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What Happens, Financially Speaking, When Your Parents Die?

Beyond the emotion and loss, things can get complicated pretty quick

Losing a parent is devastating. But aside from the huge emotional aspect of this loss, what actually happens to whatever they’ve left behind — home, bank accounts and everything else that we refer to as their estate? How do you resolve what’s sure to be at least somewhat of a mess? How big of a tax chunk does the government take for itself following the death? Are you liable for your parents’ unresolved debts? For most people, it’s all a huge mystery. Alongside Kelly Crane, a Certified Financial Planner and CEO of Napa Valley Wealth Management, let’s look for some answers.

Man… where to begin with all my parents’ stuff?

Where indeed? “We’re tight-lipped about finances in America — we don’t study it in school, and we don’t educate our kids very well,” Crane says. “We don’t talk about our own finances with friends and neighbors, or even with our kids.” 

Did your parents talk to you about any sort of will, or their estate? Did they do any planning? Most don’t, but if they did, that makes things a whole hell of a lot easier. And even if they don’t talk about this sort of planning with their kids, any planning they actually did becomes enormously beneficial after they die. 

Like a will? Everything sorta flows from the will, right?

Yes the will, but also things like a living trust, powers of attorney and medical directives, Crane says. It’s kind of a package approach. The latter two are especially important nowadays — because people are living longer, people are also suffering from dementia or Alzheimer’s, in which they’re alive but incapacitated and incapable of making financial or medical decisions. 

And a will helps with all that?

A will just lays out who’s supposed to get what, and then you can go to court and deal with it if you need to. It doesn’t necessarily make things easy, but it’s far better than the alternative. When someone dies without a will, or there are parts of the estate not specified in the will, all that stuff will go to probate. That’s a legal process that sorts all this stuff out, but it basically makes simple things complicated, and takes a lot of time and expense. Now, estates with a will can also be probated to make sure it’s executed correctly, but a carefully written will allows the beneficiaries to skip the time and expense of probate. 

“It can take two years to get through a probate,” Crane says. “And then the expense just comes right out of the assets. It’s a statutory fee that’s built into the probate code. On the smaller estates it’s like 6 percent, and on the larger estates — say, a million dollar estate — it might be 3 percent: $30,000 just to probate a million-dollar house, for instance.”

What’s that living trust about, then?

Living trusts are different from wills, though many people have both. A living trust can have co-trustees — often a parent’s kids, who can step in and make decisions while the parent is still alive, which makes it more hands-on and, possibly, collaborative than a will. As you can imagine, it makes for a smoother transition over time. “Ultimately, the child can be the trustees even though the trust is still in place for the parent,” Olson says. Think of it like this: When the will is executed upon death, the trust becomes the legal owner of the assets (and those surviving co-trustees are the beneficiaries). In addition to the smoother transition trusts allow for, another reason people create them — particularly wealthy people — is that up to $12 million in the trust is exempt from estate taxes (more on those in a bit).

What happens to their retirement accounts and stuff?

Things like IRAs and 401(k)s are obviously part of the estate, but trusts can’t own them. However, a parent can put a beneficiary designation on them to indicate who the money is supposed to go to. If a parent is incapacitated, Crane says you’ll need a power of attorney to manage them yourself. Once the money is passed on to the children, they need an inherited IRA account, in which each child receives their portion. 

As for bank accounts, many states have what’s called a TOD, or transfer on death, available at financial institutions. If there’s no trust, having a beneficiary on the accounts at least makes things easier, creating a smooth transition when the parent passes away — meaning, it lets you avoid probate! The key difference between this and a living trust, though, is that in a TOD, the beneficiaries have no access or control over the assets as long as the account holder is alive. 

What if, uh, there’s none of those beneficiary designations on any accounts when my parents die?

Worst-case scenario, Crane says, is it gets paid into the estate, and if it’s probated, well, it’s lumped into the probate fee amount. “So you could have a $300,000 account that’s taxed all at once and you might end up losing as much as $100,000 in taxes,” Crane says. 


What’s up with the estate tax?

Estate tax is, basically, a tax on the right to transfer money from wealthy estates onto its beneficiaries. At the federal level it only really applies to very rich people: roughly $12 million per person in the estate, Crane says (meaning the threshold for a husband and wife, say, would be roughly $23 million). Though it affects very few people, it’s expensive: For the wealthiest Americans, their estates are taxed at 40 percent, though the average estate tax rate that people pay is closer to 17 percent. (The very wealthy still find loopholes in it to exploit, though, of course.) Some states also have an estate tax, though for lesser amounts, so it all depends on which state you lived in. 

Do I need a lawyer for the will or anything else when my parents die?

You might. There’s a lot of financial stuff to sort through. For example, if your parents had accounts with financial institutions based variously in California, Massachusetts and New York, those banks are each using their own state’s laws in transferring the money in their accounts, and you might need a lawyer, wealth manager or CPA just for sorting through that fun stuff.

Typically one lawyer or professional can handle most of this business — most likely the same person your parents used to set things up, who can assure you that everything’s in good order. It’s called estate and trust administration, and that’s the easy stuff. But if there’s any sort of dispute about the will, each heir will need to lawyer up and get their own representation.

Debts get passed on, legally speaking, right?

Yep. You’ve got to settle those to settle the estate. That obviously includes real estate mortgages, but even unsecured debt — credit cards being a great example — may still be due when a parent dies. If the estate goes to probate, guess what? The creditors get notified, as they’re part of the process. And when they know there’s assets in the estate, you best believe they’ll try to get what they were owed. However! “If you have everything handled in such a way that there’s no probate, it makes it harder for the creditors to know what’s going on, and they may or may not be able to collect as easily,” Crane explains.

Do I have to pay capital gains taxes on any of this stuff, since it increased in value?

Not generally. That’s because there’s what’s called a step up in basis upon death. That means that stocks, bonds and real estate are revalued (“stepped up”) at the date of death to the current value, for tax purposes.

“If mom dies first, her estate is stepped up; dad can sell everything the next day, and not pay any tax,” Crane explains. “When dad dies, then the children can sell everything and they don’t pay any tax — if they did it right away. Your only tax liability would be on the difference. So if you wait two years and the house goes up from a million dollars to a million two hundred thousand, you’re going to pay tax on [that] 200,000.”

You will, though, get taxed on their money that becomes yours, though, as it counts as income — unless it’s in some kind of tax-sheltered account.

What if I don’t get along with my siblings?

Yeah, this is the hard part. Crane’s seen it a million times in large-enough families: One sibling is almost always bad with money and totally financially dependent on other people. Things can get messy when it comes time for the parents’ assets to be distributed. The takeaway of all of this is that the parents can save everyone a lot of time and emotion and especially money by planning all of this stuff out — and explaining it to their children while they’re still alive. 

“In general there’s a lot of reasons people don’t do it,” Crane says. “You hear all kinds of crazy things — a lot of it’s not rational. Like, ‘If I take care of my wills and trust, it means I’m planning to die.’ Well, you’re going to die whether you plan to or not! So why not make it successful, right?” 

Your kids will thank you, and have more of your money for it.