While you can’t take your property with you when you die, you can direct how your assets will be distributed by making a will. Unfortunately, some people never get around to the task, and instead die “intestate” – a legal term dictating how all property greater than the sum of your enforceable debts and funeral expenses, in the absence of a will, is distributed. Surprisingly, almost half of all adults die without a will, according to a 2012 Rocket Lawyer survey. In such cases, state law determines who gets what – including custody of minor children.
It is not just the poor and uneducated who die intestate. Celebrities such as Howard Hughes, Pablo Picasso, and Sonny Bono all failed to have wills, as did Swedish author Stieg Larsson, best known for “The Girl With the Dragon Tattoo” series of novels. As a consequence, distribution of their property to loved ones and business partners was delayed and expensive.
Unfortunately, even those with the foresight to prepare a will often forget to update its provisions as their circumstances change over the years – the birth and maturity of children, accumulation or divestiture of assets, or changes in personal responsibilities, for example. Therefore, the transfer of their assets may be inconsistent with their final wishes, overly expensive, and a source of emotional pain and frustration for their loved ones. In the worst circumstances, the estate passes (escheats) to the government, an undesirable result for almost all people.
Creating a Will
Some people elect to postpone or avoid writing a will because they falsely believe that taxes and administrative expenses may reduce the amount of funds (what lawyers call the “corpus” of the estate) that will be distributed to their heirs. However, a will does not complicate the distribution of an estate, but is intended to facilitate the passage of assets and maximize the benefits of the parties. Failing to write one only complicates matters for those who will be left to pick up the pieces.
There are three primary ways to go about creating a will.
The assumption that preparing a will requires the use of an attorney and attendant expenses is incorrect. Creating a will can be as simple as writing or typing out how you want your assets to be distributed, naming the guardian or guardians of your minor children, and signing the document in front of witnesses. In some states, a completely handwritten will – legally known as a “holographic will” – does not even require witnesses.
In the majority of states, the requirements of a valid will are as follows:
- You must be eighteen years or older.
- You must be of sound mind, with mental capacity to understand and express your desires.
- The language of the document must clearly state it is your will.
- An executor must be named.
- The will must be signed in the presence of two witnesses who must also sign and date the will. In lieu of witnesses, the signature of the maker can be witnessed and authenticated by a state licensed notary public.
While there is no legal requirement that a will be notarized or recorded with authorities, doing so may safeguard against any claims that it is invalid and generally ease the probate process.
2. Prepaid Legal Forms
Rather than rely upon your own ability to correctly decipher the law and properly use legal language, many people use prepaid legal services and standardized, fill-in-the-blanks forms. Lawyers have historically used “boilerplate” language whose meaning is commonly accepted as the result of years of use and litigation. Designed to have limited flexibility in order to save legal fees, such options can be beneficial if your estate is modest and the transfer of your property at death is not likely to be contested.
3. Professional Advice
Many people rely upon the advice of an attorney to create or review a will’s details. Here are some reasons to seek professional advice:
- The size of your estate is significant, or taxes may be due.
- Management of distributed assets is complex or extensive, especially if assets are located in several states.
- Your will is likely to be contested.
- Children and guardianships are involved.
Critical Parties to a Will
As you execute your will, keep in mind the following roles and responsibilities to be considered:
- Testator. The person who writes the will and whose property is distributed according to the will’s provisions.
- Beneficiaries. The people named in the will by the testator who receive one or more assets from the estate.
- Executor. Sometimes called the personal representative of the testator, the executor is the person who has the responsibility of carrying out the testator’s wishes. Any person of sound mind and legal age can act as an executor.
- Trustee. Executors or testators sometimes name people to manage specific assets of the estate for a period of time for the beneficiaries, especially if minor children are involved. For example, the testator or executor may appoint an investment advisor to manage securities owned by the estate in trust for children until they reach legal age.
- Legal Guardian. The person named by the testator to provide care for minor children until they reach legal age. Guardians are always established when a testator dies with children and no other parent is alive.
- Witnesses. These are independent persons of legal age who verify the testator’s signing of the will by signing it themselves, as well.
Estate Taxes and Probate Costs
The lack of a will – or a will that is out-of-date and no longer reflects the wishes of the testator – can result in unnecessary costs, an extended probate process, and potential complications for beneficiaries. Inheritance and trust laws are regularly revised by federal and state legislatures and may affect final distribution amounts. Regularly reviewing how changes in regulations and laws can impact your will, as well as your asset distribution preferences, can ensure that you are able to transfer your property with a low tax burden and minimal probate costs and time.
Estate taxes – what many refer to as “inheritance” taxes – are the amounts due to the federal and state governments for assets transferred from a deceased person to beneficiaries. The assets, net of legal liabilities, can be of any kind, tangible and intangible, and include real estate and insurance and annuity proceeds. Even though the vast majority of U.S. estates pass today without the burden of taxes, the imposition of an estate or inheritance tax has always been controversial.
Opponents of the tax argue that property rights should include the unrestricted right to dispose of property upon death and that this is essential to the entrepreneurial spirit of the nation. They argue that inheritance taxes interfere with families unjustly, discourage economic ambition, and endanger the continuity of small businesses and family-owned farms.
Proponents of the tax assert that unlimited transfers between generations violate the principle of equal opportunity and perpetuate feudal privileges. Surprisingly, Andrew Carnegie, the Scottish immigrant best known for the creation of U.S. Steel, advocated that wealth that was not transferred to charitable foundations during the owner’s lifetime should be subject to high inheritance taxes. Carnegie wrote, “The man who dies leaving behind many millions of available wealth, which was his to administer during life, will pass away ‘unwept, unhonored, and unsung,’ no matter to what uses he leaves the dross which he cannot take with him. Of such of these the public verdict will then be ‘The man who dies thus rich dies disgraced.'”
While the battle over the inheritance tax continues to rage, the exclusion amount for estates exempt from taxation was $5.43 million in 2015. Executors of estates transferring less value than the exclusion amount (adjusted to include past gifts) are generally not required to file an estate tax form (IRS Form 706). In other words, if your lifetime gifts and residual estate are less than $5.43 million, there is no tax due nor a requirement to file the estate tax form.
Probate is the process by which a will is proved valid and the estate is correctly administered according to law. It is designed to ensure your property is distributed according to your wishes, within legal confines, and that all of your legally enforceable debts are paid before assets are transferred.
There are certain fees and costs associated with probate – usually ranging between 3% and 8% of assets – whether or not you have a will. These costs can include the following:
- Court Fees. Established by state law, fees can run from a few hundred dollars to more, depending upon the complexity of the estate, the condition of the deceased’s records, and whether the terms of the will are contested.
- Attorney Fees. Costs of representing the estate in court are set by law, but may be increased if the attorney has to provide “unusual” services – such as handling the rental of an unoccupied estate during probate.
- Accounting and Appraisal Fees. At death, all assets are recognized at market value, which may require independent valuations. Some estates may require the payment of federal and estate taxes, especially if the probate period is extended.
- Miscellaneous Costs. These costs can include moving and storing personal property, copying and mailing notices to the court and taxing authorities, and insurance.
The legal transfer of your property or the creation of guardianships of your children occurs through the probate process.
The Probate Process
The probate process occurs in special state-based probate courts. Procedures vary from state to state and are administered by a probate judge. The process typically proceeds in the following manner.
1. Formal Recognition of Your Personal Representative
Also known as your executor, this is the person whom you have chosen (or the court has appointed) to be in charge of your estate after you die. Evidence of the executor’s authority is provided through “letters of administration” or “letters testamentary” given by the court.
2. Notification of Your Death to Creditors and the Public
Some states require the publication of a death notice in public newspapers so that people who have an interest in your death are informed. This notice makes your estate part of the public record and enables the public to view your private estate matters. If confidentiality is essential or desirable, legal advice during the preparation of your estate plan is essential.
3. Inventorying of Assets
Your executor must list the different types of property that make up your estate – real and personal – with up-to-date market values to be sure that the estate is sufficient to pay off your debts and cover the desired distribution of your assets. If your assets do not meet your obligations and bequests, the law applies abatement statutes. This means that one or more of your beneficiaries may receive less than your bequest, and possibly nothing at all.
4. Asset Distribution
In many cases, assets must be liquidated in order to have sufficient cash to complete the distribution process. Generally, assets are distributed in the following order:
- Estate administration costs
- Family allowances
- Funeral expenses
- Enforceable debts
- Gifts and bequests
It is important to understand that not all assets are required to pass through probate. For example, jointly owned assets in a community property state usually pass automatically to a spouse, just as life insurance proceeds are distributed to a named beneficiary without court intervention.
5. Final Accounting – Probate Ends
Probate ends with the court’s acceptance of a final accounting and the distribution of the estate. The process can last months, or even years where minors and large sums are involved. As a consequence, interested parties may contest the accounting or proposed distribution, resulting in multiple court hearings and extensions. Where probate is likely to be litigious, executors frequently turn to mediators to help settle disputes and limit expense.
Making Changes in Your Will
You can easily change your will by either revoking the old one and writing another or adding a “codicil” (an addition) to your current will. A new will should include an opening statement expressly revoking any old wills that may have existed prior to your latest version.
Minor changes, such as adding a new provision or changing a beneficiary, can be done through codicils. In each case, you must be sure to date and sign each new provision in the presence of at least two witnesses.
Any of the following events should justify a review of your will and possible amendment:
- Value or Composition of Your Assets Change Significantly. If the value of your assets changes significantly over time, you should review your bequests to be certain they remain appropriate and reflect your wishes. For example, a family-owned business may increase substantially in value over time or become more complex to manage as it grows. Beneficiaries may lack the specialized knowledge to properly manage the assets.
- Change in Marital Status. Marriage, divorce, or remarriage are major life changes and are usually accompanied by changes in responsibility to the people involved. For example, ex-spouses who are also co-parents of children may require special consideration.
- Birth, Adoption, or Death of Children. Spouses and children are typical beneficiaries of estate planning – the addition or loss of a child affects the other beneficiaries. In some cases, children may require special provision for care and take priority in the amount and distribution of the testator’s assets.
- Changes in Beneficiaries. In the period between establishing a will and executing it, personal relations ebb and flow through death and estrangement. Be sure your bequests and beneficiaries conform with your latest intent, and consider any legal restrictions on the distribution of property. For example, some states require minimum distributions to spouses or children despite their relationship with the testator.
- Relocation to Another State of Residence. State laws regarding estates and distribution of property vary – what is appropriate in one state may not be permitted in another. Acquiring or disposing of property in a state where you are a nonresident is sufficient reason for review to be sure estate plans and will conform to each state’s laws.
- Executor Death, Incapacity, or Estrangement. As with testators, life changes may affect an executor’s ability or desire to execute your final wishes appropriately. For example, a person with young children may initially name an adult sibling as executor. Over the years, children mature and ultimately become executors of their parents’ estates.
- Estate Law Changes. As with all laws, estate and inheritance laws are in constant flux. Be sure that you remain aware of changes in the law that might affect your estate, and adjust your will and plans accordingly.
A will is your last opportunity to control your assets and ensure your wishes are implemented after death. There is no perfect estate plan nor will for all times, in all circumstances. Reviewing your will on a regular basis – if not annually, at least every three years – protects you and your loved ones. The review does not have be overly time-consuming or expensive, and can provide peace of mind when it is time to leave this world.
Do you have any additional advice for preparing or updating a will?