When your parent or spouse passes away, there are an overwhelming number of things that must be handled in a short amount of time. It’s not something that many of us have experience with, so it can be hard to know how to handle finances and what to expect where assets and taxes are concerned.
Here, we’ll cover some of the basic questions you’ll have as you go through the process of laying your loved one to rest, handling their possessions, property, and assets, and dealing with their financial affairs.
Financial institutions like banks, credit card companies, and mortgage companies won’t know someone has died until they are notified. What happens to the asset depends on whether there was a joint account holder or if the accounts were part of a living trust.
In most cases, if a bank account is jointly owned and one account owner dies, the other account owner continues to have full access to the account. They can do what they please with the funds. The same goes for joint owners of property, including real estate.
Assets held only in the deceased person’s name will automatically become part of the estate. Depending on whether they set up a will or designated beneficiaries for their accounts, a judge may have to decide what to do with the accounts and property. This process is called probate court.
Without funeral insurance, the deceased person’s estate will pay for funeral costs if there’s enough money available. If the balances in bank accounts or value of personal property isn’t enough to cover the costs, the person signing the funeral contract is responsible for covering the balance.
The surviving spouse or child of a person who was receiving social security payments when they died will receive a $255 death benefit to help pay for burial and funeral costs.
If there isn’t money to cover the costs of a funeral and burial, it’s possible to turn the body of the deceased person over to the county coroner’s office. They’ll handle cremation and burial and the family may be able to return to claim the ashes for a small fee.
If there’s a will, the deceased person named an executor. It’s this person’s responsibility to file the appropriate paperwork in probate court. They’ll have to provide a death certificate and present an inventory of the deceased person’s assets, including property and accounts.
During the probate process, a judge will oversee the process of using estate assets to pay debts in the right order, according to state law. If assets must be sold to create cash, the judge will make that determination. A home owned as joint tenants with right of survivorship does not have to go through probate. Ownership can transfer immediately to the surviving spouse.
Life insurance policy proceeds, deferred annuities, and retirement accounts will go to named beneficiaries. The remainder of the estate will be split up according to the will.
If the deceased person didn’t have a will, the state laws where the person last lived will determine how their assets are disbursed. Typically, if the deceased person was married at the time of their death, the entire estate goes to their spouse.
If the deceased person wasn’t married but had a partner that they lived with and shared their life with, the law may not recognize that person when it’s time to split assets if they weren’t named as a beneficiary in the will. If the couple’s state recognizes domestic partnerships, the surviving partner may inherit the same amount as they would if the couple were married.
Community property states consider assets owned by married people to be the legal property of both parties. There are nine states that follow community property rules: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Spouses each legally own 50% of the assets gained during their marriage in these states. If the deceased spouse didn’t have a will, both halves of the couple’s property goes into probate court. There, a judge directs the settlement of debt. The surviving spouse gets half of what’s left. The other half is dispersed according to the will. If there wasn’t a will, the surviving spouse typically gets the remainder of the estate.
While it’s generally not legal to leave minor children and spouses out of a will, it is possible to bequeath personal possessions, cash, accounts or any asset to anyone. This can even be done if grown children or other relatives who expect to be included in the will are disappointed to find out that they will receive very little or nothing as a result of their loved one’s passing.
If someone who expected to receive money or property feels shortchanged, they have the right to sue the estate for the amount they want. A judge will then decide whether to overturn the will or honor it.
Everything the deceased person owned at the time of their death counts as part of their estate. Real estate held in their name, stocks and bond, cars, jewelry, annuities, bank accounts, cash, and personal property are all assets.
If the deceased person owned a life insurance policy, its value is also included in the gross estate assets, even if the policy had a designated beneficiary and wouldn’t be paid out until after the policy owner’s death.
Inheritance taxes are levied by the state when you get property or money from the estate of a dead person. As the beneficiary of the property or money, you are responsible for paying the tax to the state in a timely manner.
Estate taxes are paid to the federal government directly out of the estate before the beneficiaries receive any money or property. The total value of the estate, minus liabilities, equals the net taxable estate.
Not all states have inheritance taxes. Each state decides how to tax inheritance money and property, and the rules change frequently. As of 2019, here are the states that impose inheritance tax of some kind:
The District of Columbia also has inheritance taxes.
Because the laws and rules vary according to each state, if you live in one of these states or the District of Columbia, you should consult a tax attorney or estate planning attorney to understand your tax liabilities in the event of the death of a parent or spouse.
Although the rule is set to expire in 2025, for now, the estate tax limit (sometimes called the “death tax”) is $11.4 million per individual. In 2018 it was $11.18 million. If your deceased spouse or parents’ estate value exceeds the limit, it’s subject to tax upon transfer to heirs and beneficiaries.
Before the newest set of tax reforms, the estate tax limit was $5 million per person. In the year 2000, the limit was $675,000 per person. According to the Tax Policy Center, there were just 1,890 taxable estates in the U.S during 2018.
If the deceased person’s estate was large enough to be subject to federal estate taxes, there are some scenarios where the tax may not have to be paid.
Any assets in the estate left to charity don’t count toward the total value of the estate. So, if your grandmother had an estate with a total value of $12 million, but she left $3 million to her church, her total estate value would be $9 million, which is under the individual limit of $11.4 million.
Debts owed by the deceased person at the time of their death and paid from the estate reduce the size of the taxable estate. Income taxes owed by the deceased person must be paid from the estate assets.
Money and assets left to a spouse by the deceased person are exempt from taxation.
Money paid to lawyers, financial advisors, and tax experts and other costs incurred in order to administer the estate are deductible for estate tax purposes.
If you have a parent that is the sole owner of their home, they may want to add you as a joint owner while they are still alive. While this may seem like a good idea, it means you’ll pay capital gains taxes on the difference between the amount of money they originally paid for the house and the amount of money you sell it for.
If your parent bequeaths the home to you as part of their will or estate plan, you won’t pay capital gains tax.
Before there’s a death in the family, it’s crucial to handle a few things. First, make sure all accounts, including life insurance policies, have a designated beneficiary. Without this designation, the asset will go into probate, where it could be tied up for years. Even if you know you designated a beneficiary, check in with the companies every three years to make sure they still have that information on file. Beneficiary designations sometimes get purged, so it’s important to make sure the information is up to date and correct.
Anyone who has people who depend on them for financial support should have a life insurance policy. It doesn’t have to be expensive or complicated. A straightforward term policy to take care of funeral and burial expenses, settle debts, and replace future lost income is an ideal choice for young people.
For those in retirement, a funeral expenses insurance policy or smaller term life policy may be the only affordable option. In some cases, it may even be beneficial to pre-pay for funeral and burial costs to spare the family the financial burden if you aren’t adequately insured or if your assets won’t cover those costs upon your death.
Those without a will should make one right away. Even if you don’t feel like you have a lot of assets, it will save time and trouble after your death. Be sure to make health care directives at the same time. Get copies to anyone who may be asked to make decisions about your medical care in the future.
If you have a life insurance policy with a designated beneficiary, don’t keep it a secret. The beneficiary needs to know they are named in the policy. Make sure they have contact information for the company and a copy of the policy, as well. At this point, there isn’t a central database of information that your loved ones can check to see if you have life insurance after you die. Many life insurance policy payouts never get to the beneficiary because they simply don’t know the policy exists.
Since it’s not something that most people go through more than a few times in their lives, understanding what happens to someone’s assets when they die can seem difficult. Even if you have a firm grasp on the basics, you may still have questions specific to your family’s situation.
It’s a great idea to seek the counsel of a tax, estate planning, or probate law expert. The decisions you make about finances when your spouse or parent dies could affect your family for years to come, so if you are unsure about how to proceed, don’t be afraid to ask for help.