Administering the estate of a deceased loved one may seem like a daunting task. It can include many responsibilities in addition to being a complicated and time-consuming process. It requires filing court documents, paying debts and taxes, collecting and maintaining assets, and distributing property according to state law and perhaps the specific terms of a will.
Jump ahead to these sections:
- What Is an Estate Account?
- Do You Have to Open an Estate Account After a Loved One Dies?
- What Can Typically Be Paid Out of an Estate Account?
- Who’s Allowed to Open up an Estate Account?
- Does It Usually Cost Anything to Open Up an Estate Account?
- What Documents Do You Need to Open an Estate Account?
- How Do You Open an Estate Account After a Loved One Dies?
- When Do You Close an Estate Account?
One of the most important responsibilities of the person handling a decedent’s estate (called an “executor” or “personal representative”) is opening an estate account. While there may be many responsibilities of an executor or personal representative, opening an estate account is a simple and straightforward process.
It requires only a few steps and it serves to make the task of administering a decedent’s estate much easier than handling the decedent’s financial affairs on your own.
What Is an Estate Account?
An estate account is a financial tool used to manage the estate of a decedent. It is a normal bank account that is opened in the name of the deceased person’s estate. When a person dies, most or all of their property is held by their estate, and the executor of the estate must manage the estate through the probate process.
Just like a person may have a traditional checking account to manage their financial affairs while they are alive, their estate may have its own checking account to manage the decedent’s financial affairs after their death.
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Difference between an estate account and a trust account
An estate account is only one of several different accounts that may be used to manage a decedent’s property. Another account often used is a trust account.
An estate account and a trust account are similar in several ways. For example:
- Just as an estate account is opened to manage the property held in the decedent’s estate, a trust account is a bank account that is opened in the name of a specific trust and is used to manage the property held in the trust.
- The estate account is opened and managed by an executor who is named in a will or a personal representative who is appointed by the court.
- Likewise, a trust account is opened and managed by a “trustee,” who may be named in the trust document or appointed by the court.
- The executor’s management of the estate account may be limited by the terms in the decedent’s will. Likewise, the trustee’s management of a trust account may be restricted by the terms of the trust.
Although an estate and a trust share some similar characteristics, they are each considered their own legal entity. An estate account and a trust account are two very different tools used to manage these respective entities.
The main difference between an estate account and a trust account is that a trust account is not part of a decedent’s probate estate. The property held in trust is not subject to probate proceedings. Instead, it is governed strictly by the terms of the trust and is managed by the trustee named in the trust. The trust account is used to manage only the property held by the trust entity. In comparison, the estate account is used to manage only the property held by the decedent’s estate.
Do You Have to Open an Estate Account After a Loved One Dies?
Each state may set out specific rules governing the creation and management of an estate account. Generally, it is not required that every estate has its own account, but most executors use them because they are so effective in helping to manage the estate with clarity and accountability.
The main reason to open an estate account is to keep the finances of the decedent’s estate separate from your own finances. As executor, you are responsible for all of the assets owned by the decedent at their death, and you must use those assets to settle the debts of the estate and make distributions to beneficiaries named in the decedent’s will (or to the decedent’s heirs if there is no will).
Opening an estate account allows you to manage the estate without confusing estate assets with money in your own bank accounts. This draws a clear line between the estate’s assets and your personal assets. It also helps you to provide to the court an organized and accurate accounting of your management of the decedent’s estate.
What Can Typically Be Paid Out of an Estate Account?
In settling a decedent’s estate, an executor collects all of the assets left in the estate and holds them in the estate account. Before making distributions to beneficiaries, the executor must pay all of the outstanding debts of the estate. These may include payments for:
- End-of-life care. One of the financial burdens that often is left to an estate is the cost of end-of-life care for the decedent, such as if the decedent were in the hospital or nursing home when they died.
- Funeral and burial costs. When the decedent dies, the executor may use assets from the estate to pay for funeral and burial arrangements.
- Creditors. If the decedent died with outstanding bills or credit card debt, the estate must pay off the balance of those debts.
- Federal and state taxes. The executor also must pay all federal and state taxes owed by the estate. Taxes may vary depending on the size of the estate.
- Administration costs. The executor is not responsible for bearing the cost of administering the estate. The miscellaneous day-to-day costs of managing the estate, such as fees for opening accounts, postage, and copying may be paid out of the estate account.
- Executor and attorney fees. Serving as an executor is not voluntary. The decedent may provide in the will for the executor to be paid a flat fee or, depending on state law, the executor may charge a fee, which is normally based on the size of the estate. In addition to the creditors’ debts and taxes, executor and attorney fees get paid out of the estate before any distributions are made to named beneficiaries.
Who’s Allowed to Open up an Estate Account?
Generally, only the executor of the estate may open an estate account to manage the assets of the estate. As with any other bank account, you will not be able to open an account in the name of the estate unless the court first authorizes you to act on the estate’s behalf. The court grants this authorization by issuing the letters testamentary once the executor files to open probate proceedings.
Does It Usually Cost Anything to Open Up an Estate Account?
To open an estate account, the executor must obtain an employment identification number (EIN) from the Internal Revenue Service so that estate taxes can be paid. There is no fee for obtaining an EIN for tax purposes.
However, depending on the financial institution at which the estate account is opened, there may be a nominal fee required for opening the account, but this is usually not the case with most banks and credit unions.
What Documents Do You Need to Open an Estate Account?
Usually there are only three things you need to open an estate account:
- Letters testamentary. Before you can open an account in the name of the estate, the financial institution will require you to show proof that you are authorized to manage the assets of the estate, known as letters testamentary or letters of administration. You will need the letters testamentary issued by the probate court for this purpose.
- EIN or tax ID number. Because the estate is treated as an individual entity for tax purposes, you will need proof of an EIN in the name of the estate before opening an estate account. You can obtain an EIN online on the Internal Revenue Service (IRS) web page.
- Death certificate. The financial institution may require a death certificate for the decedent. Even if the bank does not require one, you may need it for other purposes, so it is always best to obtain numerous copies of the death certificate.
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How Do You Open an Estate Account After a Loved One Dies?
Once you obtain the documents that are usually required (letters of administration, EIN, death certificate), opening an estate account is as simple as opening any other traditional bank account.
Simply choose an appropriate financial institution to open a checking or investment account, depending on how the estate will be managed, and then use the account just as you might use your normal checking account. Always be sure to keep accurate records of all the transactions made with the account and keep the estate account separate from your personal accounts.
When Do You Close an Estate Account?
The executor will maintain the estate account until all of the estate’s debts, taxes, and beneficiary distributions are made. Once these responsibilities are fulfilled, the executor must submit an accounting to the probate court to account for how they managed the estate.
The court will confirm that the estate account was managed properly and that all debts and creditors with a claim against the estate are paid. The executor should close the estate account only after the court terminates the probate proceedings and closes the estate.
An Estate Account Is a Valuable Resource
Managing the estate of a loved one is an enormous responsibility for which you must account to the court. The court will require a clear and accurate accounting of all transactions the executor makes on behalf of the estate. Opening an estate account is an effective way to keep the assets of the estate separate and to stay organized when handling the estate, without commingling the estate’s assets with your own.