This is another guest post from JoeTaxpayer. This is a two part series discussing estate planning.
I am going to die. No, I don’t have a terminal disease, I am going to die because I am human, and dying is part of living. I won’t die any sooner for the fact that I have a will, in fact, with a will I sleep better at night knowing my affairs are in order.
First, let’s take a step back, you might be saying “I don’t need a will, I don’t own a house, I don’t have much of an estate.” If you have any possessions at all and you’d like to direct who gets your stuff upon your passing, you need a will. As you add to your life, a spouse, a child, a house, a will is mandatory. It’s the document most commonly used to exercise your wishes after your passing. It’s where your desire for guardianship of your children is spelled out (note, technically the court will approve the final guardianship, but it’s important that your nomination for this important decision appear in your will.) If you don’t have a will in place, when you die, it is called “intestate.” A court will appoint an administrator and the order of inheritance will follow the rules of your state. The way you want your property divided up may not match the state’s rules. There are also times when you’d prefer that a beneficiary not receive a lump sum inheritance the day they turn 18 as they are likely not ready for that kind of windfall.
Where's There's a Will….
A will can comprise any or all of one’s estate planning, but it can’t cover everything. Certain accounts have their own beneficiary provisions; this is referred to “designated beneficiary.” Among these accounts are IRAs, 401(k), Pension Plans, and Annuities. The process for each is similar; when you set up the account you fill out a beneficiary form in which you list the beneficiaries of the account. These forms allow you to list primary and secondary beneficiaries as well as include multiple people for each level. e.g. you might list your spouse as 100% primary beneficiary, and each of two children as 50% split as secondary. I would like to emphasize these beneficiaries take precedence over anything stated in your will.
Be sure to review all of your beneficiaries on your accounts at least once a year, as there are some major mistakes this will help you avoid. Maybe when you started your job, you were still married to your first wife. At the time, your pension and/or 401(k) had little to no value and therefore wasn’t part of any settlement. Now, years later, you need to make sure your current wife is listed as beneficiary. The same thought goes for any children you’ve had since opening these accounts or to remove any listed beneficiaries who’ve passed on. For these accounts, a beneficiary is permitted to take withdrawals over their own life expectancy. This option is lost if they are not the designated beneficiary on the account.
More from GFC, Below
Editor's Note: I cannot stress this enough. I have came across several instances where beneficiaries on insurance polices and/or retirement plans (IRA's, 401k's, etc) have not been reviewed before an untimely passing. A simple check would have prevented any mishaps from occurring.
A will needs to have an assigned executor, someone whom you trust to have the knowledge and skill to perform their duties, which include:
- Manage the estate
- Pay any remaining debts
- Pay any taxes due
- Collect any debts owed to the estate
- Disburse assets according to the terms of the will.
What is Probate?
The next topic I’d like to discuss is Probate. Probate is the process by which your executor will prove the validity of your will, presenting the court with a summary of your assets, debts, and the beneficiaries for what remains. Probate can take anywhere from a few months to a year, and involves time and expense when lawyers are required. It’s at this point that the assets of the estate become a matter of public record. We’ll talk in a bit about how to avoid some or all of the probate process.
Another document to discuss with the attorney preparing your will is a “living will.” This is where you spell out your wishes regarding life prolonging medical treatment. To be blunt, it’s how you leave the message to your loved ones whether you want the plug pulled or if you wish to have any and all available medical treatment offered to you. This is a very personal matter, but one that you shouldn’t overlook. This document is also referred to as a health care directive.
Be sure to check out tomorrow's post that discusses how to use trusts in estate planning.
JoeTaxpayer is not endorsed or affiliated with LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute specific individualized tax, legal or investment advice. We suggest that you discuss your specific tax issues with a qualified tax or legal advisor.