How to Ensure Your Family Doesn’t Feel Financial Pain When You Die

No doubt, your death will be difficult for your loved ones. So do you really want to make it even harder by leaving them in a financial bind? If you don’t, you should be taking steps now to make your death easier for your family.

“We’re all going to die,” said Liza Hanks, an estate planning attorney and author of “Every Californian’s Guide to Estate Planning: Wills, Trusts and Everything Else.” “Being realistic about it, being thoughtful about it is a really caring thing you can do for the people you leave behind.”

Click through to see the cost of dying in each state, and learn what you can do to save your family from financial pain when you die.

Having life insurance is one of the keys to a financially secure life. However, about 30 percent of households are uninsured, according to a study by insurance and financial services research organization LIMRA.

Learn ways to save on life insurance.

Without a life insurance policy that pays a benefit when you die, your family might have a hard time staying afloat financially if they depend on your income.

“Life insurance can help protect your family and keep them financially secure when you’re not there to take care of them,” said Annamaria Vitelli, managing director at PNC Asset Management Group. “In addition to supporting your family, life insurance proceeds can help provide immediate cash at death and take care of some or all of a decedent’s debts, funeral expenses and income or estate taxes.”

Even if you’re a stay-at-home parent, your family would feel the financial impact of your absence because the contributions you made, such as child care, would have to be outsourced. Having a life insurance policy that pays a benefit when you die will help limit the financial impact of your death.

You can save money on life insurance by buying a term policy rather than an expensive permanent — or whole life — policy. Just make sure the term of the policy is long enough and the benefit (payout) is big enough to tide your family over until your kids are through college or, perhaps, until the mortgage is paid off.

Even if you have a life insurance policy through work, you should get your own so you won’t lose coverage if you switch jobs, Hanks said.

If you have a life insurance policy, you don’t want to forget to name who will receive the benefit from your policy. You also want to make sure you name beneficiaries on all of your other financial accounts, such as your retirement plan.

It’s easy to get busy, though, and forget this important task.

If you don’t name beneficiaries, the funds in your accounts will have to go through the probate process.

“That could cause significant delays in getting assets to the people you want to receive them,” Vitelli said.

By naming beneficiaries on your accounts, you’ll eliminate confusion, Vitelli said. “By having a current beneficiary on all your accounts, you leave no doubt about what you want to be done with your financial account or insurance proceeds,” she said. “It also saves time.”

Make sure you name names rather than just listing “my dependents” or “my children.” Otherwise, there might be confusion about which children you want to receive the funds if you have children from more than one marriage or stepchildren. And don’t forget to update your beneficiaries if you have more children, get divorced or have any other major life events.

If you haven’t bothered to draft a will, you’re not alone. A Gallup poll found that more than half of adults don’t have a will that describes how they want their money and estate handled after they die.

Related: Everything You Need to Know About Estate Taxes

“If you die without a will, each state has laws about who gets what,” Hanks said. “If you die with a will, you decide who gets what.”

A will also lets you name an executor of estate to oversee the distribution of your assets. And it allows you to name a guardian for your children and appoint someone to manage any money you leave behind for them when you die. “If you don’t have a will and name a guardian, you give a judge you don’t know total control over who gets your kids,” Hanks said.

Having a will can help ensure that your wishes about who gets your assets and who cares for your children are followed. And it can help prevent lengthy, expensive court battles among families over who gets what after you die.

You can use a website such as Nolo to create an inexpensive will. Or you can meet with an attorney — which is ideal if your situation is at all complicated — to draft a will for you.

An attorney also will identify other estate planning documents you might need, such as a living trust. Keep reading to find out why this document can be essential to eliminating financial pain for your family when you die.

A trust might sound like something only wealthy people have. But even if you’re not rich, your loved ones will benefit if you set up a living trust before you die.

If you have only a will, your estate will have to be settled through a process called probate. That process can be lengthy and expensive. For example, if you have a house and assets worth $1 million in California, where Hanks practices law, you could easily pay more than $40,000 in probate-related fees, she said.

A living trust allows your estate to bypass probate court. “The reason people do a living trust is so when they die, the court doesn’t step in,” Hanks said.

It will likely cost you more to create a living trust than a will. But it will save your family money and time when you die.

There are self-help products out there to do your own living trusts, Hanks said. But most people will benefit from working with an attorney, who “brings to the process of having done it hundreds of times,” Hanks said. The cost will vary depending on the state where you live and whether the attorney charges a flat fee or an hourly rate.

Surely you’ve heard the saying that nothing is certain but death and taxes. But you don’t want to miss opportunities to minimize the impact of taxes on your estate when you die.

Without proper planning, the tax bill on your estate might be bigger than necessary. The federal estate tax has pretty much gone away, Hanks said, because the exemption per person is now $11.2 million.

However, some states have inheritance taxes that could leave your loved ones with less.

You can take steps to minimize your estate tax by putting assets into trusts, Hanks said. Other options include gifting assets to loved ones before you die or leaving money to charity. Work with an estate planning attorney or accountant to explore your options.

You might not realize that you have the option to designate your bank or other financial accounts as payable on death. This is similar to naming a beneficiary for your account because it allows you to designate who will receive the funds in the account when you die.

Without a payable on death, or POD, designation, your accounts might be difficult for your family to access when you die. “POD accounts are simple because they pass directly to the beneficiary named upon death rather than going through the probate process,” Vitelli said.

A POD designation can be helpful if you and your spouse don’t have joint accounts. However, POD accounts aren’t meant to be a comprehensive estate planning tool because of their limitations. “For example, one limitation is if a beneficiary dies before you do, you will need to change your beneficiary designation to ensure that the account continues to avoid probate as you cannot name successor beneficiaries,” Vitelli said.

Call the financial institutions where you have accounts to find out their requirements for designating your accounts as payable on death.

Whether you have a joint bank account with your spouse is a personal decision. “During your lifetime you may or may not want your spouse to have access to the funds,” said Vitelli.

But one of the benefits of having a joint bank account is that you make it easier for your spouse to access money in the account when you die.

If you don’t have a joint bank account, POD account or living trust, your spouse won’t have access to those funds, Vitelli said. “The surviving spouse would have to wait for the estate to be settled to have access to the account,” she said.

In other words, it will cost your spouse time and money to go through probate court just to get the money in your account.

Again, having a joint account is a personal decision. But when weighing the pros and cons, consider how easy it will be for your spouse to have access to the money in the account when you die if you have a joint account.

About two-thirds of adults don’t have an advance directive that names someone to make healthcare decisions for them if they can’t and spells out what sort of end-of-life care they want, according to a study published in Health Affairs. If you don’t have one, you could be setting your family up for financial and emotional distress if an illness or accident leaves you on life support.

If you become terminally ill or permanently unconscious, disputes could erupt among your loved ones if they have different opinions about your care. Remember the seven-year legal battle between the husband and parents of Terri Schiavo about whether to remove the feeding tube that was keeping her alive in a vegetative state?

An advance directive or living will allows you to specify the treatment you would or wouldn’t want to keep you alive. A healthcare power of attorney is another advance directive that lets you designate who will make healthcare decisions for you if you can’t.

You can find inexpensive advanced directive forms online at sites such as Nolo. Or you could meet with an attorney to draft this document along with a will, living trust and other estate planning documents.

“Spell out what want,” Hanks said. “Don’t leave critical decisions to other people.”

Most of us don’t want to think about dying. So it’s understandable if you haven’t given much thought to what sort of funeral or service you want when you die.

If you don’t let your family know your final wishes, your death could cost your loved ones more than necessary. “If you have wishes about your funeral arrangements, it’s great to let people know,” Hanks said.

Otherwise, your loved ones might spring for the priciest casket and headstone even though you wanted an inexpensive cremation without a burial.

Do your family a favor by writing down funeral and burial wishes and either give them a copy of the document or let them know where they can find it. You might even want to prepay your funeral to spare your loved ones the expense. Hanks said she has clients who have done this. Just make sure your family knows if you choose this option.

Perhaps you’ve had a few jobs and had a retirement account such as a 401k with each of your past employers. If you haven’t rolled those accounts into an IRA or your current retirement account, you might make it difficult for your family when you die, Hanks said.

Your death will be difficult enough for your loved ones. Don’t make it harder by forcing them to track down all of the retirement accounts you’ve left open with former employers.

It’s a lot easier for your spouse or family members when you die if all of your retirement funds are in one account, Hanks said. “If someone dies with 15 accounts as opposed to someone who dies with one, which one is easier to administer?” she said.

If you’ve left behind money in a retirement account at an old job, roll over your 401k into your current retirement account if you have one and your employer’s plan allows it. Talk to your human resources department about having the money transferred from your old account.

Or open an IRA — which is an individual retirement account — with an investment firm such as Fidelity or Vanguard. Then reach out to your old retirement plan’s administrator to have the funds in that account transferred to your new IRA.

You’re likely well aware of what financial accounts you have and know the passwords for accessing them, But would your loved ones know what accounts you have or know how to access them when you die?

If you don’t make a list of all of the financial accounts you have, your family members might not know what sources of income will be available to them when you die. They need to know whether you have insurance and where your policy is located.

They need to know what retirement accounts you have, whether you have a brokerage account, savings accounts and so on. They also need to know what credit accounts you have.

You should make a list of your accounts and passwords to make it easier for your family, Vitelli said. “However, the list should be in a secure location and access should be limited to only a trusted individual or individuals,” she said. Store it in a locked file cabinet, lockbox or in a digital file that’s protected with encryption software.

You don’t know where your Social Security card is. Your old tax returns are scattered about the house, and none of your financial documents are in a central location. In short, you’re not organized.

You’ll only add to your family’s stress when you die if they can’t find your important financial and legal documents. For example, your dependents will need to know where your life insurance policy is to file a claim for benefits. Your spouse will need to gather documents such as your marriage license and Social Security statements to get benefits.

In addition to creating a list of your accounts, creating a filing system for all of your important financial and legal documents. Then tell your family members where they can find those documents.

Of course, if you’re deep in debt, you’re feeling the repercussions now. You might be living paycheck to paycheck, having trouble getting ahead financially or even getting calls from collection agencies. You certainly don’t want your debt to haunt your family after you die.

“Typically when someone dies, their personal debt does not get passed on to surviving family members,” Vitelli said. But that doesn’t mean it disappears entirely.

“Generally, the estate owes the debt,” she said. “An executor is appointed and debts from the deceased spouse are paid out of the estate. If there are enough assets to cover the outstanding debts, the executor must sell them to pay the creditors who file a claim on you.” That means there will be less in your estate to pass onto your loved ones.

However, if there isn’t enough money in the estate to pay the debt, it typically goes away, Vitelli said.

Don’t let your debt impact how much your heirs receive. You should make this the year for paying off your debt by cutting spending or generating extra income with a side gig to boost debt payments.

Also, make sure you have named beneficiaries for your life insurance and retirement accounts so creditors can’t claim that money to pay your debts when you die.