In this article, I will discuss the assets or payments you get when a person dies, and how not all of it is “estate” or “inheritance”.
The notion of “the estate”. We all have an idea of what the estate is: it’s the deceased’s assets, which are used to pay off their remaining debts, and what’s left is then distributed to the heirs according to the will (or according to applicable laws, if the person died intestate).
Furthermore, you may be aware that if the deceased’s debts are greater than their assets, then the creditors lose: the heirs do not inherit debts. We say that the estate is “insolvent” if its assets cannot pay its debts.
But there is money you may get when a person dies which is not part of the estate, and that money cannot be touched by creditors. So even if the estate is insolvent, you may still receive some compensation for your loved one’s death.
Death certificates. In order to do a lot of business pertaining to the deceased person — opening the estate, claiming life insurance, closing their credit card accounts, taking over utilities, taking over the title of their car, you name it — you will need death certificates. Some companies may ask you to fax them a copy; others will want an original certified copy of their very own, so you will need a bunch of them. We got twenty when my mom died. You request them from the funeral director, and each copy costs money, so I’ll talk more about this when I cover funeral expenses.
Life insurance. Life insurance money is not part of the estate (cannot be touched by creditors) and is not subject to inheritance tax, because it was not money which “existed” during the deceased’s lifetime; they could not have used it to pay bills or buy stuff. It is “created” by the insurer and paid directly to the policy’s beneficiaries. As our attorney put it, life insurance is the “best” sort of money to get when someone dies.
However, there is one potential “gotcha” …
Contestability of life insurance. If a person’s life insurance policy is new enough (two years in PA and most states; just one in some states), the insurer may choose to investigate it. Say I find out I have a terminal disease and I take out a policy and I lie when I apply for it, saying “Nope, I have no terminal diseases.” Then I die during the contestability period. The insurer can go “Uh oh” and they get to pull my medical records. They see that I lied on the policy and they are allowed to tell my beneficiaries they lose. The insurer can deny the claim even if the thing I lied about was not the cause of death (I lie about not having a disease but then I die being hit by a bus). So do not lie on your life insurance policy, even if it will get you a better premium, because you may basically be throwing your money away.
My mom had several life insurance policies. We received the payment for one of them about 40 days after she died. The other one was still in the contestable period; four months after she died, we were notified that they had finally gotten copies of her medical records and were reviewing them, and as of this writing, we still haven’t been paid.
Suicide and life insurance. Fortunately this didn’t apply to us, but life insurance policies generally have a clause about suicide which can be confused with the contestability period: if the person kills themselves within a certain initial period after setting up the policy, the claim will be denied, but if the suicide happens after that period, the policy may in fact pay the claim. Obviously this is to protect the insurer when the person is already planning to kill themselves when they open the policy. It is not the same as contestability, but works similarly in practice. (I know this from my own reading; as I said, fortunately, it didn’t apply to us with my mom.)
Joint bank accounts. My name was the second name on some of my mom’s bank accounts. Because that was the case, the accounts are considered jointly held and I had right of survivorship, which meant the entire bank account went directly to me; it is not treated as estate for debts, but it is inheritance. Half of the money is subject to the inheritance tax. (Only half of it, since my name is on it; effectively, the law assumes that I put half of the money in the account and I only get taxed for the other half, even though in actual practice that’s not what happened.)
Any other joint assets. If there’s anything else you owned jointly, like say you were on the title of the deceased’s house, then again, it may be considered inherited but not estate. I can’t speak to this, because the only stuff my mom and I jointly held were her bank accounts. You’ll have to consult a lawyer on this, as with everything else.
The downside of joint assets. Of course, the caveat is that if you co-owned a house or car or something because you co-signed the loan, then it’s not part of the estate but you do still have to pay for it. This isn’t “inherited” debt; it’s debt you already were responsible for since you co-signed, but maybe you weren’t making the monthly payments because the deceased was the person who was really using the asset. Sorry, now you’re on the hook for it, and the general principle of creditors only being able to go after the estate doesn’t protect you in this case.
Retirement accounts. Sort of halfway between between life insurance and bank account. I was the beneficiary of my mom’s retirement account, so I got an “inherited IRA”. An inherited IRA or 401(k) is not estate for the purposes of estate debts, but all of it is included in computing inheritance tax.
Disclaimer: I AM NOT A LAWYER. NONE OF WHAT I SAY HERE SHOULD BE CONSTRUED AS LEGAL ADVICE. A LICENSED LAWYER SHOULD BE CONSULTED ON ALL LEGAL MATTERS PERTAINING TO ESTATES. The purpose of this article is to tell you some things I learned in the process of dealing with my mom’s estate, which you may want to think about in planning your own estate or dealing with a loved one’s estate. Furthermore, details of some of these matters differ from state to state, so if you’re not in Pennsylvania, things may be different. Consult your lawyer on all matters.