Broker Check
Death and Your Estate: Part 1

Death and Your Estate: Part 1

June 18, 2020

Hi everyone! Welcome back to Melissa Making Cents!

As a Certified Financial Planner, I have had to walk families through the process of financial planning for “a loved one's final stage”.  It’s never easy, and it almost never makes the top of the “most fun things to do”.’s necessary,  and it's easier to plan ahead than to have your loved ones plan after nature wins.

Today’s topic is a very personal one for me. My stepfather was placed into hospice care a little over a month ago, which has been especially difficult with everything else going on in the world. Paul has been a very special gift to our family, and I have always admired him for his strength, kind heart and tough spirit.  He is staying true to that fighting spirit and giving death a good run for it’s money.  As tough as it is to watch and experience, we are there to fight right along side of him.

Papas make a great napping spot!

In addition to the heavy emotional toll that my family is experiencing, we’re also thinking about the logistics of settling his finances after his passing. I know I’m not the only one in this situation, which has inspired me to talk more about what happens to your assets after death. 

Sometimes death is a slow but expected process, as in the case of a terminal illness.  While other times it comes completely by surprise. Either way, it’s important for all of us to have our finances in order so that we can reduce stress on spouses, children, and other family members who outlive us. The process of managing the future distribution of assets after  death is referred to as “estate planning.”

Estates come in all shapes and sizes!

Now, the word “estate” might call to mind a large manor house in the English countryside, or a sprawling mansion with 17 bedrooms. But in this case, the word “estate” means all the money and property that you own and can bequeath at death. Different components of an estate have different rules about what happens when you pass away. Who does the money go to? What are the tax implications? And what’s the actual process of distributing the estate? 

As a Certified Financial Planner, I recommend that you consult your CPA or tax advisor, as well as an attorney when necessary.  In most cases transferring assets after death are fairly simple, but as I love to point out... Life throws curve balls and some inheritances may come with tax or legal complications.

Today I’m going to cover what happens to different types of financial accounts after death. Next week I’ll finish with what happens to property, such as real estate. So, without further ado...

After Tax Accounts May Be Subjected to Probate 

After tax accounts accounts are accounts that are funded with money that may have already been taxed, like your paycheck.  Examples of after tax accounts include bank accounts, savings accounts, or investment accounts that are not retirement accounts.  In an after tax account any dividends or income earned in the account are normally subject to your ordinary income tax rate.

Banks and financial institutions may freeze or close any financial accounts under the name of a deceased person. Depending on the type of account and how it is styled. There are generally four things that could happen next.  (However there are accounts that may not follow under these situations, in which case you will need to consult your financial planner or advisor for guidance)

  1. If you were the sole holder of the bank account and you have a will, then the assets within the account must go through probate. Probate refers to the legal process in which a court establishes the validity of your will, uses the money in the account to pay off any existing debt or bills, then distributes the remaining assets to the beneficiary named on the account. These actions are typically taken by the executor of the will
  2. If you were the sole holder of the account and, for some reason, you do not have a will, upon your death your financial accounts will be considered “intestate." States have their own laws about intestate succession and how property is distributed upon death. 
  3. If your account was formed as joint tenants with rights of survivorship (JTWROS), then that means your account has a co-owner. Real estate, checking accounts, savings accounts, mutual funds, and brokerage fund accounts are eligible for JTWROS.  In this case, the probate process is skipped and the remaining assets pass to the other person named on the account. This type of account is common between spouses or between a parent and child. As with single holder accounts, creditors can collect debts from the deceased’s previously held JTWROS account.
  4. If you have a transfer on death (TOD) account, the financial institution will automatically transfer the assets to a previously chosen beneficiary (or beneficiaries) upon your death. A TOD account also means that a probate process is not required. In some states, vehicles and real estate can also be transferred through a TOD account. Keep in mind that TOD accounts may also be subject to inheritance tax, which requires beneficiaries to pay taxes on what they inherit from the estate. 

As part of the estate planning process, understand which type of accounts you have and make sure you’ve listed any beneficiaries where necessary. And if you haven’t written your will yet, get thee to an attorney! I always tell my clients that they (and their loved ones) should always have a will in place, and it’s never too early to put one together!  I also explain that if you don't plan for your loved ones and your financial future, your government will take care of planning for you...

Retirement Accounts Pass Through Beneficiary Designation 

Retirement accounts, including IRAs, 401ks, 403b, 457s and Health Savings Accounts, will be passed on to your named beneficiaries. As long as a beneficiary is listed on each account, the account will not need to be settled through probate court. However, if you did not designate a beneficiary, the distribution would be determined through probate. 

Some retirement accounts, such as 401(k)s, require you to name your spouse as the beneficiary (unless the spouse provides written consent giving up that right). However, other retirement accounts like IRAs allow you to name anyone you want as a beneficiary. It’s usually an easy process to change beneficiaries for your retirement accounts if you undergo unexpected life changes, so make sure your information is up to date. I’ll take a moment to let you imagine how you might feel if your ex-spouse inherited your money, or better yet how your new spouse might feel if your ex-spouse inherited your money.

What happens with the account depends on if you die before or after you are required to take distributions (Required Beginning Date, or RBD). If your death occurs before the RBD and your retirement accounts are inherited by a spouse, the money can be withdrawn over their lifetime starting either the year after death or the year you would have turned 72, whichever is later. Other options for spouses are to take the money as a lump sum, or to transfer the assets from the inherited account into their personal retirement account. However, if your death happened after the RBD, the spouse beneficiary must take their distributions over either their own life expectancy or what would have been your remaining life expectancy, whichever is longer. 

Current laws specify that retirement accounts that are inherited by a person other than a spouse requires the money to be taken out by the end of 10 years. This is the case regardless of whether the death occurs before or after the RBD. However, it can be tricky, if the beneficiary is a minor with limited capabilities to manage finances over a 10-year span, so you may wish to explore other options such as a trust in this instance (more on those later).  A Certified Financial Planner can help you to develop a plan for your family that considers any future distribution and the pros and cons of each option. 

The beauty of retirement accounts is that they are able to grow tax-free prior to distribution. When you or your beneficiaries take money out of a 401k or IRA, then it’s taxed as ordinary income. However, recipients of Roth IRAs do not have to pay taxes upon distribution because you will have already paid the taxes prior to putting that money in your account. Since the rules vary so much, I recommend that any recipients of a retirement account consult with a financial advisor to determine what they’ll owe.

Annuities Are Contracts That Have Many Options Upon Death

Offered through insurance companies, annuities can vary by product and design as well as complexity.  (Just as a reminder, please consult a prospectus and examine the contract details before purchasing an annuity.. aka.. know what you are getting into!) Typically annuities are long-term investments that are designed to provide income and security throughout later stages of life. When you purchase a policy, you will make either a single payment or several payments for a number of years, known as “premiums”, and in exchange you will receive income at a later date that can sometimes last for the rest of your life. 

There are several ways persons receive income :

  1.  Single life or life only annuity: In single life annuity, you will receive lifetime payments, but payments stop at the individual’s death and no further value is paid. 
  2.  Joint and survivor annuity: With this option, both you and your spouse receive annuity payments for the duration of your lives. If one spouse dies first, the other   will continue to receive payments. When the second spouse dies, payments cease and no further value is paid.
  3.  Life annuity with period certain or refund feature: You receive lifetime payments. If you die prior to the period certain elected (10, 15, 20 years), the remaining   payments for the period are made to the beneficiary. With a refund feature, a death benefit payment is made either in lump sum or in installment payments until the   money paid out equals the money paid into the policy.  
  4.  Period Certain: Annuity payments are paid for a specific time period, such as 10, 15 or 20 years. If you pass away during that time, the remaining payments will be   made to the beneficiary

As with most other types of financial accounts, you can choose one beneficiary or several and divide the percentage of any remaining annuity payments accordingly. Keep in mind that minors can only receive the remaining payments from an annuity after they become legal adults. A few other beneficiary options include charitable organizations or a trust (yes, I promise we’ll get to those soon!).

Payouts can occur as a lump sum or series of payments. The series of payments option either takes the form of a five-year withdrawal period or a maximum of ten years like the retirement accounts above.  However, beneficiaries must pay taxes on the annuity payments they receive. A lump sum payout will result in having the taxes taken out all at once, while the series of payments options spread out the tax burden over time. One isn’t necessarily better than the other, and a financial planner can help you make the best decision for you.

Life Insurance Provide Tax Free Benefits to Your Beneficiary 

There’s a good chance that you also have a life insurance policy offered through your employer, or purchased on your own. Many people take out life insurance policies in order to provide for their loved ones upon death. Like annuities, life insurance is offered through an insurance company and requires the policyholder to pay a premium in exchange for a future benefit. The advantage of life insurance is that the insurer will provide a payout to your designated beneficiary(s) upon death.

There are different types of life insurance policies, and the benefits can vary from policy to policy or from provider to provider.  Life insurance is typically offered either as “Term Insurance,” which only lasts for a specified amount of time (such as 20 years) or as “Permanent Insurance” (a.k.a. Universal or Whole Life), which lasts forever or until death do you part.

In order for the beneficiaries to receive your life insurance benefits, they will need to submit a death claim and copy of the death certificate to the insurance company. Insurance companies will review the claim (usually within 30 days), and then usually issue the payouts within 30 to 60 days. Payouts can take a few different forms, such as lump sums or annuity payments over time. 

Life Insurance death benefits are generally income tax free. The beneficiary may have to pay income tax on any interest that accrues before the total benefit is paid out. Federal and State estate taxes may be charged if the policy is held inside the estate and the estate is large enough to trigger the tax. Amounts vary by state. Let this serve as a reminder for you to check and update your beneficiaries regularly.

Trusts Avoid Probate and Allow for Privacy

A lot of people think of “trusts” as something that’s only used by the superrich. But that’s not the case! Anyone can set up a trust, and this could be a good option for you depending on your situation. Assets held in a trust are passed through trust documents rather than through probate after death. Trusts are set up through an attorney and offer you even greater say over who receives the assets and how the assets are paid out. This is a great solution if most of your estate would pass to a minor, who would not be able to control the money for a number of years. Trusts often include real estate or personal property, but they can also include financial accounts such as savings accounts.

There are many different types of trusts, but they fall into two major categories: revocable or irrevocable. A revocable trust, or “living” trust, enables you as the grantor to maintain control of the assets and make any changes while still alive. However, beneficiaries of revocable trusts may still have to pay estate taxes depending on the value and structure of the trust. 

By contrast, an irrevocable trust has terms you cannot change once established. However, since an irrevocable trust means that your assets are transferred out of your estate, it is not subject to estate taxes or income taxes generated by the assets within the trust.

Stay tuned for Part 2!

Next week I’ll be back with Part 2 about what happens to property. Keep in mind that if you are setting up your own estate plan or working with a family member to set up theirs, it helps to get in touch with a Certified Financial Planner to understand the different options and what will work best for your situation. It’s never too early to start planning.

Schedule a call with Melissa Cox CFP®

Until next time...this is Melissa Making Cents!

Melissa Anne Cox

CERTIFIED FINANCIAL PLANNER™  is also a College Planning and Student Loan Advisor in Dallas Texas.

Read last week's blog post by Melissa Cox CFP

Read Last Week’s Blog - Does Borrowing money in the parent’s name make sense for funding college education?