One of the first steps an executor of an estate should take is opening an estate account, or bank account held in the name of the estate of a deceased person. The estate executor can use the funds held in the account, which are owned by the estate, to deal with day-to-day administration expenses as well as the final distribution of funds to the estate’s beneficiaries.
Note that a trust account is very different from an estate account. If you wish to set up a trust as part of your estate planning, it’s advisable to speak to a Citrus Heights estate planning attorney who can help you decide what kind of trust is appropriate for your estate planning needs.
Benefits of an Estate Account
During the estate planning process, the idea of adding a beneficiary, usually an adult child, to an existing bank account as a joint account holder can seem like an attractive, more efficient option than having your executor set up an estate account after you pass. In such a situation, the funds in a joint account would then transfer over to your child, who can then distribute the funds according to your wishes without having to go through probate.
However, while an estate account is not required by law, it’s a much better option for both your estate and your executor. Some of the reasons include:
Having an estate account reduces the risk of your funds being used in a way that you would not want them used. When an account holder of a joint account passes away, the surviving joint account holders get title to the account’s remaining funds. This means that they can legally use the funds in whatever ways they wish. In an estate account, the funds belong to the estate and can only be used for estate purposes.
Having an estate account reduces the potential for liability falling on the executor’s shoulders because there is no risk of commingling funds, which occurs when personal assets are mixed in with estate assets. In an estate account, the only funds that can be deposited are those that belong to the estate. Record keeping is also a lot easier, since there’s no need to keep personal funds separate from the estate’s funds and there are also no tax issues regarding who owns the income generated by the account.
How to Open an Estate Account
While it might seem daunting to open an estate account, the process is actually quite straightforward. The executor of the estate needs to follow these basic steps.
Begin the probate process. The steps for beginning this process depend on the state in which the deceased person resided. Typically, you need to provide the state court with the death certificate and the will, if there is one. During the probate process, the court appoints an executor (the person named in the will) or, when there isn’t a will, an administrator. Both an executor and an administrator have the same powers when it comes to administering the deceased’s estate.
Obtain a tax ID number for the estate account. Once the probate process has been started and an executor appointed, the executor should apply to the Internal Revenue Service (IRS) for an employer identification number (EIN) for the estate. This might sound a bit confusing, as the estate isn’t an employer, but, despite its name, an EIN is simply a tax identification number used by different entities, from individuals to corporations to estates, for tax-filing purposes. Banks require estates to have an EIN in order to open a bank account in the estate’s name.
Bring all required documents to the bank. Once you have the estate’s EIN, gather all the required documents and bring them to the bank. Bank policies vary as to what documents are required, but all will ask for the court document naming you as the estate’s executor or administrator.
Open the estate account. Fill out all the required forms. Since an estate account is simply a bank account in the estate’s name, associated costs are similar to those for any other kind of bank account. In many cases, this might simply be the cost of ordering checks for you to make payments from the account.
Executors can use the account to deposit any payments made to the estate and to pay any ongoing estate debts. Once probate is complete and final distribution of the estate funds is permitted, the executor can make the final payments to all of the beneficiaries, after which the estate account can be closed.
Closing an Estate Account
An executor needs to close probate before an estate account can be closed. The process for closing probate depends on the state in which probate takes place, but it generally involves a final accounting that shows all the transactions that have affected the estate’s funds during the probate process. This final accounting is typically made after payment of all the estate’s debts and taxes.
Once probate is closed, the executor can make final distributions from the estate account to the beneficiaries, after which the account itself can be closed. In most cases, this process may be as simple as filling out forms required by the bank.
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