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The Undiscovered Country; or What Happens Next? (3Q23 Wealthwise by WEIL)

Updated: Oct 16, 2023

September 15, 2023

Tyler Hewes, CFP®


To die, to sleep;

To sleep, perchance to dream—ay, there's the rub:

For in that sleep of death what dreams may come,

When we have shuffled off this mortal coil,

Must give us pause…

- Hamlet, Act III, Scene i


Theologians, poets, philosophers, biologists, academics, and Danish princes have questioned and debated, to one degree or another, what happens after we shuffle off this mortal coil. Hamlet, the aforementioned Danish prince, calls what comes after death “The undiscovered country, from whose bourn no traveler returns…”. With apologies to The Dane and his fellow askers of the great question (“What comes next?”), this missive is not about the metaphysical or spiritual aspects of death; instead, I am far more interested in what happens to your bank and/or brokerage accounts, retirement assets, and Social Security Number (SSN) after you make your journey to the undiscovered country.


You can consider this a sequel, after a fashion, to the newsletter I wrote about the sudden passing of my father-in-law in 2022. One of the biggest lessons that was driven home is that you can never be too prepared for the unexpected. Last time I explored the transition of assets to heirs. This time, I dive into the procedural aspects which may prompt discussions with your family, estate attorney, and/or us. While every family and situation is unique, below are some universal topics to be aware of. Preparing our clients and their loved ones for what happens after they pass, helping them navigate the “undiscovered country,” is one of the core services we provide at WEIL.


BANK & BROKERAGE ACCOUNTS


There is the potential for the deceased’s accounts to be frozen once the bank or brokerage firm is informed that the account owner has passed. Title of the account as well as the estate plan dictate the action taken after the passing of an account owner. For example:


Individual’s sole name - will generally freeze the account pending direction from either the estate executor or the probate court;


Jointly held with a secondary account holder (instead of a “joint signer’) - will generally freeze the account pending its closure during the estate settlement process (at which time the surviving joint owner can transfer funds to a different account);


Jointly held with multiple signers - the account may have automatic rights of survivorship, allowing the surviving signer(s) to continue to use the account without interruption. Note that online access can be affected if the deceased’s social security, email and/or cell phone are the ones on record for the account;


Family Trust - there may be delays if the deceased’s SSN was used as the Tax ID for the account, (or even a requirement to open a new account), under the surviving trustee’s SSN;


Payable on Death (“POD”) or Transfer on Death (“TOD”) - will typically release funds to the named beneficiary/ies once informed of the account holder’s passing and confirmed by receiving a verified copy of the death certificate.


It is recommended that you review the titles for all your bank and brokerage accounts, consolidating accounts where possible, to avoid unintended interruption of access to capital when your heirs may need it the most.


SOCIAL SECURITY NUMBER


Per the Social Security Administration (SSA), since the first SSNs were issued in November 1936, there have been over 453.7 million numbers issued and, using their recently implemented randomization methodology, there will be no need to recycle any numbers for the foreseeable future. This means that once an individual passes away, their SSN is no longer valid and will be discontinued from use and the SSA begins the process of informing financial institutions about the death of the individual.


The SSA is typically informed of an individual’s passing either by the funeral home or the family of the deceased. If the individual was a member of the United States Armed Forces (either active duty or retired), the Department of Defense will inform the SSA.


The SSA will discontinue payment of benefits as of the month of an individual’s passing (for example, if an individual passed away in July, the payment received in August for the previous month would need to be returned to the SSA). Once the SSA is informed of a death, eligible survivors can apply for Survivors Benefits and spouses can convert their Social Security benefits to the higher of the two benefits (if the benefit of the deceased spouse was the greater of the two). Navigating the rules for Social Security survivorship benefits can be intricate. To determine eligibility, we recommend paying a visit to your local Social Security Administration office. Note that the SSA will not automatically update the benefits for the survivor, so be prepared to work through the process.


DEATH CERTIFICATE


Obtaining copies of an individual’s Death Certificate is a key step in the processing of a deceased’s estate. The timeframe for the issuance can range from a few weeks to several months. Every state is different and each municipality has its own process. In San Diego County for example, Death Certificates are issued by the Vital Records and Statistics Office of the County’s Health and Human Services Agency.


In California there are two types of Death Certificates:


Authorized Copy – These documents can only be obtained by certain individuals and will include sensitive information, including the SSN of the deceased.


Informational Copy – These documents can be requested by the wider public but have certain pieces of sensitive information redacted.


Both the Authorized Copy and Informational Copy are considered “Certified Copies” for use with financial institutions in processing the beneficiary claims.


There is a fee charged for each copy (currently $24.00 each). Requests for copies can be made in person, by mail, and online using the VitalChek system (for an additional fee). It is recommended that at least ten copies be requested of a Death Certificate as the executor/beneficiaries/heirs will need to provide copies to multiple government agencies and financial institutions.


STEP-UP IN COST BASIS


When an individual passes away, the cost basis of their non-retirement account assets is reset to the fair market value at the time of their death (so called “stepping up” or “stepping down” the basis).


The process of stepping up or down the cost basis of assets (depending on market conditions) is not automatic and requires some work on the part of the trustee or executor. (Laws vary from state to state. As a community property state, California enjoys a double step-up in basis. Assets jointly owned by spouses step up at the first death and again at the second death, allowing the heirs to enjoy the full growth of those assets without consideration for capital gains tax.)


Here is a brief breakdown of the process for different asset types:


Equities & Bonds

  • Generally, for equity assets held in brokerage accounts (stocks, bonds, mutual funds, exchange-traded funds, etc.), the value at the Date of Death (DOD) is determined once a copy of the Death Certificate is provided.

  • Once the DOD value(s) is determined, the basis information is updated in the account. Stepped up assets are automatically updated to Long-Term (one year or more) regardless of how long the asset was owned.

Real Estate

  • There are multiple considerations when it comes to stepping up the basis of real property in California, not the least of which is the impact of Proposition 19 on the reassessment of the property tax basis of inherited homes.

  • Before Proposition 19’s passage, the inheritance of a primary residence from a parent to a child was exempt from property tax reassessment. Now, under the new regulatory structure of Proposition 19, a home inherited at the death of a parent is reassessed for property taxes.

  • There is an Intergenerational Transfer Exclusion that applies, but only under certain circumstances: the home was the primary residence of the parent AND has a value below $1 million and the child has moved into the home within one year of the transfer of the title. Both the homeowner and child will have to file the homeowner’s exemption (form BOE-266 available from the County Accessors’ office.) If the home’s value is above the $1 million threshold, the portion over the limit is subject to reassessment for property taxes. An example: Person X’s home was valued at $1.4 million, and his son inherited the property, both having lived in the home. The Exclusion applies to the first $1 million of the home’s value, but the $400,000 above the limit is subject to reassessment and triggers an increase in the annual property tax due.

  • Exclusive of the issues around Proposition 19, getting a professional appraisal of the property at the time of the owner’s death will be the best way to determine the fair market value for the stepped-up cost basis of the property. This will be important when dealing with both the IRS and California’s franchise tax board based on the transfer and/or sale of the property.

  • The California Bureau of Real Estate Appraisers is a good place to start your search for a Licensed Appraiser. Visit brea.ca.gov for more information.

Life Insurance

  • Generally, depending on the ownership of the life insurance policy and how the beneficiary structure was delineated, most families will not encounter any capital gains tax on a life insurance policy. Since the trigger event is the death of the insured party/ies and the premiums paid are the basis (along with any growth in the policy value throughout its existence), any gains that come from the trigger event also negate the taxability of said gain.

  • Note that the preceding section does not take into consideration any policies with outstanding loans that may be subject to income tax at the death of the insured, or estates over the current estate tax exclusion where the death benefit may be included (and taxed) as an asset of the estate.

Retirement Accounts

  • Retirement accounts (pensions, 401(k), 403(b), IRAs, etc.) that are either pre-tax (traditional) or after-tax (Roth) are not, generally, subject to any step-up in basis. There are some very specific instances where assets in a retirement account may have a retained basis, but those examples tend to be rare.

  • Individuals who inherit retirement accounts will either have to take distributions that contribute to their ordinary income (from a traditional/pre-tax account) or are tax-free (from a Roth/after-tax account). Surviving spouses have the option to assume the account as their own or establish a Beneficiary Designated Account (“BDA”) and follow the prescribed distribution rules under the SECURE Act which went into effect in 2020. For non-spouse beneficiaries, a new BDA account will need to be opened and the account distributed, typically within 10 years of inheritance.


WHAT’S NEXT?


If your head is swimming based on the volume of information above, don’t despair. Death, even when denuded of the metaphysical and emotional, can become overwhelming when you consider the number of steps involved in transferring assets and the potential pitfalls that can very easily be overlooked during an emotionally and mentally draining time for the heirs. The more work that can be done proactively and well ahead can help to ensure that the “slings and arrows” of estate planning don’t befall your heirs. These steps can include:

  • Engaging an experienced estate attorney to establish/revise your estate plan.

  • Reviewing the title of all bank and investment accounts to ensure that none will be subject to probate.

  • Discussing your real property holdings with your family/heirs to ensure that there is an understanding of their plans and any potential property tax impact.

  • Utilizing WEIL to assist you with preparations now, and assist your heirs with the transition later.

Whatever approach you choose, committing to proactively planning and a willingness to act in the now instead of later, should serve you and your heirs in good stead. If you would like to discuss any of the items above, feel free to ring up any of the WEIL team. It is our goal that you and your heirs do not have to navigate this “undiscovered country” alone.



This communication may contain privileged and confidential information; people other than the addressee should not review, distribute or duplicate it without permission. Nothing in this communication constitutes a solicitation by us for the purchase or sale of any securities. We do not accept account orders or instructions by e-mail, and will not be responsible for carrying out e-mailed orders or instructions. We provide reports as an accommodation to help you monitor your investment activity; securities pricing may not reflect reliable values. In the event of a discrepancy, the information in your confirmations of daily activity and monthly statement of account shall govern. While the information in this communication comes from sources believed to be reliable as of today, we make no representation as to its accuracy and completeness and provide no assurances as to future returns or performance. We may own positions in securities mentioned in this communication. Investing involves risks, including the possible loss of the principal amount invested. There can be no assurance that recommended investments will be successful in meeting their objectives. Investment in mutual funds is also subject to market risk, investment style risk, investment adviser risk, market sector risk, equity securities risk, and portfolio turnover risks. More information about these risks and other risks can be found in the fund prospectus. You may obtain a prospectus for CWC's mutual funds by calling us toll-free at 888.550.9266 or visiting www.cweil.com. The prospectus should be read carefully before investing. CWC's mutual funds are distributed by Arbor Court Capital, LLC, Member FINRA/SIPC. Nothing herein should be construed as legal or tax advice. You should consult an attorney or tax professional regarding your specific legal or tax situation. Christopher Weil & Company, Inc. may be contacted at 800.355.9345 or info@cweil.com.


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