Financial Account Considerations for Heirs

Losing a loved one is a stressful experience.  Along with suffering grief, heirs will be thrust into various meetings with the professional team who previously provided service to the deceased party; such as, the financial advisor, tax professional, and estate attorney.  Additionally, there is a lot of paperwork (much of it is now digital) that is involved in order to close the estate. 

Launching into a loved ones estate case can be a daunting experience for heirs.  However, when you have an understanding of the process and the possible time frame, it helps to ease a person through the estate journey. 

In this article, only the distribution process of financial accounts will be addressed.  How real estate, custody of children, and personal property are handled is outside of the scope of this post.  Consult with an estate attorney for details and legal advice.

First, let’s review terminology that you may see or hear while navigating the estate case.

Common Estate Definitions - 

Beneficiary: A person or Trust that is designated to receive assets after a grantor passes away.  It is exceptionally important to have beneficiaries listed on Investment Accounts. If beneficiaries are listed on accounts at the financial institution, these named persons or entity are honored above all other instructions.  The beneficiaries listed at the custodian even out rank any beneficiaries listed in a Will.  

Custodian: A financial institution, bank, or insurance company holding and safeguarding assets.  Altruist and Charles Schwab are the financial institutions used by Imagine Financial Services.

Executor: If the decedent left a Will, the court will appoint the person who is indicated as executor for the estate.  When no Will is present, the court will appoint an executor.  The executor handles various administrative duties of the Will and estate after the grantor passes away.

Grantor: A Grantor is the person who seeks to establish a Will and/or Trust that can later be used as a distribution guide after they pass away. 

Probate: A court-supervised process to close a person’s estate after they pass away.  It can be costly, time consuming, and a good portion of the court records are made public.  

Trust: A legal agreement that allows assets to be held, transferred, and distributed on behalf of the beneficiaries.  A trust allows a deceased parties estate to bypass Probate Court.

Trustee: A person or firm appointed to act as the asset manager for what is titled and held within the trust for the benefit of the beneficiaries.  

Will: A legal document outlining the grantors wishes for the distribution of assets after they pass away.

Now that you have a better understanding of the various roles within an estate case, let’s move on to what can be expected and general timelines.

Step one: Certified Death Certificate  

No action can be taken until a Certified Death Certificate is made available. 

Assuming the deceased party has been working with a financial advisor, tax professional, and estate attorney, each professional will need a Certified Death Certificate.  Ask each of these professionals if their office  will accept a scanned copy.

Death Certificates can be costly. If you do not need to provide an original, save yourself some fees at the County Recorders Office and simply provide scanned copies of the original (if this is accepted).

The financial advisor will contact the account Custodian to notify them of the client’s passing. Each Custodian firm will have their own company policies regarding estate cases.   

Once the Investment Firm receives notification of the account owner’s passing, the account(s) will be frozen.  No transactions (trading, withdrawals, deposits) can take place in the account. 

Step two: Open an Estate Case

Paperwork will be issued by the financial advisor or Custodian which will open the estate case.  Paperwork may be coupled with new account opening documents.  This will later allow funds to be moved to new Inherited accounts for each beneficiary.  

Along with a Death Certificate, the firm will request Trust documents if a beneficiary is listed as a Trust.  Most Attorney offices will provide a Certificate of Trust which is a short version of the entire trust document.  The Certificate of Trust is widely accepted at financial institutions.  

Depending on the complexity of the Estate Case, additional documents may be requested.

Most financial institutions have their own Estate Team that specializes in working on estate cases. 

Many financial institutions now allow for digital signatures through accepted platforms like DocuSign.  However, each firm has their own policies and some may still require wet signatures.

Timing: After paperwork has been submitted, it can take between a couple of weeks up to several months to complete the Estate Case processing.  The timing depends on the complexity of the case (title of beneficiaries, number of beneficiaries, type of assets, etc.).  

This waiting period can feel frustrating, but the Estate Teams are in place to protect against any errors and/or fraudulent practices that may go against the original wishes of the decedent.      

Step Three: Transferring assets to Inherited accounts

If new account paperwork was not submitted with the original estate documents, this is the time to initiate the account opening process.  

For beneficiaries new or experienced in investing, this is a smart time to consider your options for receiving financial advice.  There will be short-term and long-term decisions to be made like investment allocations, taxable triggers, beneficiary considerations, and more.  

Seek advice from a qualified investment manager who knows financial planning, like a Certified Financial Planner® professional.     

Turn your current financial dreams into goal-setting and implementation for your future.      

How beneficiaries are taxed on inherited brokerage accounts

In most cases, heirs receive a step-up in basis for the valuation of stock assets they receive from a brokerage account.  

Step-up in basis - Example: 

Julia inherits her mother’s brokerage account.  The account holds a particular stock.  Julia’s mom Betty, purchased the stock for just $75 per share several years ago.  At the date of Betty’s passing, the stock is worth $300 per share.  For tax purposes, Julia receives a step-up in basis to the new value of $300 from her mom’s date of death.

Julia considers selling the stock. With the help of her financial advisor, she navigates through all of the estate notification and transfer paperwork at the Investment Firm.  Now that the estate process is complete, and the stocks are in an account in her name, she can decide if she wants to sell now or later. 

Sell Now - 

The stock has gone up in value and is now worth $310 per share.  If she sold right away, she would have a Capital gain of $10 per share.  

Ordinarily, to receive  Long-term Capital Gains, and investor must hold the stock for at least 1 year.  However, inherited stock is treated more kindly for tax purposes.  Regardless of the holding period, inherited stock receives a more favorable tax status of Long-Term Capital Gains (LTCG), even if you hold it for just 1day. 

Sell Later - 

What happens if Julia holds the stock for a longer period of time?  There is no crystal ball for which direction the stock prices will go.  If they go up to $400 per share and Julia decides to sell, she will pay $100 per share ($400 sale price - $300 step-up basis at mom’s DOD (Date of Death) = $100)

Perhaps when Julia is ready to sell the stock it has lost value.  It is now worth $275 per share.  She could receive a $25 Long-term Capital Loss ($275 sale price - $300 step-up basis = negative/- $25).

Tax Treatment for Qualified Accounts

Assets held in qualified accounts like a 401(k), 403(b), SEP, and IRA’s will not receive a step-up in basis.  Technically, IRAs are not qualified accounts but they are modeled in a similar manner and the same rules apply.

Qualified accounts are subject to special rules for distributions and tax. 

Conclusion

Does all of this sound like a lot of work?  Yes, it will be work.  Again, depending on the complexity of the estate, it may take several months to finalize everything, but careful estate planning by the grantor is a true gift to the beneficiaries.  It is a guide to how assets will be managed both short-term if simply distributed according to the Will and potentially long-term if managed by the Trust.  

Grantors should carefully review their documents every 2-5 years and as life changes may indicate changes are necessary to the estate documents and that they are updated accordingly.   

Holding regular review meetings with the appropriate parties like grantors, trustees, and executors ensures that each understands their role and authorities and can familiarize these key people with the professionals (financial advisor, tax pro, and estate attorney) who work directly with the grantor(s) to help facilitate their wishes.  

If you don’t currently have an advisor or have never sought financial advice, but you want to learn more, contact me.  My name is Marianne Nolte, CFP®.  I’m a Certified Financial Planner® professional who works with women and couples.    

My ideal clients are within 2 years of retirement, or have recently retired, and have accumulated more than $300,000 in investable assets.  To learn more, visit imaginefinancialservices.com

Take control of your financial life.  Set an appointment and begin working toward your financial independence.

Seek professional guidance from a qualified financial advisor, tax professional, and estate attorney. The sale of all inherited assets should be carefully considered with the comprehensive guidance of a financial advisor, estate attorney, and tax professional.  There are a lot of nuanced rules to be reviewed and considered so you can work towards an optimized outcome.       

References:

When a brokerage account holder dies—what comes next? | finra.org. (n.d.). https://www.finra.org/investors/insights/when-brokerage-account-holder-dies