Summary — “Are You Leaving Your Spouse a Mess and No Plan?” 🎙️💡

Hosts

• Matt Sorenson
• Mark J. Kohler

Big Picture — Why this matters

• Most people will face reduced household income and changed tax situations when a spouse dies.
• Small pre-planning steps can save thousands — even hundreds of thousands — in taxes and preserve wealth for surviving spouses and heirs. 💰⚖️

Four key problems (and opportunities) at death

1. Social Security reduction

   • If both spouses collect SS, when one dies the surviving spouse loses one check.
   • Survivor can take the higher of the two benefits, not both → reduced income.

2. Increased withdrawals from retirement accounts (IRD)

   • Surviving spouse will likely withdraw more from IRAs/401(k)s to replace lost SS.
   • Traditional (pre-tax) accounts create taxable income called Income in Respect of a Decedent (IRD).

3. Tax bracket shift in year of death vs. following years

   • Year of the spouse’s death: surviving spouse files as Married Filing Joint (MFJ) for the whole year — often a larger tax bracket threshold.
   • The following year: surviving spouse files single — bracket thresholds roughly cut in half.
   • Opportunity: use the MFJ year to perform Roth conversions while you’re in a lower effective tax bracket (e.g., convert up to $400k MFJ at 24% vs. only $200k single). 🔁➡️🟧

   Tactical points:

   • Convert traditional retirement assets to Roth in the MFJ year to lock in lower tax rates and produce tax-free future withdrawals.
   • Pair Roth conversions with charitable giving in the death-year to offset tax and enable larger conversions.
   • Spousal rollover: when a spouse dies, the surviving spouse can roll the deceased’s IRA into their own IRA (not treated as an inherited IRA) — enabling conversions and normal IRA treatment.

4. Stepped-up basis issues on non-retirement assets

   • Step-up in basis resets asset tax basis to fair market value at death — reduces capital gains tax on sale.
   • If property is jointly owned 50/50 (common), surviving spouse only gets a step-up on the deceased spouse’s half → built-in taxable gain remains on the other half.
   • Community property states give a double step-up (100% step-up to surviving spouse) — huge benefit.
     • Community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin.
     • Residency (domicile) at death determines whether community property rules apply — you can get double step-up on assets nationwide if you die as a resident of a community property state.
   • Planning option in non-community-property states: use two trusts (his/hers/ours) and allocate highly-appreciated assets into the trust likely to get stepped-up basis first — preserves basis for survivor and heirs. 🏠📈

Important asset-specific guidance

• Retirement accounts (largest wealth pool — ~$50T): prioritize Roth conversions in the MFJ year; Roth IRAs are the best asset to leave to children (tax-free growth and withdrawals).
• Brokerage & real estate: titling and trust ownership determine whether assets get full step-up or partial; improperly adding children to title is a common costly mistake.
  • DO NOT simply add a child on title to avoid probate — that often results in only 50% step-up and may trigger gifts, taxes, probate, sibling conflicts. ⚠️
• Use a properly funded revocable living trust to:
  • Avoid probate
  • Ensure full step-up in basis for intended beneficiaries
  • Control how assets pass to children (avoid forced gifts, gift-tax issues)

Practical action steps (do this now)

• Get an estate plan: revocable living trust + proper beneficiary designations. 📝✅
• Inventory assets: retirement accounts, brokerage, real estate, insurance, business interests.
• During MFJ year (if near that life event): evaluate Roth conversions up to the MFJ bracket threshold.
• Consider charitable gifts in death-year to offset taxes and enable larger Roth conversions.
• Review titling: decide between joint title, trust ownership, or separate “his/her” trusts to optimize stepped-up basis.
• If in/considering moving to a community property state, understand residency implications for stepped-up basis.

Common mistakes to avoid 🚫

• Thinking “everything goes to my spouse tax-free” — ignores SS loss, IRD, bracket changes, and basis issues.
• Adding children to title to avoid probate (costly tax consequences).
• Not funding a trust — having a trust but leaving assets titled in personal names defeats planning.
• Failing to use the MFJ year window for Roth conversions.

Final takeaway

• Death + taxes are inevitable, but thoughtful planning (trusts, Roth conversions, titling, charitable offsets) can greatly reduce tax leakage and leave your spouse/kids with far more of your wealth. Plan ahead — don’t let odds and inertia cost your family dearly. 🛡️❤️

If you want, I can:

• Create a one-page checklist tailored to your state (community property vs non) and asset mix. ✔️