Do I Need an Estate Account?
While it can be a difficult subject to broach, putting plans in place for what will happen to your assets and belongings after you pass away is crucial for the loved ones you'll leave behind. If you've made a start on this process, one question you may be asking is: Do I need an estate account?
What Is an Estate Account?
First, it’s important to know what exactly an estate account is. An estate account is a temporary bank account that holds an estate's money. The person you choose to administer your estate will use the account's funds to settle your debts, pay taxes and distribute assets. It's important to have logistical discussions with this estate representative, whether they're a loved one or a professional. Also, there are additional actions you can take today to make your estate administrator's job a bit easier when the already emotionally difficult time comes.
Pass on Knowledge About Estate Accounts
Estate accounts can only be created after the estate has an IRS-issued tax identification number called an employer identification number (EIN). Banks will also ask for certain documents, including a death certificate and proof that your chosen representative is authorized to manage transactions on behalf of the estate.
It's useful to have an estate account in the form of a checking account, but your estate's needs may call for adding a savings or money market account, too. Once your representative has set up the account, they can transfer money from your other bank accounts and deposit incoming funds, like stock dividends, remaining paychecks, or other income.
Write a Will
Having a legal document with instructions on how to distribute your assets once you've passed on can offer peace of mind to you and your loved ones — especially the person you name to manage your estate. If you don't formally make decisions about who inherits your assets, your state will make them for you based on its laws, which may not reflect your wishes.
Having a will can also prevent legal issues down the road, including the major question of guardians for any minor children. Writing a will is a key component of the estate planning process you should go through with a financial advisor, attorney, and tax professional.
Consider Establishing a Living Trust
A living trust is another way to manage what happens with your assets and is worth discussing with your estate planning team. One benefit: Assets included in a trust are generally not subject to probate, which is a public, court-supervised and often costly process for settling an estate.
Name Beneficiaries When Possible
When you name beneficiaries, assets usually transfer directly to the designated parties without first passing through probate. You can commonly name beneficiaries for retirement accounts like IRAs and 401(k)s, as well as life insurance policies, securities, and certain bank accounts. Some states allow you to name a beneficiary for real estate or vehicles, too.
Keep Records in Order
Your representative will need to itemize your creditors and individually owned assets and then handle the necessary transactions to close the estate. Having a thorough list of financial resources would be helpful in this process. Keep your representative from having to play detective by preparing orderly records not only of wills and trusts but also annuities, insurance policies, mortgage documents, bank accounts, securities, real estate information, passwords for budgeting software, the contact information of relevant advisers, business interests, and a list of creditors. Store these lists and records in a safe deposit box that your representative already has permission to access.
Shed Unused Assets
Reducing unwanted assets now can help unburden you and the person you choose to one day close out your estate. For example, do you have a bank account that you haven't touched in a while? It may be time to close that account and streamline where your liquid assets are kept.
While no one likes to think about their own death, planning for its legal and financial aspects gives important guidance and peace of mind to your loved ones.
