How to Set Up an Estate Account
When a person dies with assets in their individual name, those assets are usually “frozen” and cannot be accessed without opening a deceased person’s probate estate.
Probate is the process of winding up a deceased person’s affairs, liquidating their assets, paying off creditors and distributing assets to the appropriate heirs or legatees.
That seems simple enough in theory. In actual practice, it means that an executor or a court-appointed administrator of a probate estate needs to perform a number of tasks on behalf of the Estate.
The process usually begins with the filing of court papers and a trip to court to open the estate.
When the estate is opened, the court appoints whoever is named in the will, also known as an executor, or whoever has been nominated to act when there is no will, also known as an administrator.
Once appointed, the estate executor or administrator has a right to act on behalf of the estate and the right to access those previously frozen accounts belonging to the estate.
In order to undertake the business of the estate, one of the first things a probate representative needs to do is to open up an estate bank account.
The Estate Bank Account
The estate bank account will be the epicenter of estate financial transactions. So, how does an executor go about opening an estate account?
What kind of estate account should be established? Where should the account be located? These are the questions an executor must consider.
Where to Open an Estate Bank Account
The first task of an executor is to determine where the estate account should be opened. Usually, it is smart to open the account in the same state where the decedent resided.
Any interest earned on the estate account during the administration of the estate will be taxed to the estate.
The estate will report and, depending on the amount of income, file a 1041 estate income tax return. To avoid filing state tax returns in multiple states, it makes sense to centralize the estate assets in one state.
A good place to start is the bank where the decedent kept accounts during their lifetime. That will make it a bit more convenient to liquidate the decedent’s bank accounts because the bank will be able to do an internal transfer.
For smaller estates, one bank may be sufficient. For larger estates, an estate executor may need to set up accounts at multiple banks.
What Type of Estate Account Should Be Established?
Estate executors and administrators should be careful not to exceed the limits of FDIC insurance as they may be held responsible for a bank failure if an estate’s assets are wasted or lost because a bank failed and the assets on deposit exceeded FDIC limits.
An estate executor or administrator should also be cognizant of the local state laws that govern the administration of the estate.
Some probate codes may restrict the kinds of assets an estate can invest in or limit the kinds of accounts that hold estate assets.
Sometimes an estate executor already has authority to act on a deceased person’s bank account.
It never makes sense to operate out of a joint account or an account that is not expressly in the name of the estate.
The assets in the account might not belong to the probate estate and, worse, if there are other co-owners with access to the account the estate assets may not be fully secure.
It usually makes sense, in order to do the business of the estate, to open at least an estate checking account.
Depending on the nature of the estate assets and how long the estate is likely to be open, an estate executor or administrator should also consider whether there is a need for an estate savings account or even an estate money market account.
Opening the Estate Account
When an estate executor or administrator is appointed by a court, the court will issue letters of office or letters of authority.
This is a document that evidences the executor or administrator’s power to act on behalf of the deceased person and the estate.
When the personal representative of the estate goes to the bank to open an estate account, the representative should bring along a certified copy of the court-issued letters of office.
In addition to letters of office, an estate executor will usually need a certified copy of the decedent’s death certificate.
This will be necessary for the bank to verify that the bank account holder has passed away and will be necessary to close the decedent’s existing accounts so that they can be placed into the estate account.
In addition, the estate will need to obtain a taxpayer identification number that the estate executor will need to bring to the bank.
This is the equivalent of a social security number for the estate. A taxpayer identification number can be obtained from the IRS in a number of different ways whether online, by fax or by mail by filing a form SS-4.
When the account is open, it will probably be necessary for all co-executors or co-administrators to be present to sign signature cards and provide proof of identification.
While it can vary from institution to institution, the account will normally be titled as something like “Estate of John Doe, Jane Doe, executor”.
Operating with the Estate Account
Once the account is set up, the account needs to be funded.
Assuming the same bank is used for the estate account as the decedent’s other accounts, it is easy to close the decedent’s checking and savings accounts and have the funds deposited into the estate account.
In addition, the estate executor or administrator can endorse and deposit any checks in the decedent’s name, such as the decedent’s last paycheck.
Any bills or debts of the estate, such as property taxes or funeral expenses, can be paid from the funds within the account.
As assets are liquidated, such as in the case of the sale of estate owned real estate, the proceeds can be placed into the estate account.
If the account gets large enough it might make sense to open an estate savings account or money market to possibly earn a bit of extra income on the estate funds.
Once the expenses of administration and debts have been paid, the estate executor can disburse the balance of the estate to the heirs or legatees of the estate.
Good records of account transactions should always be kept. These will aid in the preparation of an estate accounting or income tax return as the probate progresses.
The proper use of an estate account will actually protect estate representatives.