What If You Don’t have a Will?

Studies suggest that a majority of adults do not have an estate plan of any kind, even a will.  The issue of what happens when a person doesn’t have a will comes up frequently in our practice.  The answer to the question, which is what I’ll discuss here, provide lots of reasons to have one.  You can see a recent article entitled “Placing the puzzle pieces of long-term care and planning a will” from the Pittsburgh Post-Gazette for a bit more background, although state processes vary.

First, a will is a written document stating wishes and directions for dealing with the property you own after your death, also known as your “estate.” When someone dies without a will, property is distributed according to their state’s intestacy laws.  Intestacy sets who your beneficiaries will be since you haven’t chosen them, and generally are next of kin (with some wrinkles). If your next of kin is someone you loathe, or even just dislike, they may become an heir, whether you or the rest of your family likes it or not. If you are part of an unmarried couple, your partner has no legal rights, unless you’ve created a will and an estate plan to provide for them.

Intestacy rules vary greatly from state to state, especially in a community property state like Texas.  In general, intestacy laws distribute property to a surviving spouse or certain descendants. A very common exception, which many people don’t know and are surprised to learn, is that if you have children from outside of the current marriage, not everything goes to that spouse.  I frequently encounter families who assume spouse gets everything, regardless of family makeup, and this often leads to conflicts with family.

While practicing in Pennsylvania I actually had a situation in which one spouse died young without children and with living parents.  Not everything goes to the spouse in that situation, but instead, partially to spouse and the rest would have been divided between the surviving spouse and parents.  The surviving spouse was not pleased to learn that.

This may also lead to a difficult result for the beneficiary.  If they have disabilities and are using government benefits, receiving the inheritance may cause them to lose those benefits, which may be critical for that person’s care.  Wills and other estate planning documents can prevent that outcome.

If you don’t have a will, at least in Texas, it may be necessary to have a proceeding to determine who the heirs even are.  This is called an heirship proceeding and can be quite expensive as the court appoints another attorney (who you pay) to look for unknown heirs.  This whole process also adds time and uncertainty to a process which is already difficult due to the loss of a loved one.

Additionally, a will designates a person to handle the estate, often called an executor, and typically names successors should the first named person be unable or unwilling to serve.  In the absence of these directions, the heirs will have to figure it out among themselves, hopefully amicably and without litigation.

Many states also have limited proceedings that may or may not be helpful when a person doesn’t have a will.  For example, Texas has affidavits of heirship which can address retitling of land interests, such as the residence.  However, that won’t help for bank accounts.  Pennsylvania actually has a rule permitting small bank accounts to be distributed to next of kin after the funeral is paid.  That too may help, unless the account is $10,000 and is useless for land.  Many states have small estate proceedings that can work, but in practice are often cumbersome.

A much better solution: speak with an experienced estate planning attorney to have a will and other estate planning documents prepared to protect yourself and those you love.

Start by determining your goals and speaking with family members. You may be surprised to learn an adult child doesn’t need or want what you want to leave them. If you have a vacation home you want to leave to the next generation, ask to see if they want it. It may reveal new information about your family and change how you distribute your estate. A grandchild who has already picked out a Ferrari, for instance, might make you consider setting up a trust with distributions over time, so they can’t blow their inheritance in one purchase.

Determining who will be your executor is another important decision for your will. They are a fiduciary, with a legal obligation to put the estate’s interest above their own. They need to be able to manage money, make sound decisions and equally important, stick to your wishes, even when your surviving loved ones have other opinions about “what you would have wanted.”  See this article for further ideas:  https://www.galliganmanning.com/what-are-the-duties-of-an-executor/  

If there is no one suitable or willing, your estate planning attorney will have some suggestions. Depending on the size of the estate, a bank or trust company may be able to serve as executor.

The will is just the first step. An estate plan includes planning for incapacity. With a Will, a Power of Attorney, Medical Powers of Attorney and other documents appropriate for your state, you and your loved ones will be better positioned to address the inevitable events of life.

Reference: Pittsburgh Post-Gazette (April 24, 2022) “Placing the puzzle pieces of long-term care and planning a will”

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What is an Estate Asset?

Estate planning attorneys are often asked if a particular asset will be included in an estate, from life insurance and real estate to employment contracts and Health Savings Accounts. The answer is explored in the aptly-titled article, “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?” from Kiplinger.

When you die, your estate is defined in different ways for different planning purposes. For example, you have a gross estate for federal estate taxes which defines all of the assets subject to the tax. However, there’s also the probate estate, which means property controlled by a will, and a non-probate estate, which means property passing outside of probate and the will.  So, if you are asking if an asset is part of an estate, it depends on which “estate” you mean.

Let’s start with life insurance. You’ve purchased a policy for $500,000, with your son as the designated beneficiary. If you own the policy, the entire $500,000 death benefit will be included in your gross estate for federal estate tax purposes. If your estate is big enough ($12.06 million in 2022), the entire death benefit above the exemption is subject to a 40% federal estate tax.

However, if you want to know if the policy will be included in your probate estate, the answer is no. Proceeds from life insurance policies are not subject to probate, since the death benefit passes by contract directly to the beneficiaries.  An executor or administrator of your estate never controls or has access to it.

Next, is the policy an estate asset available for beneficiaries of your probate estate?  So, let’s assume you left a will and your son is the named executor.  The will names all three of your children as equal beneficiaries.  Because the life insurance bypassed the probate process and went to a named beneficiary, none of the life insurance is available to the other two children.  If you wanted the money to go in trust for a beneficiary under the will, fund charitable giving or specific bequests, then the life insurance proceeds aren’t available for those purposes.

As an aside, common probate assets may include real property, tangible property like household contents, vehicles and so on, bank accounts depending on titling, and miscellaneous refunds due to the decedent.  Common non-probate assets may include life insurance, retirement funds and accounts with beneficiary designations generally.

Another aspect of figuring out what’s included in your estate depends upon where you live. In community property states—Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin—assets are treated differently for estate tax purposes than in states with what’s known as “common law” for married couples. Also, in most states, real estate owned on a fee simple basis is simply transferred on death through the probate estate, while in other states, an alternative exists where a transfer on death deed or similar technique is available.

It is also true that certain states expect executors to have information about non-probate assets.  For example, New York has estate tax and Pennsylvania has inheritance tax.  Both states require an executor to file the appropriate return that will include information about non-probate assets because they are subject to tax (similar to the federal estate tax) even though the executor doesn’t take control of them.  Texas, you’ll be happy to know, does not have an estate or inheritance tax.

Speak with an experienced estate planning attorney in your state of residence to know what assets are included in your federal estate, what are part of your probate estate, and how taxes and creditors will apply to these various assets.

Reference: Kiplinger (Dec. 13, 2021) “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?”

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What Estate Planning Mistakes Do People Make?

Clients often make these estate planning mistakes which jeopardize family harmony and expose families to anxiety, delay and unnecessary cost.

Estate planning for any sized estate is an important responsibility to loved ones. Done correctly, it can help families flourish over generations, control how legacies are distributed and convey values from parents to children to grandchildren. However, a failed estate plan, says a recent article from Suffolk News-Herald titled “Estate planning mistakes to avoid,” can create bitter divisions between family members, become an expensive burden and even add unnecessary stress to a time of intense grief.

Here are some estate planning mistakes to avoid:

This is not the time for do-it-yourself estate planning.

An unexpected example comes from the late Chief Justice of the Supreme Court Warren Burger.  He wrote a 176 word will, which cost his heirs more than $450,000 in estate taxes and fees. A properly prepared estate plan could have saved the family a huge amount of money, time and anxiety.  This example also points out that even brilliant legal minds make mistakes if they aren’t experts in this area!

Don’t neglect to update your will or trust.

Life happens and relationships change. When a new person enters your life, whether by birth, adoption, marriage or other event, your estate planning wishes may change. The same goes for people departing your life. Death and divorce should always trigger an estate plan review.  Clients often confront this estate planning mistake at this time of year as part of new years resolutions or as part of a financial check-up with their financial advisors, so now is an excellent time to consider it.

Don’t be coy with heirs about your estate plan.

Heirs don’t need to know down to the penny what you intend to leave them but be wise enough to convey your purpose and intentions, at least to the individuals in charge of the plan. If you are leaving more uneven amounts to children for example, it may be a kindness to explain why to your love ones.  Otherwise, they will be forced to come up with their own answers, which may lead to fighting. If you want your family to remain a family, share your thinking and your goals.

If there are certain possessions you know your family members value, making a list those items and who should get what. This will avoid family squabbles during a difficult time. Often it is not the money, but the sentimental items that cause family fights after a parent dies.  Some of the worst estate disputes I’ve ever dealt with were over sentimental items.

Clients often ask about this topic, so see this article if you are interested in more information.  https://www.galliganmanning.com/how-to-avoid-family-fighting-in-my-estate/  

Understand what happens if you are not married to your partner.

Unmarried partners do not receive many of the estate tax breaks or other benefits of the law enjoyed by married couples. Unless you have an estate plan in place, your partner will not be protected. Owning property jointly is just one part of an estate plan. Sit down with an experienced estate planning attorney to protect each other. The same applies to planning for incapacity. You will want to have appropriate incapacity planning documents such as financial and medical Powers of Attorney so that you may speak with each other’s financial institutions and medical providers.

Don’t neglect to fund a trust once it is created.

It’s easy to create a trust and it’s equally easy to forget to fund the trust. That means retitling assets that have been placed in the trust or adding enough assets to a trust, so it may function as designed. Failing to retitle assets has left many people with estate plans that did not work.  Happily this is a very easy estate planning mistake to correct, though you should consult an attorney on how to properly utilize your trust.

Don’t be naive about people you put in charge of your estate plan.

It is not pleasant to consider that people in your life may not be interested in your well-being, but in your finances or other self-serving motivations. However, we see this all the time. This concern must be confronted honestly, even when it is children, during the estate planning process. Elder financial abuse and scams are extremely common. Family members and seemingly devoted caregivers have often been found to have ulterior motives. Be smart enough to recognize when this occurs in your life.

Reference: Suffolk News-Herald (Dec. 15, 2020) “Estate planning mistakes to avoid”

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