“What will happen to my account(s) when I die?”

It’s an honest question, that many want to know but may feel funny about asking.

Like many financial advisors (or most of a certain age), I’ve had clients who have passed away, so I actually do know what happens. It’s part of my job to help clients prepare for the inevitable and assist their family with next steps after their death. On a personal note, I helped my mom through this process after my dad died a few short years ago. It’s never a fun conversation, but making sure your estate plan is squared away truly does protect your family by removing some of the uncertainty about your wishes. It’s can be agonizing for families to realize that mistakes were made or to try and figure out what happens to your assets after you are gone. So hopefully this post will help you (or your heir) know what to expect.

We always our clients have an estate plan in place including a fully executed will. We also recommend that you select an Executor and bring them up to speed on your estate plan (for example, where to find it and/or contact information for your attorney) so that they know what to do in the event that something happens to you. We are not attorneys and do not give legal advice but can recommend an estate attorney to prepare documents such as wills, medical directives and power of attorney.

The Basics

Generally speaking, assets may transfer “by contract” or “by law”. Assets that are not bound by law or contract will go through the probate process.

Assigning a beneficiary to your life insurance policy or retirement account is an example of a contract. An account titled as “Joint With Rights of Survivorship (JTWROS)” is an example of an asset that will pass “by law”.

Probate is the legal process of settling the estate of a deceased person. If there was a will, the probate process validates it; if someone dies without a will, the court must appoint an administrator for the estate. Basically, the courts need to figure it out. This process takes time (1 to 3 years in NY, according to my research) and legal expenses are paid from the estate, therefore reducing the assets for your heirs.

For transfers of assets that occur after your death, claims are verified with an original death certificate. This person handling your affairs will receive several copies to use for this purpose. [With my dad, the funeral home asked us how many we would need, and my mom received them in the mail a few days later.] What happens next depends on the type of account or asset that’s being passed on to your beneficiaries.

Life Insurance

One of the benefits of life insurance is that generally, a check will go to your beneficiary very quickly. Once the insurance company receives a death certificate, the executor must complete some paperwork (a claim form). After these steps are completed, the beneficiary will usually receive a check within 30 days.

If you have a life insurance policy, make sure that your listed beneficiary and contingent beneficiaries are up to date. Out of date beneficiaries could unintentionally “contract” the life insurance company to your ex-spouse or a family member who was listed as your beneficiary before you got married or had children. Checking your beneficiary list annually is a good idea to make sure things are up to date.

Bank and Investment Accounts

The titling on a bank account or investment account (retirement accounts are handled differently) is very important. If you have a joint account, your co-owner (or owners) will maintain access to the account after you pass away. Note there is a difference between “Joint Tenants With Right of Survivorship (JTWROS)” where all parties own 100% of an account, and Joint Tenants in Common (JTIC), where each party owns only their designated percentage (which would pass to their estate).

For individual accounts, if you have no special titling, the funds be distributed to your heirs per the instructions in your will.

One alternative is to add Transfer on Death (TOD) titling. When you do this, you specify the beneficiary of the account in the title. Upon your death, the account would not be distributed through the probate process, it would simply be transferred upon death to the person you’ve designated. Of course, as mentioned above the bank or custodian will need to receive a death certificate and your heir will probably need fill out some paperwork, but overall, the process is fairly easy.

Retirement Accounts

All retirement accounts should have a beneficiary, but if you don’t have any beneficiaries listed, the assets in your retirement account will go to the estate and transfer via the will. Again, checking your beneficiaries regularly is critical. I’ve seen cases before where account owners never updated their beneficiary to be their new spouse, and the funds are designated to go to an ex-spouse. Or they listed an older family member as beneficiary years ago, but never updated it after getting married and having a family of their own. If your designated beneficiary has passed away (before the owner of the account), the assets go into the probate process to be distributed, which can be costly and time-consuming.

Annuities

Here’s where the paperwork can be somewhat confusing. The amount may depend on many factors: whether the annuity has already been “annuitized”, whether there was a survivor benefit established, and the age of the beneficiary assigned. The first step for your executor or heir will be to call the annuity company, report the death, and determine the options available under the terms of the contract. [They’ll send a nice fat envelope full of paperwork!]

Social Security

If you’re receiving Social Security benefits, your spouse or executor will need to notify the Social Security agency of your death. A spouse or dependent child may be eligible for survivor benefits. Although you can find general information on the website at SSA.gov, your heir will need to personally contact the Social Security Administration to claim Survivor benefits.

Beyond the Basics

If you have a more complex financial situation, you may find that speaking with a financial planner can help you to clarify what additional steps need to be taken to construct your estate plan. For example, if you have real estate like a family home or farm that you’d like your kids to inherit, they should be prepared financially to pay the property tax bill. Utilizing tools like life insurance, where the cash payment in the event of your death could cover those taxes, can be helpful.

You should also be aware of the“step up” on the cost basis of inherited property. The cost basis on an asset (such as shares of stock or real estate) will be updated to the price on the date of your death. This means that, should the new owner sell an inherited asset, the capital gains (or profit) is calculated using the “stepped up” cost basis as the starting value. This can be very beneficial for the inheritor from a tax perspective, and make inheritance a better way to transfer appreciated property than gifting it during your lifetime.

Some people have more complicated estate planning wishes, and in these cases it makes sense to sit down with a financial planner to go over what you want to happen to your wealth when you die. Whether you want to donate your money to a charity after your death, or you’d like to create a scholarship fund at your alma mater with your wealth, a financial planner and an estate attorney can help you put the necessary legal documents in place to make that happen.

Don’t Go It Alone

Finally, I can’t stress enough how important it is to pull in professional assistance when creating your estate plan. An estate planning attorney should be the first person you call, followed shortly by your financial planner. Together, they can help you to coordinate an estate plan that leaves a legacy you’re proud of.