You've probably heard the horror stories of famous people with massive wealth who died without a will. But it's a common estate planning error.
The list of members of the "No Will Club" is long. It includes the musician Prince, reclusive billionaire Howard Hughes, painter Pablo Picasso and the "Queen of Soul" Aretha Franklin, to name a few.
A will is a legal document that coordinates the distribution of your assets (money, investments, and property) and caring for your minor children after death. Not having this key estate planning document can result in consequences that feel worse than death for surviving family members and other people who feel they deserve a cut.
Control Your Inheritance
That big inheritance that heirs were counting on suddenly isn't a sure thing. Probate courts can take over. And how your estate is eventually divvied up is often a wild card.
The financial fallout can be sizable. The emotional toll resulting from costly legal challenges, family infighting, lengthy probate is taxing, too.
Not having a properly prepared will and other key estate documents is an unforced personal finance error. Financial advisors and legal experts say you should avoid this misstep at all costs.
Rob Leiphart, VP of financial planning at RB Capital Management, likens a will to the importance of a catcher in a baseball game.
"It's the backstop," said Leiphart. "It's there to catch any (asset) that doesn't have a labeled beneficiary designation that determines who that asset goes to next."
Time To Craft Your Will And Estate Planning
Now's a good time to get up to speed on what wills — and other estate documents like trusts — do and don't do. And you might get going on creating a will if you don't have one or updating an outdated one.
Dying without a will presents problems. Not having a will could mean your assets are distributed in ways you may not approve of. Each state applies its own so-called intestate succession laws to spell out who your heirs are and how to divvy up and distribute your assets to them. In most cases, your family members get your property. If the state can't locate your relatives, your entire estate typically passes to the state.
While a will is an important first step, it has weaknesses. For one, while a will directs your estate to distribute your assets as you've spelled out, it must still go through the courts and probate process.
And going through probate means your finances and estate wishes will be all part of the public record that nosy neighbors and other outsiders can view, dissect and gossip about.
"All your dirty laundry gets aired," said Leiphart. "Anything that flows through probate and has been spelled out in your will is public record."
Estate Planning: The Will After Death
Another weakness of a will is it only kicks in after you die. That means it doesn't afford other estate-related protections while you're still alive.
A will, for example, doesn't include a living will, or written instructions to your doctor regarding end-of-life care. Nor does it include a medical power of attorney, which appoints someone to make medical decisions for you while you are still alive but unable to make decisions on your own due to incapacitation, dementia, or coma. And unlike a trust, wills also don't spell out the management and distribution of your assets while you're alive.
These drawbacks are key reasons why estate planning experts view the will as only a first step in protecting your estate.
Kelsey Simasko, an attorney at Michigan-based Simasko Law, isn't a big fan of wills.
"I view a will as the least important document in the entire estate plan," said Simasko. "I hope they never had to use it because the only place a will can be administered is in probate court. And going through probate court — it's time-consuming, it's expensive, it's public. I draw up a will for people thinking that only in a worse-case scenario are we going to use it."
The only time a person can really benefit from a will is in situations where it's completely impossible to avoid probate, says Simasko.
When Wills Pay Off In Estate Planning
One scenario where you benefit from a will is if you have minor children, as a will is the only place to set up guardianship (naming someone to care for your minor children if you pass) if both parents pass. "The will makes sure that somebody's going to take care of the kids," said Simasko.
The other instance where a will makes sense is if someone passes due to the fault of someone else. For example, probate court is the only venue where lawyers can pursue a wrongful-death lawsuit, says Simasko. "If someone passes away in a car accident, and we have to sue the other driver for drunk driving, the will is going to make the lawsuit go faster," he said.
To avoid probate, for example, you must rely on other estate planning tools, such as establishing a trust.
It's important to point out that a foolproof way to avoid probate and make sure your money goes to who you want it to go to is to name beneficiaries on retirement funds like 401(k)s and IRAs, brokerage accounts and life insurance policies. The reason: Beneficiaries you designate on these accounts overrule any beneficiaries designated in your will.
"That's the smoothest and easiest way," said Leiphart.
Avoiding Probate
Similarly, jointly held accounts with right of survivorship generally bypass probate. All assets go to the surviving spouse upon your death.
A trust is an estate planning document that bypasses probate, offers privacy, and also addresses key things like handling asset distributions to beneficiaries while you're still alive.
In a nutshell, the trust is basically the beneficiary on everything you own. "A trust allows you to have control (of your estate) beyond the grave," said Leiphart.
A trust affords flexibility that a will does not.
Let's say you die and you don't want your 18-year-old kid to get the entire $5 million you've passed along at 18. In a trust, you can spell out how to distribute the assets over time. In contrast, while a will spells out who gets your money, the state manages the distributions during probate.
The Power Of Trusts
A trust offers more precise instructions to pass money along to children, for example.
"Trusts are pretty intelligent documents," said Simasko. "If you want your minor children or your college-age children to get all your money if you pass away, a trust allows you to have a say over what they do with the money, how old they have to be to get it. For folks in that scenario, we're going to use a trust."
Trusts make sense in a number of life scenarios. If you're divorced or remarried, for example, a trust can help ensure your assets are passed along to your kids from your original marriage, as opposed to your new wife's kids. Or make sure your assets don't go to your ex-wife you no longer talk to.
A trust is also wise if you own property in multiple states. Let's say you own homes in three different states: a lake house in New York, a condo in Florida and a primary residence in Connecticut. If you die and just have a will, you'll have to go through probate in all three states. But if the properties are held in a trust, they are distributed directly to named beneficiaries by the successor trustee according to the terms of the trust.
Step-Up Your Basis For Estate Planning
Another perk of using a trust for those who own real estate is that it allows the so-called step-up cost basis upon the sale of the property without having to pay court costs if you go through probate. Step up in basis is when you sell a property and for tax purposes the value of the property is valued at the current market value, not the original purchase price.
It's important to review your estate documents and beneficiary designations on an annual basis, says Leiphart. Since August is Make-A-Will Month, you can designate August as the time to do an annual checkup to make sure everything is still in order.
Reviewing your estate plan is also a good idea if there have been any life changes, such as divorce, the birth of a child, when minor children reach the age of majority and are considered adults or the purchase of a new home.
And remember, wills are important, but don't bank all of your estate wishes on that single document, says Simasko. "I'd rather bank on other strategies, like trusts, beneficiary designations, than primarily using a will," said Simasko.
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