Despite the advances in science and tech, death remains certain for everyone. The problem is many often leave assets behind. What happens to them as soon as the person passes away?
A person before death may already have a clue if they have engaged estate planning attorneys. These professionals can already provide an overview of the distribution of assets, the process of probate the family has to go through, and the tax implications of accumulating wealth.
Most of all, they can make all these steps easier for those left behind, especially since the actual rules on how to manage the estate can vary between states.
For those who have yet to talk to an estate planner, however, a more thorough knowledge of what goes on after death can help them decide what they want to do with their assets more effectively.
Where Does Your Asset Go?
Usually, the family notifies the executor of the will or the estate planner as soon as their loved one passes away. This way, they can begin with their duties.
One of the first steps is probate. Under this process, the court will verify the validity of the will and the executor. If the individual died without any will (a condition known as intestate), then the same court will determine the distribution of the assets, including who will receive them and what they will get.
However, not all assets go through probate. These include 401(k) plans and retirement accounts, life insurance policies (unless the beneficiary is also the estate), and trusts. Some states may also impose an amount threshold, which means smaller-valued assets may also skip probate.
Probate can take many months or even years depending on several factors like the size of the assets, the number of beneficiaries or heirs, and disputes. However, legal documents like wills can help speed it up.
At the end of the process, the court will provide a grant of probate. Later, this can serve as proof when the beneficiaries want to access certain assets under the deceased’s name. This also signals that the executor can already begin overseeing the distribution of wealth to the designated individuals.
Other possible scenarios that involve the estate include:
1. Payment of Debt
Unfortunately, many types of debt don’t die with the person unless they passed away without any will or asset to pay them.
Usually, the beneficiaries cannot get the assets unless these financial obligations have been settled. With a mortgage, the bereaved family may have several options:
- The estate pays off the mortgage.
- The co-owner, who is usually the spouse, may take over and keep the mortgage payment current. This way, they can keep the property or have more control as to when they want to sell the house.
- Someone else inherits the house, who is then responsible for settling the mortgage before they can get the property.
For most debts, creditors can claim from the estate, but usually, they can only do so within three to six months after death. Regardless of the kind, however, beneficiaries and heirs need to remember that these obligations are not easily passed on to them. Thus, creditors can run after assets but not people.
Taxes also don’t disappear as soon as the person dies. In fact, in certain states, they may need to settle inheritance and gift taxes. The federal government also collects estate taxes. The good news is there’s an exemption limit, which means the beneficiaries pay only the difference between the value of the estate and the threshold.
For 2021, the estate tax exemption is $11.7 million (and this amount can increase each year since it’s adjusted for inflation). This means that if the estate’s value is below this amount, then no one owes the taxman.
Otherwise, the remaining balance is subject to a base tax and a marginal rate, varying according to the amount. However, because the exemption is so high, the majority of Americans with assets do not end up paying estate tax.
3. Bank Accounts
Contrary to popular belief, it is illegal to use or withdraw from a deceased’s account even if it is active unless they are joint account holders. Moreover, when a person dies, usually, the bank will close the account. What happens then depends on whether the person who died designated a beneficiary or share the account with someone else.
If the bereaved family wants to remove the money from the bank, they may need to present proof of death like a certificate. In some states, or depending on the account’s value, the bank may ask for a grant of probate.
If the individual had identified a beneficiary of the account, the recipient can ask the bank to transfer the funds to their account.
Death is hard for those left behind, but it can be even more challenging when the bereaved family would have to settle assets and debts. To avoid complications, consider estate planning.