As solemn as the topic is, it is important to consider death when managing your personal finances. When someone in your family passes away, be it a parent, grandparent, sibling, or child, not only are you faced with deep emotional stress, but you may suddenly face a variety of complex financial considerations. In this piece, we will discuss funeral costs, asset distribution, and income replacement for the people that depended on the deceased.
The most immediate financial concern involves paying for the funeral. Funerals can be expensive as the process of taking care of the person’s remains, storing them, holding the funeral itself, gravestones, and burial can add up to thousands of dollars.
Funeral cover, also known as funeral insurance, is a financial product that covers funeral and other burial-related costs in exchange for premiums during the life of the deceased. Given that funeral insurance is designed for funeral expenses specifically, it can be more narrowly tailored to your family’s funeral and burial expectations than life insurance.
There are a number of different asset distribution options available to you – all of which depend on the decisions made beforehand.
A last will has specific instructions for the distribution of your estate upon death. Think of it as a document that lists who gets what if you pass away, helping to avoid any disagreements or additional emotional stress for your family. Another very important reason to have a will pertains to those who have minor children. With a will, you can name a guardian for your children in the event of your death.
Probate is the legal process of validating a person’s will. It involves taking the will to court and having a judge rule that the will is legally binding. Once this happens, the assets are then distributed.
If you die without a will, you won’t have any say in how your property will be distributed. Again the estate itself would have to go through the probate process and your assets would pass to your survivors according to the laws of the state.
By consulting with both a lawyer and a financial planner, you can determine how you would like your assets to pass through your will rather than going through a court-determined intestate process.
A trust is a vehicle that you can use to manage income replacement for your dependents.
At death, the assets in a revocable trust do not go through the Last will (and therefore do not pass through probate). Instead, the assets in a revocable trust are distributed by the terms of the trust itself. This can in some cases be a much simpler process than the probate process. Often times people will create a revocable trust simply to avoid the time and costs that come with probate. That said, revocable trusts are still included in one’s gross estate and therefore they are not used to avoid estate taxes (which can be as high as 40%).
The biggest advantage of an irrevocable trust is that the assets in the trust are not included in your gross estate for estate tax purposes. Another benefit of an irrevocable trust is that the assets in the trust are out of the reach of creditors – so in the event of bankruptcy, creditors are unable to tap into the trust assets. Irrevocable trusts are generally used as an estate planning tool. If one’s gross estate and prior taxable gifts exceed $5.49 million (2017), this type of trust can save considerable amounts in estate taxes.
One common income replacement plan often used for estate planning is life insurance. For term life insurance, premiums are paid during the lifetime of the designee and their passing creates a set monetary payout to the beneficiaries as long as the principal passes away within the set term.
Another option is whole life insurance, which will issue a payout to the beneficiaries regardless of when the principal member dies.
As compared to the set sum from term life insurance, whole life insurance may be better designed for long-term income replacement. In contrast, the set amount from term life insurance may be better if the income replacement is rather meant to help in a big transition rather than a permanent support line.
Beyond term and whole life insurance, there are a large variety of other more complex life insurance variants that may suit your particular income replacement strategy. These include survivorship life insurance, in which you and another person have it so that the first to die pays out to the other.
There is also universal life insurance, in which there is a permanent benefit to the beneficiaries but also a cash-based portion that can be invested and grown tax-free. Beyond these, there are also numerous other forms of insurance with varying risk-reward equations. The more complex the product, the bigger the fee, so make sure you are not being sold a complex product for the wrong reasons.
It is important to explore your options and choose the right type of life insurance for you and your particular situation.
The death of a family member can be an extremely difficult time. Estate planning can help to ease the financial and administrative burden during this time.