When You or a Loved One Are Facing Terminal Illness: Finances To Address

While I’ve never had to face the heartbreak of a terminally ill spouse, I did witness my parents going through this from the time I was 9-years old, until my father ultimately passed away eight years later. I watched my parents navigate not only the emotional toll of illness but also the heavy burden of financial uncertainty. I remember conversations around the dining room table about life insurance, mortgage payments, and something called a pension.

As if the emotional weight of a terminal diagnosis isn’t enough, financial stress often compounds the pain — especially when the person who usually manages the household finances is the one who’s ill. I’ve seen how overwhelming that can be. And that’s why I want to help.

This article is a guide to help you navigate your financial situation when faced with a terminal illness. It outlines key steps to help protect your household, respect your partner’s wishes, and prepare for the future.

Financial considerations

1. Cash flow and financial planning

Ensure you have a clear understanding of your household’s income, living expenses, and liquidity needs for unexpected expenses. This includes:

• Reviewing emergency funds, savings accounts, and retirement plans.
• Regardless of your or your spouse’s age, you may be able to withdraw from their retirement account without the usual 10% early withdrawal penalty if a doctor certifies they are expected to pass away within seven years. In some cases, there may also be an option to repay distributions within three years.
• Evaluating whether you’ll need to adjust work schedules or caregiving responsibilities.
• Checking whether your spouse can obtain accelerated life insurance benefits. These benefits, also known as “living benefits,” let you access part of the death benefit while they are still alive.
• Determining the need for long-term care, which can significantly affect cash flow and assets.
• Calculating the need to sell investments to cover expenses.

2. Estate planning and legal documents

Review and update legal documents to help ensure protection for you and your family:

• Wills and trusts: Confirm that documents reflect your current wishes. A revocable living trust allows you to plan what will happen to your assets upon your passing, but also should you become incapacitated.
• If you and your spouse own several properties, make sure residency is clear. Think about putting real estate, including out-of-state real estate, into a revocable living trust. This can help avoid probate in multiple states.
• With any estate plan, there may be state-specific issues to consider. Holding assets in your own name or out-of-state property can trigger probate, and insufficient planning can expose you to estate tax liability. Further complications can arise if you are not prepared, including that some states require a surviving spouse to pay for the costs related to their partner’s illness.
• Financial and healthcare powers of attorney: This is a good time to review and update your financial and healthcare powers of attorney. This ensures that someone else can make decisions in case of incapacity and provides guidance for your agent on the decisions you’d like them to make.
• Advance healthcare directives: Clarify both spouses’ wishes for end-of-life care.
• Beneficiary designations: Whether or not you have a will or a revocable living trust, check all insurance policies, retirement accounts, and bank accounts to see if beneficiary designations need updating. It may be prudent to include contingent beneficiaries on accounts.
• Digital assets: Either plan for your digital assets in your estate plan directly or transfer digital assets to heirs prior to a spouse’s passing, in order to preserve them.
• Investment and bank accounts: Transfer your investment and bank accounts into a revocable living trust, which should avoid probate and allow for a smooth transition of assets. Alternatively, you may think about adding “transfer on death” or “payable on death” beneficiaries to accounts, if not titled in a revocable living trust.
• Gifting: To reduce tax liability for heirs, you and your spouse can each transfer up to $19,000 to as many individuals as you’d like, tax-free each year, as of 2025.
• Planning for federal estate tax is crucial, if you are near or over the federal estate and gift tax exclusion, $13.99 million per person in 2025, or $27.98 million per couple. If so, consider strategies to minimize your possible federal estate tax liability.

3. Insurance and employer benefits

• Review your spouse’s life insurance policies, including any group coverage through work.
• Your spouse may be able to elect the “disability waiver of premium.” Review the elimination period for paying premiums and file a claim accordingly.
• Understand what benefits may be available through your spouse’s employer, such as disability or death benefits. Also, check into any pensions or other employer benefits to ensure you don’t overlook them.
• If your spouse is a veteran, explore VA benefits for terminal illness and survivor support.
• If your spouse has LTC insurance, review the policy to confirm understanding of what you need to do should they need to be admitted to a care home or require hospice care. Also make sure you understand what the insurance will not cover so you have a clear understanding of your financial responsibility.If your spouse is unable to work, look into whether they are eligibility for Social Security Disability benefits.
• If they’re eligible, will there be a need for health insurance? Your spouse must receive benefits for two years before they can get Medicare if they are under 65.

4. Tax and filing considerations

• You may still file jointly in the year your spouse passes away.
• If you have dependent children, you may qualify for the Qualifying Widow(er) status for two years after.
• Consider the tax implications of accessing retirement accounts or receiving accelerated life insurance benefits.
• Determine whether medical expenses will be deductible.
• If so, your spouse can deduct medical expenses that are not reimbursed. These expenses must exceed 7.5% of AGI. They include transportation to health care appointments. They also cover modifications to a home or car for medical reasons. Additionally, they can include privately hired in-home healthcare workers. Long-term care insurance premiums may also qualify, but this is limited by age.
• Unreimbursed medical expenses could exceed your taxable income. Consider doing a Roth IRA conversion to take full advantage of the medical expense deduction.
• When you have a capital loss carryover on your tax return from your spouse, think about selling an asset for a gain. This can help offset the carryover loss. You can use your spouse’s carryovers on their final tax return, but you will lose them afterward. A carryover allows losses exceeding capital gains to carry over to future years.
• Check if your spouse has any unrealized tax losses in their account. Think about harvesting those losses or gifting the asset. This will help preserve the loss for tax benefits and avoid the step-down in basis, which will lower the fair market value.
• Protect yourself from tax scams. Pay close attention to any emails or phone calls that seem suspicious. Delay any action until you check the source.

5. Housing and property

• If you own your home with your spouse, you may still qualify for the $500,000 capital gains exclusion. This applies if you sell the home within two years of your spouse’s death.
• Review how property is titled — either holding the property in trust or by joint tenancy with right of survivorship can simplify transitions.

6. Assets and debts

Determine whether there are any debts that will be due upon death such as commercial loans or medical expenses. Also learn if any debts will discharge upon death such as a student loan.

• Update your portfolio’s time horizon, investment objectives, or risk tolerance, if needed.
• Make a plan for how your spouse’s stock options, grants, or restricted stock units (RSUs) will factor into your income and tax liability.
• Review annuities or illiquid assets, like real estate collectibles, or private equity investments. Understand your options for selling or drawing income.
• Gift taxable investments with an unrealized gain to your spouse. This can allow you to receive a step-up in basis at their death, if their death occurs more than one year after the date of the gift.
• Construct an exit strategy or succession plan if your spouse is a business owner.

Get guidance

Preparing to lose your terminally ill spouse is a life-altering situation. We understand that navigating your finances can be overwhelming during this time. Our experienced team of advisors can help you regain stability, simplify decision-making, and confidently look to the future. We’ve been guiding our clients through life transitions for 40 years.

Contact your Mercer Advisors wealth advisors if you haven’t yet and let them know your circumstances have changed.

If you’re not a Mercer Advisors client and want help with making confident decisions during this emotional time, on your financial, estate, and tax planning needs, let’s talk.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.

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