Losing a Loved One: Essential Financial Steps After Losing a Loved One

Losing a parent or spouse can be one of the hardest experiences we face in life. Even when the passing is expected, it can be emotionally overwhelming. Dealing with the estate, taxes, and paperwork of your loved one can increase your stress as you are grieving

To reduce your stress during this difficult time, we wanted to share a list of important tasks to consider when preparing for or dealing with the loss of someone you loved:

Record-keeping:

Begin keeping detailed records of any financial transactions related to the estate, such as payments to creditors, distributions to heirs, and any tax filings. Below includes notifications and documents you should collect. 

Notifications to Government Agencies and Businesses

• Social Security: Notify the Social Security Administration (SSA) if your loved one was receiving benefits. Any future payments should stop, and in some cases, surviving spouses or dependents may be eligible for death benefits.

• Pension/Retirement Accounts: If your spouse or parent was receiving a pension or had retirement accounts, notify the administrators to begin any claim or beneficiary payout process.

• Health Insurance/Medicare: Cancel any health insurance, and if applicable, notify Medicare or Medicaid to stop services and return any overpayments.

Life Insurance and Retirement Benefits

• Claiming life insurance: If your spouse or parent had life insurance, you will need to file a claim with the life insurance company to receive the death benefit. The process usually requires a copy of the death certificate and proof of identity.

• Retirement accounts: Retirement accounts (IRAs, 401(k)s, etc.) with named beneficiaries will typically bypass probate, but you may need to handle the transfer of assets or payouts to the designated beneficiaries.

Access to Accounts

• Bank accounts: If the bank accounts were solely in the name of the deceased, they will likely be frozen until the probate process starts. With an EIN for the estate, you can open an estate bank account to manage these funds.

• Joint accounts: Any accounts held jointly with another person (such as a spouse or children) will usually pass to the co-owner without going through probate.

• Beneficiary accounts: Certain assets, like life insurance policies, retirement accounts, and bank accounts with designated beneficiaries, typically pass directly to the beneficiaries without going through probate.

Death Certificates

Obtain multiple copies: You will need official copies of your loved one's death certificate to handle many aspects of the estate, including closing accounts, claiming life insurance, and transferring assets. It is a good idea to get several certified copies.

Additional Documents

You may also want to collect the will (if there was one), any trust documents, gift tax returns, and the previous year’s tax return as you prepare to work through the estate process. 

Secure an EIN

It is often necessary to obtain an Employer Identification Number (EIN) for the estate. An EIN is required for certain actions, such as:

1. Opening an estate bank account: To manage any money or assets left by your parent or spouse, such as paying bills, filing tax returns, or distributing inheritance to beneficiaries, you may need to open an estate bank account. Most banks will require an EIN for this.

2. Filing taxes for the estate: If the estate earns income (from investments, property sales, etc.) during the probate process, you will need to file a tax return for the estate. The IRS requires an EIN for this.

3. Handling legal and financial matters: If there are any legal or financial dealings related to the estate that require formal identification, an EIN is often necessary.

4. To secure an EIN for the estate, go to www.IRS.gov.

If the estate does not need to open a bank account, does not earn any income, or the estate is very small, it might not be required to get an EIN.

Be aware of the additional filing requirements

Final Individual Income Tax Return (Form 1040)

• Who needs to file: If your loved one had any income in the year up until their passing, you may need to file a final personal tax return.

• Filing for the year of death: The final individual income tax return would cover the period from January 1st of the year until the date of death.

• Who files: Usually, the executor or personal representative of the estate handles this filing.

• Due date: This is generally due by April 15th of the following year, just like any regular individual tax return.

• Deductions and credits: You can claim deductions and credits your parent was eligible for as of the date of death.

• Filing status: You will file as if they were still living, using their former filing status (single, married, etc.). If your dad passes away, and your mom is still alive, she will likely file as married filing jointly in the year that your dad passes away.

Estate Income Tax Return (Form 1041)

• Who needs to file: If the estate generates $600 or more in gross income during the tax year, then it is required. This could come from interest, dividends, rental income, or the sale of assets.

• What it covers: The estate income tax return is for income earned by the estate after the date of death. For example, if your father's bank account continues to accrue interest after his death, that interest would be reported on the estate tax return.

• Executor responsibilities: The executor of the estate is responsible for filing Form 1041 if required.

• Due date: This return is generally due by April 15th of the year following the year the income is earned by the estate.

Estate Tax Return (Form 706)

• Who needs to file: This is separate from income taxes and is only required if the estate exceeds the federal estate tax exemption ($13.61 million for 2024).

• What it covers: Form 706 reports the gross value of the estate and calculates any estate taxes due.

• Due date: This is due nine months after the date of death, though you can request an extension if needed.

• Inheritance taxes: Some states have inheritance taxes, and you will need to determine if this applies based on the residence of the deceased and the value of the inheritance.

If the estate is small and does not meet the thresholds for these filings, you may not need to file Form 1041 or Form 706, but you would likely still need to file a final individual return (Form 1040). Since estate tax matters can be complex, it is a good idea to consult a tax advisor or attorney to ensure everything is handled properly. 

While the Federal threshold is extremely high, please be aware that many states have much lower threshold. For example, the threshold for Illinois is only $4 million. Below are a few points related directly to Illinois estates:

Illinois Estate Tax Return (Form IL-700)

• Who needs to file: Any estate valued at $4 million or more.

• What it covers: Form IL-700 reports the overall value of the estate and calculates any estate taxes due.

• Due Date: The due date is nine months after the date of death. Any tax due must be paid by the original due date to avoid penalties. An extension can be requested. 

• Additional Notes: 

  • This return includes gifts that have exceeded the annual gift tax limit (currently $18,000 for 2024). While gifts are included in the calculation, they are taxed at a much lower rate which offers opportunity for tax planning.

  • If the estate value is close to $4 million, consider filing an Illinois estate tax return so you can obtain a Certificate of Discharge and you do not have to worry about the state coming back to argue the valuation/tax due years after the fact.

  • The challenging nature of Illinois tax law is that a $3.9 million estate would owe nothing in estate taxes, however, a $4.1 million dollar estate would include the entire $4.1 million value in the final calculation.

Understand the Probate Process

Probate is the legal process of administering the estate, which typically involves validating the will (if there is one), paying off debts, distributing assets, and following the terms of the will or state law if no will exists (intestate).

• Executor's role: The executor or personal representative will be responsible for managing the estate through the probate process. This often involves working with a probate court, especially if there are significant assets.

• Will review: If there is a will, you will need to file it with the local probate court. If there is not a will, the estate will be distributed according to your state's intestacy laws.

9. Revocable Living Trust vs. Irrevocable Trust

If your loved one had a trust set up, the process of managing the estate may be simpler and may avoid probate, but there are still key steps and considerations to keep in mind. Here's how having a trust affects the process:

• Revocable Living Trust: This is the most common type of trust used for estate planning. During your loved one’s life, they would have had full control over the assets in the trust. Upon death, the trust becomes irrevocable, meaning its terms cannot be changed, and the assets are distributed according to the trust's instructions.

• Irrevocable Trust: If your loved one set up an irrevocable trust during their life, they would have given up control over the assets at the time the trust was created. The trust's terms and the trustee’s role are set in stone, and the assets are managed outside of the estate.

Avoiding Probate

• One of the biggest benefits of a trust is that assets within the trust do not go through probate. This can save time, reduce costs, and keep the details of the estate private. The trustee (who could be you or another appointed person) will manage and distribute the assets according to the terms of the trust without court supervision.

• Non-trust assets: If there are any assets that are not included in the trust, they may still need to go through probate, unless there are other transfer mechanisms such as joint ownership or beneficiary designations.

Conclusion

Dealing with an estate can be time-consuming and emotionally draining. Don't hesitate to lean on family, friends, or even professional support (such as grief counseling) during this time. You do not have to handle everything alone. You can hire an attorney to guide you through the probate process or get help from a qualified financial advisor or tax advisor to manage any complexities related to investments, retirement accounts or tax matters.

Taking things one step at a time and getting professional help when needed can make the process smoother. Dealing with an estate is a marathon, not a sprint. For additional help or guidance, please reach out to Monotelo Advisors.

In times of grief, managing finances and paperwork can feel like an extra burden. This booklet is designed to guide you through essential tasks like tax filings, managing accounts, and organizing legal documents. With helpful checklists and practical advice, it is here to help you take care of what’s necessary so you can focus on healing.

Loss of a Loved One E-Booklet

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