The reason for this confusing time is because (1) people own many different types of assets, and (2) a family member's death is a unique event for most people.
These two facts combine to make a confusing time for many. We aim to make it much less overwhelming.
Background: While we're living, we own many types of assets and hold them in various types of ownership.
There is ownership that is sole, jointly with another with rights of survivorship, tenants in common without survivorship, in a trust, by contract (life insurance, etc.), pensions, IRAs, POD (payable on death). You get the picture.
After death, you need to look at each asset, determine who precisely owns it, and determine each value at death.
The steps needed to transfer to others depends on who and how they own an asset. State law determines the steps needed.
In addition to retirement accounts that Federal law regulates, Federal law also has a major role in defining the way a person is subject to estate tax - even if the large ($11 million) Federal exemption from the tax applies to eliminate actual tax payment.
In terms of ownership, 'joint assets with survivorship' become owned entirely by the surviving joint tenant. But tax law still says that 1/2 of the joint asset is calculated as part of your gross taxable estate.
So, don't confuse these rules of transfer with the tax laws - they are not the same.
Estate tax and Income tax concerns at death
At death, you should investigate both the estate tax and income tax situation.
Income tax considerations come into play like this: At death, most of your assets get a new income tax basis. The income tax basis is the number that your income tax is based on when that asset gets sold sometime in the future.
Obtaining these date of death values is central to the MA post-death process. Because if a higher value as of death than the date of purchase is available, then on the asset's future sale, the capital gain will be lower.
Will or trust ownership at death
A Will affects who will own the assets you own in your sole name on your death. It doesn't affect your other assets owned in a different way on your passing.
If you're married, the number of assets in your sole name can be quite limited. Many married individuals own the bulk of their assets jointly with rights of survivorship. Look at your MA deed, for example.
If you're married, the deed may likely read 'as tenants by the entirety' after your names at the deed's top. This is like joint ownership with survivorship. These kinds of assets do not need to go through the probate change of ownership approach.
Trust ownership at death
Another way you can hold title to assets is by having a living revocable trust own the asset at your death.
Trust ownership is not sole ownership, and so these assets are not affected by your will.
When a trust owns assets at your death, we say that the trust is 'funded.' This means your trust owns assets at your death.
Trust ownership avoids probate
If a person dies without any sole assets in their sole name, their affairs are said to avoid probate.
Probate is considered an expensive and time-consuming process - for some people, avoiding probate is a major reason to have a MA living trust.
Again, when assets are in the name of your MA revocable living trust at your death, those assets do not pass through probate.
1. Income tax after death
After a death, a surviving person must deal with any outstanding income tax return filing. For the first year after a passing, the income tax return filing can be more complicated than during the person's life.
The greater complexity arises because, on a person's death, the tax law states that a 'new taxpayer is born.' The new taxpayer is sometimes called the estate, and if the person had a trust in place at death, the tax new taxpayer is called the administrative trust.
Federal form 1041 for the new taxpayer after death
On the federal level, the new taxpayer must file a form 1041 for its first tax year. And if the new taxpayer continues beyond the first year after the death, then additional form 1041 income tax returns need to be filed for each year.