Losing a loved one is never easy. The process can be made even more difficult when you’re tasked with managing that loved one’s estate planning.
When this happens, you will likely have many questions around how you should go about the process. Things may also show up in the paperwork that you’re unfamiliar with, which can make it difficult to make the right decisions for you, and on behalf of the person who has entrusted you with their estate.
But how can you make the process smoother — and how can you navigate it in a way that honors your loved one, your overall financial picture, and future generations all at once?
Today, we’re here to help you achieve this with a list of five things for you to do when handling a loved one’s estate, whether you’re an executor or a beneficiary.
1. Take Your Time
First and foremost, take your time.
Losing a loved one is difficult, and it’s important that you take care of your own mental and spiritual connection with the family member and to process your loss before moving on to handling their estate.
While many people feel like they have to get everything handled as soon as possible, in reality, there is no rush.
In fact, when it comes to accounts that are not retirement accounts, there usually aren’t any deadlines you need to meet. We’ve even had clients who didn’t deal with accounts for eight or nine years, and didn’t lose out because of missing deadlines or anything like that.
On the other hand, if you have retirement accounts like IRAs, 401(k)s, or Roth IRAs, there are deadlines. The deadline is December 31 of the year following the death. If someone passed away in June 2020, for example, that means you have 18 months, or until December 31, 2021, to make decisions around these retirement accounts.
So, if you have to handle someone’s estate, don’t feel like you need to rush and make decisions immediately. Instead, take your time to grieve and to figure out the options you have before going straight into the money issues.
2. Don’t Go Straight to Cash
Many people’s instincts when handling estates is to go and get the cash right away.
But, a lot of times, when you don’t evaluate your options and go straight to cash, you could end up hurting rather than helping yourself.
If you take the cash out of an account, that account is closed and you no longer have rights to that account — and the guarantees and benefits that come with them. This is especially important if you have a life insurance-type of account, a 401(k), or an annuity, which may have some rules or benefits that you can get grandfathered in on because you’re associated with the old account.
It’s also important to be aware of rules around the accounts before you go to take out the cash. For example, you can’t take inherited IRA money and put it in your own IRA.
Instead, we recommend that the first step you take when dealing with someone’s estate and accounts is to make a list of all the accounts you have and figure out:
- What type of account is it?
- Which company is it invested with?
- How much is it?
This will give you an idea of who you need to call to find out this information so you can start gathering the information you need to make informed decisions.
3. Evaluate All Your Options
After you’ve gathered all the information you need, it’s important to take the time to evaluate all your options before making any decisions.
Sometimes, all you have to do is re-register to get an account in your name, but before you do that, make sure you find out if you’re going to have to pay a fee to do so — and whether you will be starting a new lockup period.
Oftentimes, when you get cash out as a beneficiary, you don’t have a penalty or a lockup period anymore. But sometimes, when you re-register with an annuity that had, for example, seven years left, you’re still stuck with those seven years.
When it comes to IRAs, especially if a husband and wife both have IRAs and one passes away, a lot of times, people just think they should take their partner’s IRA and put it under their name. After all, why have two different IRA accounts?
However, when you have an inherited IRA, there’s no longer a tax penalty for taking money out early — whereas on a regular IRA, if you’re below 59 and a half and take money out of your IRA, there’s a 10% penalty. That means, you can take money out any time without the penalty. But if you put your name on the account instead, then you’re locking the account back up until you reach 59 and a half since those penalties will come back in place again.
These are all important areas to consider before taking any action with the accounts you have on-hand. Since it can be difficult to evaluate all the options and “what-ifs” that can come with these accounts, a financial planner can be a big help during this phase of evaluating your options. As seasoned professionals, they’ve probably been in this position before, and might even know how all these things fit into your goals and tax picture
When considering your options, it’s also important to consider something called settlement options.
When dealing with annuities or life insurance, a lot of policies have settlement options. This means that when you decide to take the money out over time or in different ways, the issuing company offers a certain guarantee on what the interest rates are going to be — and there might even be a guarantee on how they pay it out.
A lot of times, these older policies have interest rates around 3%, which is a pretty good rate, especially when you can just take that money out right away.
So, when you’re inheriting life insurance or an annuity, don’t just ask how much it is. Ask what your settlement options are. There might be one option with your life insurance called “on deposit,” which allows you to leave the money there as long as you want, and you could get something like 3% interest to take it out whenever you want. On the other hand, if you just cash out the policy, you might be giving up that 3% guaranteed rate.
Annuities can get even more complex, especially around guaranteed income benefits. Some annuities can even have three different values, including:
- The account value, which is how much money is in the account
- A death benefit value, which is how much gets paid out at somebody’s death
- An income-based value, for when you turn the annuity into an income
Navigating these settlement options can be complicated and confusing, but a good financial planner will help you figure out what everything is and what will be the best option for you to take with these accounts.
These are things that if you don’t dig into, you won’t know about, and you’ll be missing out.
4. Coordinate with Your Overall Plan
When you inherit money, it’s not just about the inheritance money. You need to keep your whole picture in mind every step of the way.
Consider: What’s going on with your income and taxes? What’s going on with your other investments that are out there?
When you keep the entire picture in mind, you can project out what your taxes are going to look like for the next couple of years and find out if the inheritance is one you should spread out or delay so you can make the most of your tax situation.
If you inherit $100,000 and find out you’re guaranteed 3% by leaving it where it is, why take the check from that inheritance just to put it in the bank? Why would you give up the 3% guarantee for 0.1% at the bank? Sometimes, you just need to reframe your mind and say that the inheritance money that you had planned on investing, is best to keep at the 3% and invest other money instead.
5. Make Things Easier for Your Kids
Once you’ve gone through the entire process of managing someone else’s estate, the final thing to think about is how you can set things up for your kids so that it will be easier for them when the time comes for them to handle yours.
By this time, you’ve probably experienced first-hand how challenging it can be to track down the beneficiary paperwork, the will, and other important documents, which is why this is the time to use the experience you’ve gained to help others when your time comes by setting up your beneficiaries, trusts, and documents in a way that will be easier for others to manage when the time comes.
With these five steps in mind, we hope managing your loved one’s estate will feel more manageable — and that you feel like you’re making the best decisions on behalf of your loved ones and for yourself.
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