Grim topic, I know. But it’s absolutely one worth discussing.
The process of locating, organizing, and distributing your assets after you pass away is long, and it can also be expensive and very taxing to the people you left behind.
Let’s dive deep into what happens to your assets when you die and what you can do to plan ahead.
Assets are treated differently
- Bank accounts - If solely in your name and you don’t designate a beneficiary, it’ll go through probate. If you designate a beneficiary, it’ll go to the beneficiary. If you have a joint account, it’ll go to the co-owner.
- Individual retirement account - When you set up your IRA, you list your beneficiary right away. When you pass, your beneficiary will receive your IRA.
- 401(k) - Each plan varies. Some plans will let your beneficiary leave the plan with the employer, other plans will distribute it in a lump sum, and others will let the beneficiary receive payments. All plans, however, require you to list a beneficiary when you sign up.
- Brokerage account - Like a bank account, if you are the sole owner, it will go through probate. You can jointly own a brokerage and if you do this, your co-owner will keep the account. You can also attach a Transfer on Death (TOD) designation. When you do this, you select beneficiaries, and they immediately receive the account when you pass.
- Property - If your property is solely in your name, it will go to probate. If your property is jointly owned, your joint owner will receive the whole property.
- Annuities - An annuity is an insurance contract. Because of its nature, beneficiaries are selected upon application.
- Life insurance - Same as an annuity. When you apply for life insurance, you need to select who receives the payment when you pass away.
What about debt?
- House with a mortgage - there are a few different scenarios
- When you die with a mortgage - your heirs will receive it the same as you had it. Same interest rate and the same amount due. The home would stay in the name of your estate, unless….
- They refinance. If they refinance, they will own the property, the new mortgage, and will be responsible for making payments
- They own the home with no mortgage. You could have paid it off or your estate had enough money to pay the mortgage.
- What if your heirs can’t afford the payments - They can do three things. One, sell the home. Two, walk away and let the home foreclose. Three, try to work things out with the lender to keep the house, but make smaller payments.
- Reverse mortgage - If you have a reverse mortgage on the house and you die, your heirs will have two options. One, pay off the loan with money from the estate or money from another source. Two, sell the home and receive whatever equity is left after the loan is paid.
- Huge debt - If you pass away with extraordinary amounts of debt, your creditors will come after your house in order to collect on those outstanding debts.
- Student loans - Federal loans will be discharged (paid off) by the government. Private loans vary depending on the lender, and if you have a cosigner.
- Credit cards - Your heirs will not be responsible for this debt. However, if there is a cosigner on your credit card(s), they will be responsible.
- Personal loans - This debt is unsecured (most often) so your heirs are not responsible.
- Auto loans - If your heirs continue the payments right away, there will be no problem. If there is a delay, the car may be repossessed.
Do you have a will?
In its most basic form, a will is an instruction manual. It lists your assets and property, the people to be in charge when you pass, and how you would like those assets handled/disbursed.
By its very nature, a will only becomes effective when the person passes away. Once that happens, the will goes to court to prove the contents within it and the validity of the document.
Also, wills can be challenged. That’s to say that if any language in the will can be interpreted in more than one way, someone can take an opposing view and argue what the writer (testator) meant.
There are a few types of wills:
- Written wills - The vast, vast majority of wills are done this way. An attorney writes it, the testator signs it, and it is witnessed by two or three other people.
- Holographic will - Written by the testator, does not need any witnesses. However, not all states recognized holographic wills, so be careful with this.
- Oral wills - Recognized by very few states. There are 5 requirements for an oral will
- Testator must be in immediate peril
- Testator must die from that peril
- Statements must be heard by two witnesses
- Statements must be written down by witnesses within 10 days
- That writing must be presented in probate court within 6 months of testator’s death
- Living will - Very different from the above three. Basically, a living will is written instructions for medical care if the person can not make decisions because they are incapacitated or mentally unable.
Do you have a trust?
A trust is a legal document/entity that allows for assets to be transferred to it and managed. In the document, created by an attorney, the grantor lays out exactly what he wants to be done. The trustee has to abide by and do what the trust says.
If there are several beneficiaries and the grantor wants certain assets to go to certain people, that must be followed. If the grantor wants to withhold assets from a certain beneficiary until they are older (this often happens when the beneficiary is a minor), the trustee has to act accordingly.
There are three roles surrounding a trust:
- Grantor - the person that creates the trust
- Trustee - the person who manages the trust and the assets within
- Beneficiary - the person that receives distributions/assets from the trust as specified in the document
There are several different kinds of trusts:
- Revocable trust - Also called a living trust. Is set up while the grantor is still alive, and can be changed or dissolved entirely during that time. Once the grantor passes, however, it turns into an irrevocable trust.
- Irrevocable trust - Can no longer be changed. Becomes irrevocable when the grantor dies.
- Constructive trust - Also called an implied trust. More often than not, it is established by the court using a narrative or previous instructions from the decedent. If that person had intended on using certain assets or property for certain reasons, the court would make a trust using that information.
- Charitable trust - Created for obvious reasons. The grantor establishes and transfers assets to a charitable trust to limit their tax liability for their estate as well as to list certain assets and what charitable causes they wish to donate those assets.
- Special needs trust - Established for the benefit of someone who already receives benefits from the government. Had the assets within this trust been given to the person directly, it could forfeit their eligibility for those government benefits.
- Tax bypass trust - This type of trust is used to avoid estate taxes. There is an exemption up to a certain dollar amount. Once that limit is met, the estate assets are then taxable and would most likely have to be paid by the beneficiary. Placing assets in this trust and distributing from there is a way to avoid (or limit) those taxes.
If you have neither
There are separate scenarios depending on your status:
- Single, no kids - You entire estate goes to your parents unless your parents passed away (one or both). Then your estate goes to your siblings (half-siblings included).
- Single with kids - Your entire estate will go to your children. If a child died before you and had kids, your deceased child’s portion will go to your grandchildren.
- Married, no kids - If assets are held jointly, your spouse will receive that in its entirety. Any asset that lists you alone, will be split between your spouse and your parents.
- Married with kids - Your entire estate will be received by your spouse. Unless you have children from another woman, then your estate will split between your spouse and your child.
- An unmarried couple - I’m sorry, but you're out of luck. Assets will be divided among relatives.
- Domestic partnership - State laws vary, so check with your state to verify. A domestic partner will inherit the same as a surviving spouse, depending on state laws.
If there is one thing your loved ones should do when you pass away, is grieving. Planning ahead so your assets and property are accounted for and taken care of is a very easy way to set those people up for an easier process.
If you want to make things easier from them, create a plan and make sure everything you own is listed. One more thing, have a conversation with these people. Let them know your plan and where everything is.