What do you need to know when your spouse dies?  

No one wants to think about taxes while grieving the death of a spouse.  However, there is some information to consider.    

DSUE – what is it, how long to decide, do I need to do this?  

This is the concept of portability.  It is best explained with an example.   

Joe and Mary have a combined net worth of $14M when Mary dies.  Half is allocated to each spouse, so $7M each.  The current amount excluded from estate taxes is approximately $13M.  Mary’s $7M is under the exclusion by $6M, so not estate tax return needs to be filed and no estate tax is due.   

One year later Joe dies.  The value of the assets (estate value) is now $16M.  The estate tax exclusion is now approximately $14M.  This means Joe’s estate (family) owes taxes on $2M.  Estate tax ranges from 18% to 40%.  Joe’s family will owes at least $360,000 in taxes.  Yikes!  Too bad the $6M Mary did not need is gone!  Or is it?  The amount Mary did not use can be “ported”  – moved – to Joe giving him an exclusion of $14M plus her unused $6M for a total of $20M exclusion.  $16M – the current estate amount – is less than the $20M, so there is no estate tax.  The family just saved $360,000!   

Is this automatic?  No.  A Form 706 Estate tax return needs to be filed within 5 years of Mary’s death to move the Deceased Spouse Unused Exclusion (DSUE) to the surviving spouse.  Once the unused amount is ported, it stays unless the surviving spouse remarries.  Even if the estate tax exclusion goes down to $1M, the DSUE is added to the $1M to give the family a greater amount tax free.  

Do you need to do this?  What are the chances your asset value will exceed the exemption amount?  What are the chances the estate exemption will fall below the current levels?  Today it is $10M indexed for inflation, or $13,990,000 for 2025.  Could it go back down to historical rates of $1M?  You may not think your estate will ever be large enough to tax.   

Do not forget what counts in your estate:    

1. Real Estate: This includes homes, land, and any other real property. 

1. Financial Accounts: Savings, checking accounts, CDs, stocks, bonds, and other investments. 

1. Personal Property: Vehicles, boats, jewelry, art, and other valuable personal items. 

1. Retirement Accounts: IRAs, 401(k)s, and other retirement savings plans. 

1. Life Insurance: The death benefit from life insurance policies, if the deceased owned the policy. 

1. Business Interests: Ownership stakes in businesses, including partnerships and corporations. 

1. Trusts: Certain trusts may be included, depending on their structure and terms. 

1. Other Assets: Any other property or assets the deceased had an interest in at the time of death 

Some subtractions are made on these amounts, such as mortgages.  It is generally easier to think in terms of the maximum estate for planning purposes.  The deductions will change as mortgages are paid down, for instance, but the total asset amount will remain as the worst case scenario for estate tax liabilities.  

Inherited retirement – rules for spouses, how to decide which option to choose.  What do other beneficiaries need to know?   

Surviving spouses can choose to treat an inherited retirement account as their own, or treat it as an inherited retirement account.  In both cases, if the person who died was taking required minimum distributions, these need to be continued.  If they were not taking them, then when they start and the life expectancy to use varies on the choices made.  

Other beneficiaries need to know they will have 10 years to take all the money out of the account, unless they qualify as an Eligible Designated Beneficiary (EDB).  EDBs are generally spouses, persons under 21, disabled persons and persons not more than 10 years younger than the decedent.  If the beneficiary is not required to take the full amount out within 10 years, they will still need to take annual distributions.  If the person who died was taking required minimum distributions before they died, the beneficiaries must continue to take them, even if they have to distribute the full balance in 10 years.  There is a lot of tax planning to consider with regard to retirement accounts at death.  

What is your filing status going to be?  

The year that includes the date of your spouse’s death is your last year married to your deceased spouse.  This means your filing status is either Married Filing Jointly or Married Filing Separately.  If you remarry before the end of the year,  a married filing separately return should be filed for your deceased spouse.  

This first year you may have lower income but still receive the benefit of the marriage tax rates, standard deductions and benefits.  You may also have greater expenses from medical (final medical expenses of the deceased as well as perhaps grief counseling for the survivor, for instance), charitable donations given in memory of your spouse, items of your spouse donated to charity or high mortgage interest related to paying off a reverse mortgage.  In short, the first year will be very unusual.   

If you have qualifying dependent children, you might be able to file as Surviving Spouse for the next two years.  This is a rate set better than head of household but not quite as good as married.  If you have dependents who do not qualify as children, you might still be Head of Household for as long as you meet this criteria.  Otherwise, your filing status is single.   

Single filing status has half the deductions and half the tax bracket.  If your income remains similar, your tax liability will possibly double.  YIKES!  That can be a shock!  Analyzing the projections or the future will be important to avoid big tax bills at the end of the year! 

Is a QCD a right strategy for me? 

QCD is a qualified charitable distribution from an IRA to a charity.  The distribution goes directly from your IRA account to the charity of your choice.  You can only do this if you are 70.5 years or older, and there are limits regarding dollar amounts ($100,000) and IRA contributions made after age 70.5.   

What is the advantage of doing one of these?  The amount that goes to charity goes off the top of your income.  Because you might be thinking you get a benefit by taking the itemized deduction for this, and illustration will help this make sense.  

Maria has $10,000 of investment income, $35,000 of pension income, $18,000 of taxable social security and an RMD of $5,000.  Her total income is $68,000.  Her standard deduction in 2025 is $17,000.  Her itemized deductions would be $5,000 in charitable contributions, $4,000 in real estate taxes, $1,000 in other state taxes, and her medical expenses, $8,000, are reduced by 7.5% of her income.  She does not have enough deductions to itemize.  She does not get a benefit from her charitable donation.  But, if she has her RMD go directly to the charity, her income is reduced by the $5,000 of the QCD  and she gets a tax benefit.   

This strategy works best for people who give to charity already and do not have a tax benefit from itemized deductions, like Maria.  It can also work for people who wish to download their estates, who wish to reduce their income to increase the benefit of high medical expenses or for people who have income just about an amount that triggers an additional tax.  

Trust – did you have one?   

If you had a trust, did it specify a split into a revocable and an irrevocable trust?  This was the old way of tax planning to reduce estate tax exposure.  Another reason people do this is to make sure their wishes cannot be changed after they die.  This can also be done for other legal and asset protection strategies.  If you are not sure, read your original trust and all amendments carefully.  Considering discussing with your trust attorney and your tax professional.  There are procedures that must be followed to carry out the wishes of the first-to-die in these situations.   

If I don’t have a trust, should I consider one?  

This is more of a legal question than a tax question.  With that said, in California it is generally a good idea to have a trust.  A trust avoids probate.  In California probate is expensive.  Generally they also take years to administer as well.  The cost of a trust is small compared to the cost of probate.  True, you won’t be paying the bill, your estate will.  The question then falls to how you feel about your beneficiaries.  Do you want them to get more of what you earned, or do you want the probate attorney to get a chunk?  Do you want to make the process quick and easy relative to a probate?  If you are not sure, discuss with an attorney and/or your beneficiaries.   

What happens to my assets?  Should I sell them?  

In a community property state, such as California, assets owned by both spouses receive a step-up in basis.  This means the tax-free amount of the value of the asset changes to the current fair market value of the asset.  As an example, if you purchased your home in San Jose during the 1980’s for $100,000 and it is now worth $2,000,000, you can sell it for $2,000,000 and pay taxes on $0.  But if you sold it before your spouse died, it would be $2,000,000 less $500,000 Section 121 exclusion less the $100,000 purchase price plus any improvements.  It is likely that well over $1M would be taxed.  In general, inheriting property is the best way to transfer it.  Remember this before thinking about giving assets to your beneficiaries before you pass – leave them assets through a trust or will  and they will also get a step up in basis.  Otherwise they will pay more taxes than you would because they will likely not qualify for the Section 121 exclusion.  

Assets that are not community property will have a basis adjustment as well, but it will matter how they are titled and when and how they were acquired.  Title matters when assets are not community property! 

What else should be addressed?  

Tax documents, such as investment accounts and mortgages report under only 1 social security number, no matter how many names are listed.  Any tax documents that do not show your tax id (generally your social security number) need to be updated.  They need to report in your name going forward.  What tax documents report in spouses social?  Any which do not identify the survivor’s name and social should be changed right away! 

Consider including a trusted friend or family member in your medical and financial affairs.  This can help with tracking what is happening in your life in case you are not in a position to provide this information when needed.  You and your spouse used to back each other up.  You need a new back up now.  

Beware of scams and financial predators!  Public information includes recent deaths – prime time for bad actors to strike!  Bad actors will read death notices and contact the survivors offering services that are not needed or are free.  A common seemingly helpful event could be a new financial professional reaching out to review your investments.  Be very careful.  Not all financial people are looking out for you – many are looking for opportunities to cash in by selling you new investments that pay them high commissions, but may not be appropriate for your situation.  Do not begin any new relationships without carefully researching the potential new person.  There is a reason you and your spouse chose to keep with your trusted inner circle.  Do not forget those reasons!    

Email is often dangerous!  DO NOT assume the person sending an email is a good person.  Assume they are a crook trying to steal everything you have.  Would you let just anyone in your front door without knowing who they were?  Don’t let just anyone into your data life!  Clicking links or calling phone numbers can be risky.  Verify the information or simply ignore it.  If you are unsure, ask a friend or family member to look at it with you.  Assume it is bad – not that it is good!  

Phone calls are not always what they seem!  Another action of bad actors: calling impersonating a friend, family or loved one.  Or they call stating they are representing such a person.  These scams prey on the love and trust of the friend or family member.  The calls will seem urgent – money must be received for bail, to return home from overseas travel or pay a deposit at a hospital for a medical emergency.  There are lots of variations of the calls.  They all have one thing in common: they want you to depart with your money quickly to avoid something bad.   

Beware of new online friends!  Another scam involves a friendship online that may or may not develop into a romantic type of relationship.  The person either needs money for a seemingly good and important reason, or they are offering tips on investing into the latest cryptocurrency, a business, or a stock that is about to break.  If anyone you know, especially if you do not know them in person, suggests a need for money or a great investment, be very careful!   

Are these things tax deductions?   

Funerals? Gifts?  Bequests (fancy name for gifts from wishes of decedent at death)? Donations to friends/family of decedents items?  No, unfortunately, to all.  None of them are income tax deductions. 

As always, we are here to help you navigate your life changes.  These are common topics to discuss, though there are others.  Do not hesitate to ask us for assistance in reviewing your details!