Independent Thinking^®

The Ways of a Will

It is a common misconception among Millennials that a person without a will does not have an estate plan. Everyone has an estate plan, because the law regards a person who dies without a will – 55% of all Americans, according to the American Bar Association – as having chosen state laws of intestacy to govern the administration of his or her estate.
 
Each state has its own intestacy rules, and these rules can lead to unintended consequences for a decedent’s family. In some states, a surviving spouse won’t inherit everything unless the decedent has no children or other blood relatives. Most states do not regard stepchildren as legal heirs, unless the stepparent has actually adopted the stepchild during his or her lifetime. Non-married couples are not generally regarded as spouses for inheritance purposes. Also, states differ in the process of appointing a legal guardian for an orphaned child.
 
Very few people want to leave it to the courts to decide who inherits, who is excluded, and who should be a child’s primary caregiver. In failing to plan, however, that’s what many people do.
 
While every estate must go through the administrative process known as probate, with proper estate planning the process can be much faster, simpler, and private. Absent a properly executed will, courts will not consider charities and religious organizations that individuals may wish to support through their estate. Also, potential estate litigation can be avoided by including a no-contest clause in a will.

What Does a Will Do?

Generally, a will serves a few key purposes:
 
A will appoints an executor. An executor, called a personal representative in some states, administers an estate. The executor must determine what property exists, pay any debts owed by the estate, including tax liabilities, and distribute assets to the appropriate heirs. An executor can be an individual, such a family member or trusted advisor, or a corporate executor such as a trust company. In the absence of a will, the courts will appoint an executor.
 
A will appoints a guardian. For parents of minor children, this is perhaps the single most important function of a will. A guardian is the person given responsibility for minor children in the event of the parents’ death. Parents can decide who they would want to serve in this capacity and memorialize this decision in their will. However, when a person dies intestate, this decision is left to the court, which will make its own determination of who will serve as guardian.
 
A will also sets out instructions on the distribution of assets at death. Most states have rules against completely disinheriting a spouse, but beyond that, individuals may generally dispose of their property at death as they see fit. They may choose to include people who would not otherwise receive their property under the state laws of intestacy, such as stepchildren, an unmarried partner, friends, or charitable causes. Often, a will creates one or more trusts or leaves property to pre-existing trusts, to provide for loved ones and for charities.

What Doesn’t a Will Do?

A will, by itself, does not avoid the probate process. However, a comprehensive estate plan that includes additional documents such as a revocable trust (called a living trust in some states), along with retitling of assets, can effectively remove property from the probate estate, saving the time and expense associated with a court’s oversight of an estate. An effective estate plan can also preserve privacy, since any property passing via intestacy must be accounted for in court-filed documents.
 
A will does not govern retirement plans, including IRAs and 401(k)s, or life insurance policies. These assets distribute directly to the beneficiary named on the policy.
 
If an estate is subject to state or federal estate tax, any tax due will be paid first, before property is distributed to the beneficiaries named in the will. Wealth planning strategies for minimizing the tax due, such as lifetime giving, or incorporating charitable giving in a will can help minimize these taxes.

Additional Basic Estate Planning Documents

In addition to a will, a basic estate plan will include an Advance Health Care Directive and Power of Attorney documents. These documents set forth an individual’s wishes regarding healthcare decisions and financial arrangements in case of emergency, and establish who is able to make decisions on the person’s behalf in the event of death or disability. In addition, the Power of Attorney gives another individual the authority to access financial accounts, which may be necessary to pay for medical bills or other expenses in case of disability. (See Julio Castro’s article on Internet security here.)

Other Considerations

Keep in mind that as circumstances change over time, so, too, should an estate plan. A move, the birth or adoption of a child, the purchase of real estate or other significant property, and changes in net worth are all key times to revisit a will. So is, as Chris Zander writes in his article, a change in government.