When we work with people who have estate management questions, the most frequent question we hear is, “How does the estate settlement process work?”
Here are some of the most common questions we get!
What happens to IRAs and 401(k)s after death? If an account has a named beneficiary, the assets generally transfer directly to the beneficiary, bypassing probate.
Pro tip: You might want to get several copies of the death certificate. Each financial institution may need a copy to execute the transaction.
What happens with accounts that are Payable on Death or Transfer on Death?2 These accounts will transfer to the named beneficiary, bypassing probate.
What about a joint account with rights of survivorship (JTWROS)?2 These accounts pass to the surviving joint owner.
Pro tip: You might want to consider adding a new person to the account who will also have the same rights.
What if the account is only in the deceased’s name?2 Typically, these accounts become part of the estate and are subject to the probate process.
What happens if there is a will in place? Be prepared for the estate to move through probate, which is a court-supervised process. The first step the court will take is to validate the will and determine who is the appointed executor. That person will be expected to pay all debts and taxes before distributing the assets to the beneficiaries. Probate is a public process, which means that the details of the estate are accessible to anyone who is interested.
What happens if there is a trust in place?1 The assets held in the trust are generally not subject to the probate process. The trustee manages and distributes the assets according to what’s outlined in the trust document. The trust can also outline how and when assets are distributed, including whether distributions happen all at once or are staged, and whether any restrictions are placed on how the assets can be used.
“This brings us back to the point of educating the next generation to be good stewards and have a healthy fear of the Lord,” says Mick Owens, who wrote the popular book Diamond of Life: The Five P’s of Success and Significance.
Do I need both a will and a trust? Both have benefits and limitations. For example, if you have children under 18, you need a will to specify their guardians. If you have a child with disabilities, a trust might provide some additional structure.
“If any of you lacks wisdom, let him ask of God, who gives to all generously and without reproach, and it will be given to him.” James 1:5
What about costs?2 As a general rule, a trust will cost more than a will. A will outlines who you want to be a guardian for your children and who will inherit your money and other possessions. A trust is a more complex legal arrangement through which you transfer ownership of assets into a trust account.
What’s best for me? We don’t like saying these two words, but “It depends.” We’ve outlined just a few considerations, but we would need to take into account a variety of other factors before we can provide any insights. However, like many aspects of personal finance, no decision is still a decision. So, we encourage you to start—or take a fresh look at—your estate management process.
- After reaching age 73, you must begin taking required minimum distributions from your 401(k) or other defined contribution plans in most circumstances. Withdrawals from defined-contribution plans are taxed as ordinary income. If a withdrawal is taken before age 59½, a 10% federal income tax penalty may apply. Similarly, after reaching age 73, you must begin taking the required minimum distributions from a Traditional Individual Retirement Account (IRA) in most circumstances. Withdrawals are also taxed as ordinary income. If a withdrawal is taken before age 59½, a 10% federal income tax penalty may apply.
- JPMorgan.com, November 14, 2024
- When considering adding a trust to your financial strategy, it’s important to remember that trusts involve a complex set of tax rules and regulations. Before moving forward, we encourage everyone to consider working with a professional who is familiar with the rules and regulations.
