When someone passes away and leaves possessions behind, including financial assets, these possessions are known as the person’s estate. Settling an estate is the process of distributing the deceased’s assets to inheritors, known as beneficiaries.
Working with an attorney or tax advisor
If you are named as a beneficiary, it’s important to work with a trusted attorney and possibly also a tax advisor, to see how the inheritance affects your financial situation, including your own estate plan.
You’ll make any necessary decisions about your inherited assets, but your attorney and advisor can help you understand the sometimes complex implications of these decisions. You will choose your attorney and/or advisor; many inheritors feel comfortable using the family attorney who also helped create the will, but some prefer to hire their own.
What is probate?
Probate is the process of settling the estate according to the will.
For more about probate, including which assets have to go through it and what impact it can have, see Probate for inheritances.
A will is a legal document that clarifies how and to whom the deceased’s assets are to be distributed. It usually includes:
- Designation of an executor, who carries out the will.
- Beneficiaries—those who are inheriting the assets.
- How and when the beneficiaries will receive the assets.
- Guardians for any minor children.
Assets passing in the will must undergo the probate process.
However, some types of assets allow naming of beneficiaries, which allows a direct transfer of the asset without the will and without going through probate. The beneficiaries named on the asset have greater authority than the will. Assets that allow the naming of beneficiaries include:
- Retirement accounts.
- Insurance policies.
- Investment accounts with transfer on death (TOD) designation.
- Assets with joint ownership with right of survivorship or tenants by entirety.
Estate and inheritance tax
Federal estate taxes, state estate taxes, and state inheritance taxes are typically due from the estate within nine months after the date of death. These taxes usually are based on the value of the taxable estate and are paid before the assets are distributed to the beneficiaries.
In some states, the executor of the estate will need an estate or inheritance tax waiver from the state tax authority before the assets can be released.
The federal estate tax has an exemption, which means that if the taxable estate is below a certain amount and the decedent did not use the amount for lifetime gifting, federal estate tax may not be due.
For the latest on the federal estate tax exemption, see Estate and gift tax changes in Fidelity Viewpoints®.
A trust allows a third party or trustee to hold assets on behalf of a beneficiary. Trusts can be arranged in many ways and can specify exactly how and under what conditions the assets pass to the beneficiary or beneficiaries.
One benefit of a trust is that a trust's beneficiaries may have access to the trust's assets more quickly than beneficiaries of assets transferred using a will. Also, if a trust is an irrevocable trust, the assets of the trust may not be considered part of the taxable estate, so the estate and its beneficiaries may lose less to taxes.