Where Does Your Money Go When You Die?

Thinking about what happens to your money after you die might not be pleasant, but it’s an essential part of financial planning. Without a clear plan, legal processes and state laws may determine asset distribution, leading to delays, costs, or disputes among loved ones.

Understanding wills, probate, joint accounts, trusts, debts, and taxes ensures your wishes are carried out efficiently.

Wills

A will is a legal document specifying how assets are distributed after death. Without one, state laws dictate inheritance, which may not reflect the deceased’s intentions. A properly drafted will directs assets to chosen individuals or organizations, reducing uncertainty and conflicts.

For a will to be valid, it must meet state-specific requirements. Generally, it must be written by someone of sound mind, signed, and witnessed by at least two people who are not beneficiaries. Some states recognize handwritten wills, while others require notarization. Digital wills are gaining recognition in certain jurisdictions.

A will also names an executor responsible for managing estate distribution. This person ensures debts are paid, assets are transferred, and legal obligations are met. Choosing a reliable executor is crucial, as they handle financial matters and navigate legal processes.

Probate

When someone dies, their assets often go through probate, a court-supervised process ensuring debts are settled and remaining assets are distributed. The process can be time-consuming and costly, depending on estate complexity and state laws.

Some states, like California and Florida, have statutory probate fees based on estate value. In California, fees start at 4% of the first $100,000 and decrease for larger estates. Probate length varies. Simple cases may take months, while disputes, creditor claims, or difficulties locating heirs can extend the process for years.

Certain states, including Texas and Indiana, offer simplified probate for smaller estates, allowing assets to transfer without full court proceedings. Some jurisdictions permit informal probate, requiring less court oversight if no disputes exist.

Not all assets go through probate. Life insurance payouts, retirement accounts with designated beneficiaries, and assets in revocable living trusts transfer directly. Real estate with “transfer on death” deeds, available in states like Arizona and Ohio, also bypasses probate.

Joint Accounts and Beneficiary Designations

Assets in joint accounts with rights of survivorship automatically pass to the surviving account holder, avoiding probate. This is common among married couples who share bank accounts, investment portfolios, or real estate under joint tenancy. However, joint ownership can create complications, especially in blended families or when one co-owner contributes significantly more. Disputes may arise if other heirs feel excluded or question the deceased’s intentions.

Beneficiary designations serve a similar function, ensuring that retirement accounts, annuities, or payable-on-death bank accounts transfer directly to named individuals. Many financial institutions allow account holders to assign beneficiaries, simplifying asset distribution.

It’s important to review beneficiary designations periodically. Outdated information can lead to unintended outcomes. If someone names a spouse as a beneficiary but later divorces, failing to update the designation could result in the former spouse receiving the funds. Some states, like Texas and Florida, automatically revoke a former spouse’s beneficiary status after divorce, but not all states offer this protection.

Trusts

Trusts allow individuals to transfer wealth privately and control distribution terms. A properly structured trust can specify when and how beneficiaries receive assets, preventing reckless spending or ensuring funds are used for specific purposes, such as education or medical care. Trusts are useful for families with minor children, individuals with special needs, or those seeking to protect assets from legal claims.

Irrevocable trusts offer additional benefits. Once assets are placed in an irrevocable trust, they are generally no longer part of the grantor’s taxable estate, potentially reducing estate tax liability. Certain types, such as grantor-retained annuity trusts (GRATs) and charitable remainder trusts (CRTs), provide structured income streams while minimizing tax exposure. A GRAT allows the grantor to transfer appreciating assets while retaining annuity payments for a set period, with remaining assets passing to beneficiaries at a reduced gift tax cost.

Debts and Liabilities

Outstanding debts must be settled before assets are distributed to heirs. The estate is responsible for paying these obligations, and if funds are insufficient, creditors may not receive full repayment. The order in which debts are paid varies by state, but funeral expenses, medical bills from the deceased’s final illness, and secured debts like mortgages typically take priority. Unsecured debts, such as credit card balances and personal loans, are paid only if enough assets remain.

If an estate is insolvent—meaning liabilities exceed assets—heirs generally do not inherit unpaid debts unless they co-signed a loan or live in a community property state like California or Texas, where spouses may share responsibility for certain obligations.

Some debts are discharged upon death. Federal student loans, for example, are forgiven when the borrower dies, though private student loans may still be collected unless the lender offers a similar policy. Mortgages and home equity loans must still be paid, and beneficiaries who inherit real estate must either assume the loan, refinance, or sell the property to satisfy the debt.

Creditors have a limited window to file claims against an estate, typically ranging from three to six months, depending on the state. If no claim is made within this period, the debt may be unenforceable.

Estate Taxes

For individuals with significant assets, estate taxes can reduce the amount passed on to beneficiaries. The federal estate tax applies to estates exceeding $13.61 million in 2024, with rates ranging from 18% to 40% on amounts above this threshold. Married couples can double this exemption using the portability provision, which allows a surviving spouse to inherit any unused portion of their deceased spouse’s exemption.

Several states impose their own estate taxes, often with lower exemption limits than the federal threshold. Oregon and Massachusetts tax estates exceeding $1 million, while Washington’s exemption is $2.193 million. Some states, like Maryland and Nebraska, also levy inheritance taxes, which are paid by the recipient rather than the estate.

Strategic planning can help reduce estate tax exposure. Gifting assets during one’s lifetime or utilizing irrevocable trusts can minimize tax burdens. The annual gift tax exclusion, set at $18,000 per recipient in 2024, allows individuals to transfer wealth tax-free without affecting their lifetime exemption.