Documents You’ll Need to Set Up
Certificates of deposit
Retirement accounts, including employer plans
Taxable investment accounts
Cash value life insurance
Medical savings accounts
You should review your financial assets annually, and make any necessary adjustments to your will or trust if there are any significant changes in these accounts.
Life insurance is probably the simplest part of organizing your final affairs. Since a life insurance policy is a legally binding contract, the terms are spelled out at the time you purchase the policy. That includes the death benefit, and the beneficiaries who will receive the proceeds upon your death.
One of the advantages with life insurance is that it’s not dependent on a will. In fact, it doesn’t even need to be included in your will. You set the beneficiary designations when you take the policy, and no legal process is required.
However, if you’re planning to set up a trust, you can designate the proceeds of your life insurance policy for the trust. Many people even use a life insurance policy to set up a trust upon their death. In that way, you can have a trust even if you don’t have any other significant financial assets.
If life insurance is the easy part of preparing your estate, real estate is one of the more complicated. The basic reason is that real estate investments are not liquid, and cannot be distributed to multiple beneficiaries.
If you’re passing property to your spouse, the process is simple. But if you have multiple heirs, you’ll need to specify in your will or trust what the disposition of the property will be.
Generally speaking, the easiest path will be to specify the sale of the property, and the distribution of the proceeds according to the terms spelled out in your will.
However, an issue can arise if one heir wants to retain the home as a residence. You’ll need to discuss that will all parties concerned, and come to a mutual agreement. For example, your will may provide that one of your children can retain your home after buying out the shares of your other beneficiaries.
Since complications can arise, you should get legal advice on how best to set up the buyout. The more specific you are in your will, the less likely the chance of conflicts after your death.
Start by taking inventory of all your personal possessions. Make it as detailed as possible. You don’t need to include the inventory in your will, but it can be a separate document referenced in the will.
You should discuss the distribution of these possessions with your heirs. And if there are any items you want to go to a specific beneficiary, you’ll need to spell that out in writing.
If there are any particularly high value items, or none of your heirs express interest in any personal property, you can also specify all items be sold, and the proceeds be distributed according to the will.
This is generally the most complicated area of estate planning. A business is unlike any other asset you have. Not only is it not liquid, but it may require ongoing management after your death.
There are different options when it comes to business interests in an estate. One is to sell the business, then distribute the proceeds to your heirs, similar to the way you would handle real estate.
Another would be to pass the business onto a family member. The person inheriting the business may need to buy out any interest of the other heirs in your will. If that buyout will cause an undue hardship on the business, you may need to take a life insurance policy specifically for that purpose.
If you have a business, you should develop a business succession plan. It will provide a written strategy on the disposition of your business upon your death, as well as make provisions for the transfer to your intended successor(s).
This can include personal loans, whether it’s money you owe to another party, or owed to you from someone else. For example, it’s not unusual for parents to loan money to their children for the purchase of a home or some other purpose.
Under a best case scenario, the obligation will be spelled out in writing. If it isn’t, it may be difficult to prove, and can potentially lead to litigation. Your heirs, and especially your designated executor, should be aware of the obligation.
If there are any such personal obligations, they should be in writing if the amount in question is substantial. And like any other asset or debt, it should be listed in your will or trust. Your will should make a provision to settle it upon your death, particularly if the obligation is to or from one of your heirs.
First, any debts still outstanding at the time of your death will not become obligations to your heirs. However, in most cases, debts will need to be paid out of your estate before any funds are distributed to your beneficiaries.
Exactly how your debts will be handled after your death will depend on the type of loan involved.
Mortgages. Since they’re secured by real estate, they run with the property and not with the property owner. That is to say, even if you die, the lender is entitled to be paid out of the proceeds of the sale of the property.
The easiest course will be for your heirs to sell the property, pay off the mortgage, and distribute remaining proceeds according to the terms of the will. If the property is worth less than the loan amount, your heirs will need to work out a short sale agreement with the
Alternatively, if one heir chooses to live in the home, that person may be allowed to take over payments and retain the property.
Auto loans. As is the case with mortgages, auto loans are secured. In this
Credit cards. These obligations must be paid out of the estate prior to the distribution of any assets.
In most cases, there are three types of taxes that may need to be paid after your death:
Any tax liabilities you owed at the time of your death. Tax liabilities don’t disappear once you die. If you owe back taxes, those will need to be paid out of your estate. A final income tax return will also need to be filed for the year of death. If it results in
Estate taxes. These won’t apply to most people, because at least for 2019, the first $11.4 million is exempt from federal income tax. However, some states also impose estate taxes, but at much lower thresholds. For example, Massachusetts and Oregon impose the tax on estates as low as $1 million.
If your estate is likely to exceed any of these thresholds, you’ll need to set up an estate plan to deal with the resulting taxes.
Taxes on income earned by your estate before it’s distributed. Upon your death, your estate becomes a separate legal entity for tax purposes. Any income generated by the estate, such as interest, dividends, capital gains, rents, or business income, is subject to income tax. Depending on the size of the estate, as well as the amount of time it takes to settle it and distribute the assets, the tax liability can be substantial.
The estate will need to file a tax return in each year it exists. The return is the IRS Form 1041, U.S. Income Tax Return for Estates and Trusts. Any tax liability must be paid by the estate.
Parties that Need to be Notified
The average person has ongoing business relationships with literally dozens of different vendors and agencies. Upon death, each will need to be contacted.
Naturally, you’ll want to start with any companies where there is a life insurance policy. Your heirs will need to present a copy of your death certificate to be eligible for benefits.
Other examples include:
- Extended family members and close friends.
- Your employer, business partner(s), or employees, if you’re a business owner.
- The local post office, so that mail isn’t being delivered to an empty residence.
- The Social Security Administration, if you are collecting benefits. They’ll need to be canceled immediately,
otherwisethe Administration can pursue recovery.
- A pension administrator, if you receive one.
- Any financial institutions where you have accounts, including banks, brokers, and any retirement account trustees.
- Utility companies, including cable, Internet and cell phone providers.
- Lenders, including mortgage holders, auto lenders, and credit card companies.
- A landlord, if your home is a rental.
- Any service providers, including house cleaners, landscapers, snow removal companies, or personal care providers.
- Social media accounts.
Contacting the above parties will not only provide notification of
Organize Documents and Other Important Papers
This may be the last step, but in some
This is a bit of a balancing act. On the one hand, you’ll want to make sure all relevant documents are available to your executor(s) and any other important parties. But at the same time, there are privacy concerns. For that reason, you certainly won’t want to put too much information into too many hands.
At a minimum
For privacy purposes, you may want to have copies of all other relevant documents in a locked file cabinet. This will prevent anyone from having access to the documents before it’s
Important documents to store include:
- A list of important people your executor(s) may not be aware of. This can include business partners, important business contacts, your landlord, or tenants.
- Copies of the last few years tax returns.
- Copies of recent financial
statements,or at least a regularly updated list of institutions, account numbers, insurance contracts, and contact parties were each account is located.
- A list of lenders, utility companies, and other service providers, including the name, contact person, phone number and account number.
- Important legal agreements, such as leases, divorce decrees, private loan agreements or court judgments.
- Social Security and pension award letters.
If this list seems exhaustive, it’s because I tried to cover as many situations as possible. Most likely, not all of these will apply in your situation. But as complicated as life is these days, you may find yourself realizing you have more “loose ends” to tie up
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