Coping with the death of a loved one can be an emotionally taxing experience. While finances may be the last thing on your mind, understanding the basics of estates, trusts, and life insurance can help to navigate these complex processes when the time comes.
A deceased individual’s estate is the sum total of his or her assets, i.e. all the property that he or she owned at death. This can take the form of real estate, bank accounts, automobiles, stocks, insurance policies, or virtually anything else of financial value.
Estates are distributed through a process called probate. Probate frequently involves the use of the deceased’s will. The executor, often a trusted friend or family member of the deceased, oversees the distribution process according to the terms of the will. The executor acts as a sort of middleman in between the deceased person and the beneficiaries, often spouses, children, or relatives of the deceased, who are each entitled to a portion of the estate.
In the case of high-value estates, probate may become a heavily litigated process, with multiple parties claiming to be entitled to the same assets. It’s also important to note that the probate court process varies on a state-by-state basis. For instance, many states allow people with few or no assets to avoid probate (see Cal Prob Code § 13100).
A trust is an independent financial entity created when an individual (the “grantor”) puts money or assets aside to be managed, invested, and distributed by a trustee. Trusts may assign an individual or an asset management company (AMC) as trustee, and they may afford varying levels of discretion to the trustee. Some trusts specify that the trustee can distribute funds “as needed,” while others specify restricted uses or amounts at specific time intervals (see the “Spendthrift trusts” section of our previous blog post).
Because trusts are not technically “owned” by anyone, they are not counted as part of the grantor’s estate. In high-value estates (only those with values over $11.18 million as of recent tax changes), placing assets into a trust can help to minimize federal estate taxes . Trusts are also typically distributed at the discretion of the trustee, avoiding the probate process altogether.
In most cases, life insurance is not treated as part of the deceased’s estate or as a form of trust, but as a separate fund altogether (see our previous blog posts on probate and trusts for exceptions). With life insurance policies, the beneficiary must file a claim with the insurance company before being paid the death benefit. This typically involves 3 steps (see our previous blog post):
- Step 1: Gather all relevant information about the policy by looking through the deceased’s records, bank statements, taxes, etc.
- Step 2: Contact the insurance company and let them know of the insured’s death
- Step 3: Fill out claim forms and send a certified copy of the insured’s death certificate
After completing these steps, you should be paid within 2 months. However, life insurance companies will frequently delay or deny legitimate claims in order to maximize their own profits. If you believe your claim has been unlawfully delayed or denied, don’t hesitate to contact an experienced life insurance lawyer.