If you think Wills are only for the rich, you are absolutely wrong. A Will is an essential part of any estate plan. It is the primary document for transferring your assets upon your death. You should decide who inherits which assets and when they should receive them. You should decide who will manage your estate as executor and/or trustee. You should select a guardian for your minor child. You should provide for the orderly continuance or sale of a family business. The following are a handful of the questions, topics, and issues you need to consider when planning for the distribution of your estate. Remember, it’s easy to put off developing a detailed estate plan, but its your choice to preserve for your heirs what it took a lifetime to achieve.
HOW PROPERTY PASSES AT YOUR DEATH
The old adage, “you can’t take it with you,” literally applies, under state and federal law, immediately upon your death. Because you can’t take it with you, the assets you have accumulated during your life must pass to other parties. How that property gets to your heirs (automatically or by “court” action) depends upon how you own the property, what type of property it is and any beneficiary designations. Property that passes automatically (i.e., by beneficiary designation) is called non-probate property. It does not have to pass through a court process to get to the “new” owners. Probate property (i.e., assets without a beneficiary designation) must go through a court proceeding to get to those new owners.
Property that does not pass by beneficiary designation passes through the court system in the probate process. The court will allow distribution to your heirs according to the terms of your Will, after the Will goes through a special proceeding (often called proving the Will). A properly executed Will allows you to choose those individuals or organizations who will receive your property at your death. Unless special circumstances arise, i.e., the Will is contested, the court will enforce your wishes as to the distribution of your property. Please remember, all states prohibit the disinheritance of a spouse. By statute, your spouse has a right of election and may demand a percentage of your estate, no matter what the Will states.
If you die without a Will, the property that you own in your own name will be distributed according to your state’s law of descent and distributions. This is referred to as intestate distribution and varies from state to state. The state’s Will is an inflexible pattern of distribution that may not provide for the distribution you prefer.
Jointly Owned Property
Many married couples own most of their assets jointly with the right of survivorship. When one spouse dies, the surviving spouse automatically receives complete ownership of the property. This distribution cannot be changed by Will. Many people erroneously believe that this type of ownership precludes the need for the parties to have a Will. Because the surviving spouse becomes the outright owner of the property, he or she will need a Will to direct its disposition at his or her subsequent death. Since one never knows which spouse will survive the other, it is important that both have a Will. In addition, a plan that provides that everything go to the surviving spouse may be inefficient for purposes of ultimate distribution to other family members.
Life insurance proceeds payable to a named beneficiary pass without regard to the terms of a person’s Will. Therefore, insurance will generally pass outside the probate system.
Retirement Plans and Trusts
Other property that may pass to named beneficiaries automatically and without regard to a Will include benefits of qualified retirement plans, annuities and inter vivos trusts.
A WILL – DON’T LEAVE WITHOUT IT
If you own, or will own, property outright, it is recommended that you have a Will. A properly executed Will allows you to choose those individuals or organizations who will receive your property at death.
It is also a statement of your desires as to who will be the guardian of your minor children and who will be responsible for distributing your assets (i.e., the executor of the Will).
In short, a Will allows you to:
- Speak when you’re no longer able to speak
- Provide for the welfare of family and/or friends
- Pass along your assets as intended
- Arrange for the efficient management of your property
But, if you die without a Will (i.e., intestate), the state takes your place and directs the disposition of your assets. The state intestacy laws set out highly standardized and rigid rules that control who will succeed to ownership of your property at death. Although these succession statutes attempt to be fair and equitable, they more than likely will not provide for the distribution you prefer. For example, absent a Will:
- If you have minor children, your spouse may need to go to court to be appointed guardian of the children’s property. This may also require posting bond, annual accountings and judicial proceedings to act on behalf of the minor.
- A simultaneous death of husband and wife could entrust the state with the care and support of minor children.
- Generally, except for what statutorily passes to your surviving spouse, your children share equally in your estate. The impersonal nature of state intestacy laws deprives you of the opportunity to provide a greater share, for example, to a disabled daughter than to her healthy brother.
- State law may divide your property between your surviving spouse and children contrary to your wishes.
- An individual may not leave property to charity.
- If there are no heirs, property may pass to the state rather than to friends and relatives.
If you haven’t written your own Will, the state has written one for you. What follows is a “typical” pattern of distribution under intestate laws. While your state might vary in some aspects, this example should peak your interest as to what your state’s law provides. We call this Joe Procrastinator’s Will.
My Last Will and Testament
Being of sound mind and memory. I, Joe Procrastinator, do hereby publish this as my Last Will and Testament:
First, I give my spouse only one-third of my possessions and I give my children the remaining two-thirds.
A) I appoint my spouse as guardian of my children but, as a safeguard, I require that he/she report to the Probate Court each year and render an accounting of how, why and where he/she spent the money necessary for the proper care of my children.
B) As a further safeguard, I direct my spouse to produce to the Probate Court a Performance Bond to guarantee that he/she exercises proper judgment in the handling, investing and spending of the children’s money.
C) As a final safeguard, my children shall have the right to demand and receive a complete accounting from their surviving parent of all of his/her financial actions with their money as soon as they reach legal age.
D) When my children reach 18, they should have full rights to withdraw and spend their share of my estate.
Third, Should my spouse remarry, this second spouse shall be entitled to one-third of everything my spouse possesses. Should my children need some of this share for their support, the second spouse shall not be bound to spend any part of his/her share on my children’s behalf.
A) The second spouse shall have sole right to decide who is to get that share, even to the exclusion of my children.
Fourth, Should my spouse predecease me or die while any of my children are minors, I do not wish to execute my right to nominate the guardian of my children.
A) Rather than nominating a guardian of my preference, I direct my relatives and friends to get together and select a guardian by mutual agreement.
B) In the event that they fail to agree on a guardian, I direct the Probate Court to make the selection. If the court wishes, it may appoint a stranger acceptable to it.
Fifth, Under existing tax law, there are certain legitimate avenues open to me to lower death taxes. Since I prefer to have my money used for government purposes rather than for the benefit of my spouse and children, I direct that no effort be made to lower taxes.
In Witness Whereof, I have set to this, my Last Will and Testament, my hand and seal, the _____ day of ________________, 2001.
JOINTLY OWNED PROPERTY
Many married couples own a majority of their assets jointly with right of survivorship. When one spouse dies, the surviving spouse automatically receives complete ownership of the property. But, is holding all your property as “tenants by the entirety” (limited to husband and wife) or in joint tenancy (not necessarily limited to husband and wife), desirable in most instances?
It is true that if all your property is jointly owned, the survivor will obtain everything by operation of law and without the necessity of probate proceedings. Does it follow then that joint ownership is a substitute for a Will or the best tax plan? The answer is a resounding no! … and here’s why:
- Simultaneous deaths may cause jointly owned property to pass to persons other than those you would have liked to receive it.
- There will always be some degree of uncertainty that all your property will be jointly owned – e.g., an unexpected inheritance or other substantial treasure trove may come your way just before you die.
- Jointly owned property limits the possibility of distributions to beneficiaries other than the joint owner.
- Holding most or all of your property in joint tenancy may make it impossible for you to take advantage of certain estate planning techniques, such as family trusts and qualified terminable interest property (QTIP) marital trusts.
- If the property is still owned by the survivor at his or her death, it may be entirely included in the survivor’s estate for federal estate tax purposes until the federal estate tax is completely phased out by the year 2010.
Community property is a form of ownership of assets between spouses that is limited to certain states including but not limited to: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In a community property state, a husband or wife has an undivided one-half ownership interest in property acquired by either spouse during the course of marriage. Community property has the characteristics of an informal partnership between spouses.
Not all property is classified as community assets. Property that each spouse possessed prior to marriage may remain the separate property of the spouse. Property given to a spouse during marriage by gift, devise or descent is also the separate property of the spouse. However, in most situations it may be difficult to distinguish between separate and community property. Over a period of time spouses may co-mingle their separate assets with their community assets making it impossible to distinguish between them. Furthermore, income derived from separate property may be classified as community property.
Community property states use a general rule that presumes all property is community property when there is a doubt as to its classification. Community property has significant estate planning considerations. The gross estate of the deceased spouse consists of his separate property and one-half of his community property. Marital deduction planning is available so that a deceased spouse may pass his separate property and his share of the community property to his surviving spouse, estate tax free.
Estates of husbands and wives have to be carefully planned in community property jurisdictions. Ownership of life insurance, real property and businesses have to be carefully structured so the goals of each party are achieved. The use of the unified credit and the marital deduction have to be carefully considered because it may not make sense to “balloon” a surviving spouse’s estate.
A husband and wife who move from a community property state to a separate property state may have their assets retain their classification as community property. Community property interests are not easily extinguished by simply moving to another state. A husband and wife who move to a community property state from a separate property state may automatically convert their entire estate to community property.
Life insurance policies issued on the life of a husband or wife before or during the course of marriage may cause controversy when the beneficiary of the policy is not the surviving spouse. If the surviving spouse has not consented in writing to the naming of the third party as beneficiary or has not relinquished his or her interest in the policy, a claim against part of the death proceeds of the policy may still be made by the surviving spouse. The amount and nature of the claim varies from state to state. Policies naming third parties as beneficiaries must be carefully set up to avoid unexpected gift and estate taxes.
THE GUARDIANS OF YOUR MINOR CHILDREN
The people who are most important to you, your spouse and your children, are affected by your estate plan in ways other than what property they will receive at your death. For your minor children, who you select as their guardian will be one of the key decisions that you will make. The people you select to raise your children in the event that both you and your spouse die before the children are grown are called “guardians of the person.”
Ideally, you will select as guardians people whom you believe will learn to love your children and who will bring them up the way you would. Items to consider in the selection:
1) The age of guardians: too young or too old could create problems.
2) Do the guardians have children? Are they the same age as your children? Do they get along? Will the addition of your children create a burden on the guardian’s family?
3) Will your guardian’s home have to be enlarged or will your guardian have to purchase a new home to accommodate your children? Your estate plan should provide the guardians with the funds to make necessary alterations or to assist them in the purchase of a new home, if necessary.
4) Your guardians will be responsible for bringing up your children. They will have great responsibilities and will have to do a great deal of hard work. Do you believe they deserve to be compensated for their additional responsibility and efforts?
Finally, there are many situations where your original guardians are no longer able to serve. For instance, the couple may move away, become divorced, die, etc. Therefore, provisions for alternative guardians should be made.
THE EXECUTOR OF YOUR ESTATE
The executor of your estate will have many duties and responsibilities. Some of them are:
- To identify and bring together all of the assets in your probate estate.
- To pay all your debts, including any unpaid income taxes.
- To file all necessary estate, inheritance and income tax returns and pay federal and state death taxes.
- To arrange for the distribution of the estate assets passing under your Will.
- To maintain and manage assets until their distribution to the heirs.
- To prepare and file in court an accounting of all estate assets and formally close the estate.
- In some cases a person or institution with experience in the administration of estates is named executor. Often, however, a member of the deceased’s family is named, with the expectation that he or she will rely upon the advice of the family’s attorney. It is wise to name a successor executor who will serve if your primary executor is unable to do so.
CHOOSING A PROFESSIONAL TRUSTEE
When you establish a trust, whether during your life or in your Will, you must decide who will manage the investment of your property and make payments to your beneficiaries. If you select an individual such as your spouse, your brother, your parent or your child, here are some questions you should ask yourself.
Does this person have the investment knowledge you desire in your trustee?
Will the trustee be alive when the trust begins … and when it ends? If he is, will he be the “same person” he is today?
Should the trustee be bonded to guard against intentional or unintentional wasting of the trust assets?
A bank or trust company does not die. It is constantly acquiring new personnel and retiring old personnel. It has the money and the people to stay on top of market conditions. It does not need to be bonded. Often its fees are little more than the cost of bonding a personal trustee.
Sometimes the best plan is to have a bank and a family member, friend or advisor serve as co-trustees.In addition, state law and federal tax law may have an effect on who should act as trustee, particularly if the trustee is also a beneficiary. These rules should be carefully considered.
PROTECTING THE DISTRIBUTIONS TO YOUR MINOR CHILDREN: GUARDIAN OR TRUST?
If property is left outright to minor children, a guardian must be named to administer this property for them until they attain their majority. This person (the “guardian of the property”) may or may not be the individual who is raising the minor children (the “guardian of the person”).
There are certain problems inherent in arranging the child’s property under a guardianship. The guardian is limited as to the type of investments he or she can make with the child’s property. The guardian is also limited as to how he may apply this property. He cannot use a child’s property for the benefit of anyone except that child, even if the child’s brother or sister needs financial assistance.
When a child attains his majority, the guardian of the property must turn all of that child’s property over to him.
If the child dies before attaining his majority, all of the property held in guardianship for him will be part of his estate, which will require probate and may require the payment of estate taxes.
There is another way. The trustee of a trust for your children could be given broad discretionary powers in investing trust assets. This trustee could be given the power to use your estate in the same way you would for the benefit of your children. The trustee could spend money on a child who needs it – when he needs it. The trustee would not be limited by an arbitrary equal division of your estate among your children. When all of your children are grown, the trustee could then divide your estate among them. If a child dies before the trust assets were distributed, none of these assets would need to be in his estate for probate or tax purposes.
Such a trust lets you decide when your children will be mature enough to receive your estate … age 21, 25, 30, 35 or even never. It also permits you to let someone else make that decision at a later time.
You can also create such a trust for your children who have already attained their majority; its advantages are not restricted to people with minor children only.
The differences between a guardian of the property and trusts are tremendous. You should consider these differences carefully and make a choice as to how your minor children’s property will be controlled.
Congress is always reviewing aspects of the estate and gift tax system. Recent changes to the current estate tax laws will be phased in over a ten year period and the federal estate tax will be eliminated completely by the year 2010, but only for one year. In that same year, assets will begin to be inherited at their purchase price rather than market value (carryover basis) so heirs will incur capital gains tax liability upon sale. If carryover basis is maintained after 2010, when the estate tax is automatically reinstated, then heirs could end up brutally taxed on both the value of inherited assets and old gains on those assets. Estate planning is not a one time process. You must constantly review your current plan to ensure it fits your present family situation. Therefore, you should seek professional advice before implementing any estate plan.