5 surprising money facts about death

Talking about death makes even the most optimistic of us squeamish. It's normal and often healthy, to not spend too much time thinking about the unthinkable. But because death often leads to financial surprises, it can catch even the best of us off guard making a hard time even harder. 

From unexpected bills to mysterious fees, the financial chaos that often follows death can be like getting sucked into quicksand. Today, we'll dive into the five financial surprises about death that no one really warns you about:

• The price tag on death

• How banks treat a death

• The search for debts, bills, and accounts

• The ELI5 breakdown of why wills + trusts matter

• When the tax man visits

A few weeks ago, Amanda Burr joined us on our podcast to share her journey when she suddenly lost her husband and dealt with the financial realities of the aftermath while raising their two boys. Her episode inspired today’s blog post. Listen to her inspiring story of rebuilding after loss here.

The price tag of death

Losing a loved one is already hard enough without the added financial burden. On average, immediate costs average $20,000, according to Forbes. Funeral services alone had a median national cost of $7,848 in 2021, and when you add $1,841 for burial land and another $1,700 for extras like catering and flowers, expenses rise quickly. Beyond that, families often spend nearly $10k more on accountants to resolve tax matters and lawyers to sell assets.

For many families today, an unexpected loss of income can be devastating. In fact, 58% of people with household incomes of $150,000 or more expect their loved ones to inherit their debts when they die. To fully protect a family, life insurance should not only cover current expenses but also outstanding debts and ideally account for future savings they may have relied on.

Many families are significantly underinsured—only 50% have life insurance, and half of those believe their coverage is insufficient. If you're considering life insurance, remember that not all policies are created equal. Term life insurance, for example, is often a more affordable option.

How banks treat a death

The most important thing to know is that it's up to the family to contact the bank about a death to claim the assets.

When a bank account holder passes away, what happens to their account depends on whether there’s a joint owner or beneficiary. With a joint account, the surviving owner automatically takes over thanks to the right of survivorship. If both joint owners have passed, the account goes to any named beneficiaries, skipping the probate process, which makes things easier.

Without a joint owner or beneficiary, the account becomes part of the estate and goes through probate. During this time, the bank freezes the account, so no money can be spent, even for bills, until probate is finished—often taking months.

If the account goes inactive for too long (usually 1-5 years), it could be considered “dormant” and subject to escheatment, where the funds are transferred to the state and can't be reclaimed from the bank. Knowing what accounts you have together and separately can keep you both protected in the worst case scenario (which Plenty can help you track easily).

The search for debts, bills, and accounts

For unexpected deaths, it's not uncommon for family members to not know where to start. In the world of e-statements, there's literally no paper trail anymore. And without access to their email? It might be an impossible task. 

“You never truly realize how much financial activity someone has until you have to piece it all together,” shares Linda, who navigated this labyrinth after her husband unexpectedly passed.

It’s all too common for widowers to be caught off guard by unexpected debts or bills when they receive calls about missed payments or delinquent accounts. After a death, it falls on the family to notify creditors, banks, and service providers. Unfortunately, debt doesn’t pause, and interest can continue to accrue. Having a clear list of all your debts and bills can go a long way in ensuring nothing gets overlooked.

When it comes to bank accounts, investments, or other assets, time is of the essence. If an account goes unnoticed, it could eventually be turned over to the state through escheatment, making it difficult to recover.

The ELI5 breakdown of why wills and trusts matter

For many of us (myself included), it feels like we were in our 20s one minute, and the next, we're hearing about "wills" and "trusts" from friends, family, and those targeted Instagram ads.

As you start to build assets or take on responsibilities like a mortgage or family, these things become important pieces of the puzzle.

A will is a legal document that covers three key areas:

1. How to divide your assets and who inherits them. This is especially important since different states have different rules for inheritance priorities, like for a spouse or parent.

2. End-of-life care: who can make decisions and how life support is handled.

3. Funeral arrangements: your preferences, which can relieve your family from making tough decisions.

Even with a will, your estate still goes through probate, a legal process that can take months or years and comes with extra costs like legal fees. Without a will, it gets even more complicated, as the state decides how your assets are divided, which may not match your wishes. Families depending on money from probate may struggle with debt during the wait.

A trust allows you to avoid probate, giving beneficiaries quicker access to funds with less hassle. While wills take effect after death, a trust can be set up while you’re alive. Trusts also offer benefits like reducing estate taxes (more on that next!).

When the tax man visits

For most everyday families, it'll be reassuring to know the tax implications are limited for most families. There are three common taxes that are paid:

• Estate tax: Think of it as a tax on the wealthy; it's a federal tax for estates over $13.6 million (2024 limits).

• Inheritance tax: This is a tax on the person receiving the inheritance. It only exists in a few states—like Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania and can be as low as 1%, or as high as 18%.

• Capital Gains tax: When you inherit property or assets like stocks, you don’t pay tax right away. When you sell those assets later, you'll likely pay capital gains tax if the investment went up since you inherited them. 

In conclusion,

It's not a fun topic to talk or think about - hopefully, these 'worst case financial surprises' can help you prepare for some conversations with your loved ones. A few simple steps like talking about what you own and owe can not only help you make better financial decisions today, it can also protect your partner down the road.

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Sources:

Smart Money Mamas. "How Losing My Husband Showed Me the Importance of Financial Security After an Unexpected Death." Smart Money Mamas. Accessed October 6, 2024. https://smartmoneymamas.com/losing-husband-financial-security-unexpected-death/.

Bankrate. "Life Insurance Statistics and Facts for 2023." Bankrate. Accessed October 6, 2024. https://www.bankrate.com/insurance/life-insurance/life-insurance-statistics/#life-insurance-claims-statistics.

U.S. Bank. "Resources for Managing Financial Matters After an Unexpected Death." U.S. Bank. Accessed October 6, 2024. https://www.usbank.com/financialiq/manage-your-household/life-events/losing-a-loved-one/resources-for-managing-financial-matters-after-an-unexpected-death.html#:~:text=Pull%20paperwork%20together,and%20the%20certified%20death%20certificates.

DeBaun, Samantha. "Financial Changes That Happen When Your Spouse Dies." Kiplinger. Accessed October 6, 2024. https://www.kiplinger.com/retirement/financial-changes-that-happen-when-your-spouse-dies.

Bowers, Sarah. "The Financial Impact of Loss: Preparing for a Loved One's Death." Financial Planning Fort Collins. Accessed October 6, 2024. https://www.financialplanningfortcollins.com/blog/financial-impacts-loss-death/.

Gordon, Deb. "Dying Can Cost Loved Ones $20,000 Before Lost Wages and Worse Health, New Report Says." Forbes, January 31, 2023. https://www.forbes.com/sites/debgordon/2023/01/31/dying-can-cost-loved-ones-20000-before-lost-wages-and-worse-health-new-report-says/.

PR Newswire. "Nearly Half of American Adults Expect to Pass on Their Debt After Death." PR Newswire, October 6, 2024. https://www.prnewswire.com/news-releases/nearly-half-of-american-adults-expect-to-pass-on-their-debt-after-death-302030043.html.

U.S. News. "Bank Account Rules After Death." U.S. News. Accessed October 6, 2024. https://www.usnews.com/banking/articles/bank-account-rules-after-death.

Bankrate. "What Happens to Your Bank Account After Death?" Bankrate. Accessed October 6, 2024. https://www.bankrate.com/banking/what-happens-to-your-bank-account-after-death/#:~:text=After%20someone%20dies%2C%20a%20sole,assets%20are%20distributed%20as%20desired.

PNC Bank. "What Happens to a Bank Account When Someone Dies?" PNC. Accessed October 6, 2024. https://www.pnc.com/insights/personal-finance/spend/what-happens-to-a-bank-account-when-someone-dies.html#:~:text=Some%20bank%20accounts%20have%20transferrable,probate%20process%2C%20streamlining%20asset%20distribution.

SoFi. "What Is a Dormant Bank Account?" SoFi. Accessed October 6, 2024. https://www.sofi.com/learn/content/what-is-a-dormant-bank-account/.

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