works if assets are titled properly.
4. Have You Considered Beneficiaries Beyond Your Spouse?
Sometimes, naming children, grandchildren, or even charities as partial beneficiaries can help reduce the tax burden left to your surviving spouse.
What Else Should You Do to Prepare?
- Make sure your spouse knows how to access all accounts, pay bills, and locate key documents
- Keep estate documents (like wills, trusts, and powers of attorney) up to date
- Work with a fiduciary financial advisor to revisit your plan regularly
When Is the Right Time to Prepare?
The answer is simple: Now.
Waiting until a crisis limits your options. Preparing today gives you more control, and gives your spouse peace of mind for the future.
Want help reviewing your plan?
A Deschutes financial advisor can help you develop a plan tailored to your unique family’s situation. We can also help with tax projections, Roth conversions, beneficiary updates, and staying ahead of tax law changes. Contact Us if you or your loved ones have any questions or concerns, we are here to help.