After the passing of a loved one, there are many things to take care of. You have to notify everyone, plan the funeral, which is a sorrowful moment, but the real work begins after the funeral ends, including addressing financial matters.
But how should you handle the deceased’s bank accounts? Your loved one may have brokerage or retirement accounts, and these accounts may or may not have designated beneficiaries. How will these accounts be handled?
If there is a designated beneficiary for the bank account, then the money will be transferred to them. To do this, the account holder must have done one of two things before passing away.
The beneficiary must have been designated as a “Payable on Death” (POD) or “Transfer on Death” (TOD) beneficiary.
When opening an account, you need to designate a beneficiary. Some banks require you to do this in collaboration with customer service, while others allow you to do it online.
Banks typically release the funds to the account beneficiary upon receiving notice of the account holder’s passing. They would require a death certificate as proof. When there are no complications, the funds will be disbursed, and the account closed.
However, if there is a dispute over who owns the account, the bank will freeze it, awaiting a court decision before releasing the funds.
If the bank is unaware of the account holder’s passing, there are no beneficiaries, or no one claims the account, it is considered abandoned property, turned over to the state government.
When someone dies without a beneficiary, the account manager oversees the funds, depending on whether the deceased left a will, the manager could be a trustee or executor. If no one is specified, the state government will appoint one.
Without a will or beneficiary, the state government will take control of the estate, and the account will go through probate court for distribution according to local inheritance laws.
Family members or other legal representatives can request permission from probate court to access the account.
There is usually automatic right of survivorship. This means that the signatories of a joint account retain ownership of the funds, even without a beneficiary, and the account does not go through probate, allowing the survivors to continue using the money in the account.
For joint accounts, creditors cannot claim the funds in the account.
The co-account holder will close the account, however, during the settlement process, they can access the funds.
While joint account holders can enjoy up to $500,000 in Federal Deposit Insurance Corporation (FDIC) insurance, if the joint account is not settled within six months, the insurance coverage will decrease to $250,000 because the account is considered individually owned.
Appropriate documentation, such as a death certificate, is needed to manage these funds.
For joint or individual account holders, bank statements should be kept for three years but not exceeding seven years. Holding onto bank statements for at least seven years can help with tax audits or any legal challenges.
If you have a joint brokerage account, your spouse or other co-owner usually continues to hold the account, typically maintained by the co-owner and only for the investment account. If you have “right of survivorship” or “tenancy by entirety” with another person, then that co-owner will continue to hold the assets.
However, if you have tenants in common, the deceased’s interest in the account can be left to someone other than the co-owner.
If there are no joint accounts or established beneficiaries for transfer-on-death accounts, your account will go through probate. Without a will, the state’s intestacy laws will determine who inherits the assets.
Inquire with your brokerage firm about the types of accounts you have. If you have tenants in common, you can take steps to designate who inherits your portion.
Most 401(k) plans allow you to fill out a beneficiary form online, which requires the beneficiary’s Social Security number and birthdate.
The deceased must have set up “per stirpes” before passing to pass this money to their children, indicating that a portion of the funds will go to their children. If this is not done, that portion will go to the primary beneficiary or contingent beneficiaries.
For instance, if a will specifies that the deceased’s siblings are the beneficiaries, and a sibling has two children, if the sibling passes before the deceased, 100% of the inheritance goes to the surviving sibling. But with “per stirpes,” 50% goes to the surviving sibling, and 50% is divided among the deceased sibling’s children.
Many retirement account administrators require the spouse as the primary beneficiary unless they agree in writing that someone else should be the primary beneficiary.
Estate planning is crucial in designating who will inherit your funds. You’ve worked hard to create wealth and should have the right to choose who receives that wealth.
Meet with an estate planning attorney to determine how to handle your assets.