When a Spouse Passes Early: Financial Risks You Need to Plan For

Key Takeaways  

• When a spouse passes early, surviving partners can be pushed into a higher tax bracket and experience a reduction in Social Security and pension benefits.  

• Medicare premiums can dramatically increase for single filers who have six-figure incomes, even when retired.  

• Novi can test your plan’s ability to handle the premature death of a spouse and make adjustments as needed. 

Most people don’t enjoy talking about death. If you ask them how they’d protect their family if they passed away unexpectedly, they’ll tell you they’re covered because they have life insurance. Life insurance is certainly an important protection when it comes to planning for these types of situations. It ensures that someone’s income is covered so their family can continue to pay the bills, pay off their mortgage, and remain in their home.  

But sometimes this income protection problem (and solution) is not so simple. Many of our clients have substantial income coming from many different sources, including pensions, Social Security and/or required distributions from retirement accounts. That’s great for married couples, but widowers often face substantial tax increases when they must start filing single.   

One couple we work with is in their late 70s. Both partners have multimillion dollar IRAs. They’re each required to take distributions of over $100,000 a year from those accounts. As a married couple, their tax hit on that six-figure income is not too bad (22% to 24% for married filing jointly). However, if one of them passed away unexpectedly, the surviving spouse would collect almost the same income but would be pushed into a much higher tax bracket, say 32% federal instead of 22% to 24%. Further, as a single filer with the same income, the surviving spouse would have to pay higher premiums for Medicare.  

Many clients are not aware of these issues (or choose not to discuss them), but we always have them top of mind. As part of our holistic planning process, we work with our clients to ensure they are comfortable and able to continue living the lifestyle to which they’ve become accustomed -- even if something tragic happened to a loved one.  

Here are four important considerations:   

1. The loss of departed spouse’s Social Security. If there is one breadwinner in the family, the other spouse is usually able to collect half of the spouse’s benefit while they are living. But if the loved one passes early, they would get their “widowers” benefit, meaning they would get the higher benefit. But they would lose out on their own “spousal” benefit -- essentially losing one-third of the benefit they would have been receiving when both were alive.  

2. Make sure your pension has a survivor benefit. If you have a pension from your employer or former employer, make sure you have some kind of survivor benefit attached to it.  Otherwise, the surviving spouse might lose out on a large chunk of expected income.  

3. Tax bracket changes. As mentioned earlier, if someone goes from married-filing-jointly to a single filer, and their income stays the same, they move into a higher tax-bracket and could end up paying more in income taxes. This could be particularly painful if living in a state with high income taxes as well.  

4. Higher Medicare IRMAA brackets (Income-Related Monthly Adjustment Amount). Medicare premiums for Part B (medical insurance) and Part D (prescription drugs) are based on income and filing status. For 2025, those higher premiums ($259 to $629 per month) don’t phase in unless a couple has an income above $212,000, but for single filers, the higher premiums kick in at only $106,000 in income. That’s a substantial change for your healthcare costs.  

Unfortunately, it’s hard to do much about your tax filing status and required distributions from Social Security, retirement accounts or pensions. They must each be taken by a certain age. But as part of our planning for couples, we can test how well their plan will hold up if one of them passes early, becomes disabled, or endures another type of major hardship. From there we can make proactive adjustments through Roth conversions, more charitable giving, trusts or several other strategies.  

Conclusion 

Premature death of a spouse is not something that most people enjoy talking about. But it’s much easier to plan for such setbacks when you’re not alone. As a Novi client, no matter what happens, you’ll have a sound plan in place to get through any of life’s major challenges. If you or a loved one have questions about estate planning or life insurance, feel free to reach out—we’re here to help.

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RYAN A. DUNN, CFP®, is a Wealth Manager at Novi Wealth