Helping Clients Prepare for Death-Related Expensesby
There are several expenses to consider when planning for the end of one's life so that survivors and relatives aren't left in dire straits when they suffer a loss. Financial planner Bryce Sanders has some tips for accounting professionals to keep in mind when helping clients with estate planning.
Here’s a nightmare scenario: Suppose a client had wealthy older parents. They had enough cash flow to live a comfortable life and made investments along the way. However, when the client’s father died, many securities in certificate form were left in the father’s name only, not to mention the safety deposit boxes and overdue tax notices in a pile of unopened mail. As his mother was on her deathbed, she apologized for the financial mess that she was leaving behind. What does this mean for your client?
What Is Dying Going to Cost?
Don’t let the above scenario happen to your client. Make sure they have addressed any estate tax issues as well as day-to-day issues before it’s too late. Your client should have a will in place and an appointed executor who can file papers with the court for probate. Lawyers can handle the paperwork, but there are expenses for their time and effort. Here’s what you need to know:
The probate court will validate your client’s will and confirm the appointment of the executor. Their job is to identify assets, make sure bills and expenses continued to be paid, pay off any liabilities and make tax payments. Simple estates are typically wrapped up within a year.
Spousal transfer of assets
Many people hold accounts under JTWROS status, which stands for joint tenants with right of survivorship. This avoids going through probate. Providing a death certificate to each institution where an account is held should be sufficient to retitle the accounts in the survivor’s name. Funeral homes will typically provide survivors with multiple copies of the death certificate. Generally speaking, spouse-to-spouse transfers aren’t taxable events.
Retitling accounts and hard assets
If real estate is held under JTWRO status or is community property co-owned with the spouse, the transfer should be straightforward. If the other owner isn’t the spouse, the situation becomes more complicated because the asset is part of the estate, and taxes might be due. Other assets might be held in a single name. The decedent’s will must go through probate to determine who gets what.
Some people are surprised to learn that Social Security provides only $255 as a funeral expense benefit to the partner of the deceased. Of course, funerals are much more expensive than that. According to the National Funeral Directors Association (NFDA), the average funeral and burial cost in 2019 was $7,640. Of course, costs vary depending on many factors, such as where your client lives. A client in Mississippi might pay about $1,000 less than that, while a client in Hawaii might pay double that amount.
The NFDA also tracks end-of-life medical costs. These costs can average a little over $11,000 but also vary by state. Again, Mississippi typically has the lowest costs while Hawaii has the highest. (These expenses are paid by the estate.)
Claiming life insurance proceeds
There is paperwork to do, so it makes sense to work with a local insurance agent. The agent will need paperwork completed and a certified copy of the death certificate, but they usually can handle it from there.
Notifying Social Security and pensions
In most cases, Social Security comes with survivor benefits, requiring more paperwork and an in-person meeting with a representative at the Social Security Administration. This is important because it’s illegal to continue collecting full benefits when the insured person is deceased. Former spouses are eligible for survivor income benefits. When people retire or begin receiving income from annuities, they designate future payment status to become effective after they die. In some cases, the payments stop. In other cases, the payments continue but for a different amount depending on the option the annuitant chose.
They have beneficiaries, which avoids probate, assuming the beneficiaries are properly titled. This designation also takes precedence over designations in wills, which can become a problem if your client listed their ex-spouse as a retirement plan beneficiary and never changed it, for example. The retirement assets aren’t taxable as long as they remain sheltered within the retirement account. Once some or all are withdrawn, they are subject to tax.
The estate can continue making payments or the person inheriting the car can take over the payments, or the car can be repossessed by the lender.
Mortgages and other secured loans
Mortgages are secured loans, so the payments need to continue. The inheritor can choose to continue making payments or the property can be sold to satisfy the outstanding mortgage balance. A home equity line of credit (HELOC) is a loan secured by the property. Bear in mind the mortgage was issued to a person with a specific credit profile while the inheritor might have a different profile.
Credit card debt
Once the card company is notified, they should not add any penalties or additional fees. Logically, the estate is responsible. Assuming the spouse isn’t a joint cardholder and is not in a community property state, the spouse isn’t responsible for the outstanding credit card balance if there aren’t any assets in the estate.
Settling estates takes time and can be costly beyond estate tax liabilities. Most of your clients probably have assets sufficient to cover their obligations, but they might have relatives who aren’t so lucky. Going over these details ahead of time can be helpful to everyone involved.
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.