Don’t Have a Will? You Still Have an Estate

The phrase “estate” is a legal term referring to the entirety of an individual’s property and has nothing to do with whether they own a large home or have a high net worth. If you own a home, investment and retirement accounts, cars, a vacation home and personal possessions, these items comprise your estate.

Every adult needs a will to decide how they want their assets distributed upon death. If there is no will, known as “intestacy,” the state’s laws direct the court to administer the estate. This is usually based on kinship. Spouses, children, parents (if living) and siblings are typically the first ones to inherit after debts and court administration fees are paid.

The Value of a Will for Family Stability

In some states, when there is no will, fully half of the estate goes to the surviving spouse, and children of the decedent receive the balance, divided equally among heirs. If the spouse’s financial security depended upon inheriting the entire estate, there would be no opportunity to change the distribution. If the family includes minor children, a court-appointed representative may administer their share, and court approval may be required to access funds for the children’s basic needs. The surviving parent will have to navigate the court system until the children reach adulthood.

If you have no spouse or children and no family members with a certain degree of kinship set by statute can be located, the court may transfer your estate to the state.

Court Involvement When There Is No Will

When someone dies without a will, family members can expect to spend a lot of time in court. They’ll need to petition to be appointed as an administrator to manage the estate. If there are other family members who believe they should be the administrator, they may challenge the court’s decision. Anyone with a lawful claim against the estate, like an estranged child, could more easily succeed in a will challenge.

Wills Do More Than Distribute Assets

Wills are used to appoint people to key roles, allowing you to give control to those you trust. The executor is named to oversee managing the estate, including gathering assets, notifying government agencies and paying personal and estate taxes. By nominating a guardian for minor children in their wills, parents can have input regarding who will raise their children and where they will live if both parents die.

The executor and guardian must be approved by the court during the probate process. However, their names in a will provide the testator with peace of mind, knowing their estate and children will be cared for by people of their choice, not strangers appointed by the court.

Wills Create a Legacy

If your goal is to protect your loved ones, spare them unnecessary court costs and stress and direct how property is distributed after you die, having a will is the best gift you can give your family.

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Inheritance Planning Considerations

Planning for inheritances is often neglected, with disastrous results. If an IRA is inherited and transferred directly to the heir’s regular banking account, the inheritance is treated as a distribution and the asset is taxed as income. This situation and others like it can be avoided with inheritance planning.

How is Inheritance Planning Different than Estate Planning?

Estate planning protects people and assets during life, while providing instructions for property distribution after death. Estate planning documents include a last will and testament to name an executor, a guardian for any minor children, and distribute the estate, a power of attorney to appoint someone to make legal and financial decisions and an advance health care directive to address medical care and end-of-life decisions.

Inheritance planning focuses on how assets will be received, with the twin goals of minimizing the financial burden on heirs from the inheritance and ensuring a smooth transfer of wealth.

For example, if an estate includes real estate, inheritance planning addresses how to minimize costs like property maintenance, real estate taxes, utilities, mortgage payments (if any), insurance and capital gains taxes, if the property is to be sold.

Trusts and Beneficiary Designations

Trusts establish a high level of control over inheritance, minimize taxes and allow wealth to be passed directly to beneficiaries without going through probate. Trusts are customized to serve many different purposes. They can control when assets are distributed and what they are used for and may require the recipient to achieve specific benchmarks. Assets are under the discretion of the trustee and not the heir.

Any asset with a beneficiary designation should be checked regularly. Beneficiary designations supersede instructions in the last will and can derail an estate plan if not updated. Failing to check beneficiary designations on life insurance policies, retirement plans and bank and investment accounts is a critical and common error.

Can an Inheritance Plan minimize Taxes?

Depending on the state, heirs may face federal and state estate taxes and inheritance taxes. As of this writing, few Americans need to plan for federal estate taxes. However, state estate tax exemptions are lower than federal exemptions. Six states still have inheritance taxes, and Maryland has both a state estate tax and an inheritance tax. Inheritance tax amounts are generally based on the person’s relationship to the deceased.

There are many ways to minimize taxes. For instance, it may make sense to convert some or all of an IRA to a Roth IRA, so taxes are paid by the account owner, rather than the beneficiary. Annual gifting while living, trusts, 529 contributions and taking advantage of the current gift tax exclusion should also be considered.

Ensuring Liquidity for Heirs

If heirs are likely to need cash to pay taxes or maintain a home, inheritance planning needs to address liquidity. A review of the estate plan and assets should be done to reveal how much ready cash will be required. Heirs often must sell valuable assets to meet the estate costs, undoing the legacy’s goals.

Inheritance Planning and Estate Planning

Inheritance planning strategies with an eye to legal documents, tax implications and fiduciary responsibilities put a finishing note on an estate plan, protecting assets and heirs.

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Single Parents and Estate Planning

Being a single parent means you’ll need to be sure your child is protected in case something unexpected happens to you. Single parents need a comprehensive estate plan, including a will, naming a guardian, preparing for financial support for the child and, if applicable, addressing the role of an ex-spouse in the child’s life.

Fundamentals of Estate Plans for Single Parents

The last will and testament includes a provision naming a guardian in case of the single parent’s incapacity or death. In most cases, a single parent will name a sibling as the guardian, especially if the siblings are close, so that the child will have the stability of family. When this is not possible, some single parents turn to their own parents, which is not always ideal. However, it may be better than other choices.

If there is no estate plan and no one guardian is named, the matter will go before a judge who will decide who will raise the children and where they will live. There is no requirement for the guardian to be a family member. While the court may attempt to place the children with a family member, it is possible they could go into the foster care system until a permanent guardian is found.

Trusts and Funding the Child’s Care

Parents purchase life insurance, so funds will be available for food, shelter, medical care and education. However, a minor should not be named as the beneficiary of the policy, since insurance companies will not pay a death benefit directly to a minor. In this situation, a court will appoint a guardian or trustee to manage the proceeds until the child becomes a legal adult.

A better solution is to create a trust and name the trust as a beneficiary of the life insurance policy. Upon death, the proceeds will go directly into the trust, and the trustee will have access to the funds for the benefit of the child.

Does the Child Automatically Live with the Ex-Spouse?

If a single parent dies and the biological or shared custody parent is living, the surviving parent may be awarded full-time custody. However, this is not automatic. If the surviving parent is not considered suitable, the court may name a guardian instead.

Protecting Children if a Single Parent is Incapacitated

Planning for a parent’s incapacity, where they are unable to care for themselves or their children, is as important as planning for the death of the parent. Once someone is incapacitated, however, they are not permitted to sign legally binding documents.

The estate plan must include a Power of Attorney, so another person can manage the single parent’s finances and keep the household running. If a trust fund has been established and funded, these funds will also be available to the trustee, if needed.

Providing for the Child and the Parent’s Future

Having an estate plan is especially important for single parents, who don’t have the luxury of relying on a spouse to step up in case of incapacity or death. With an estate plan in place, the parents can focus on raising their children, knowing they will be cared for, whatever the future may bring.

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Long Term Care Planning and Estate Planning

When addressed in tandem, long-term care planning and estate planning protect the estate from being consumed by long-term care costs. Neglecting to incorporate long-term care planning into the estate plan can quickly undo a legacy.

Purchasing a long-term care insurance policy should be a starting point in planning for long-term care. Policies purchased in mid-life may seem unnecessary. However, when they are needed later in life, the coverage is welcome. The older you are, the more difficult it is to buy a long-term care policy. Fewer insurance companies sell these policies than in the past, and if you have a chronic condition, they may refuse to issue a policy. The premiums increase as time goes on. However, it is a worthwhile investment.

Understanding Long-Term Care and Estate Planning

Long-term care refers to the services required to help with daily activities such as bathing, dressing, toileting and eating. Medicare covers a limited amount of short-term care, and when it is exhausted, the individual must apply for Medicaid. Long-term care is sometimes performed at home. However, for most people, long-term care takes place in a skilled nursing facility, where costs can easily reach $100,000 a year—or more.

Long-term care planning and estate planning intersect when the family wishes to protect the estate from the cost of long-term care.

The Role of Medicaid Planning in Estate and Long-Term Care Planning

Long-term care planning aims to determine how to finance long-term care without leaving a spouse impoverished or depleting a lifetime of earnings. Medicaid eligibility is means-tested, meaning the agency closely reviews the person’s assets to determine if they are eligible to have Medicaid pay for their care.

A Medicaid plan is created before it’s needed. Medicaid has a five-year lookback period. Any transactions like transferring ownership of a house or vacation home, lending money to a family member, or creating and funding a trust will make the applicant ineligible for Medicaid benefits. They will have to spend down assets until they qualify.

No one knows if they will need to qualify for Medicaid. However, most people need some form of long-term care at some point. Betting on being the exception is not a Medicaid plan.

What Happens If There’s No Long-Term Care Plan?

An introduction to long-term care in the middle of a health crisis is the worst time to learn about Medicaid. The crisis often begins when an elderly parent falls and is taken by ambulance to a nearby hospital. Once their medical condition is addressed, the family learns their elderly parent can’t live alone anymore and the hospital needs to transfer the patient to a licensed nursing home. The family must shift into high gear, learning about available facilities, navigating the costs and figuring out how to pay the bills.

An Easier Transition to Long-Term Care Through Planning.

By planning in advance, you can minimize the emotional and financial impact on the family. Asset protection protects middle-class seniors by securing life savings and property from the cost of long-term care. It also allows the family to procure the best available care by having a plan.

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Beneficiary Designations as Part of an Estate Plan

Beneficiary designations are more powerful than a will. Once a person is named as a beneficiary on a retirement account, investment account, or life insurance policy, this designation overrides any instructions in a will. This easily avoided mistake is a frequent cause of litigation.

Beneficiary designations are critical in the world of pensions and retirement accounts. These kinds of accounts are governed by federal law, with strict rules about spousal rights. When accounts are first established, the spouse’s name is often required to be the primary beneficiary.

What happens if there is no beneficiary named on an account?

Assets in accounts with no beneficiary named usually become part of the probate estate. This is a missed opportunity. Beneficiary designations are an excellent way to transfer assets to heirs without going through probate, maintaining privacy and avoiding estate taxes.

What is a primary, secondary, or contingent beneficiary?

Just as a trust should have a primary, secondary and contingent trustee, any accounts with a named beneficiary should have more than one person named. As people age, so do their beneficiaries. Therefore, having three levels of beneficiaries makes it more likely someone of your choosing will inherit the asset. The asset goes into the probate estate if beneficiaries have all passed or cannot be located.

Who can be a beneficiary?

Most beneficiaries are surviving spouses or adult children, siblings, or family members. For pensions and retirement funds, your spouse will have to sign an agreement waiving spousal rights if you don’t want them to receive the asset. Minors are not permitted to inherit assets, so if they are beneficiaries, the court will name a custodian to oversee how the funds are used. The court has no obligation to name a family member for this role.

Who should not be a beneficiary?

People who receive means-tested government benefits, like Medicaid or Supplemental Social Income (SSI), should never be left an inheritance. Why? The inheritance will be considered a countable asset, and the person will lose their eligibility. A Special Needs Trust should be created, and the trust may be the beneficiary but not the individual with special needs.

Deciding who to name as a beneficiary.

Carefully consider who you want to be a named beneficiary. The beneficiary is not obligated to distribute any funds to anyone else. If you name one child to be a beneficiary and there are siblings, your estate plan and the children’s relationship could be undone.

Review beneficiary designations when creating or revising an estate plan.

Every account, from life insurance to investment portfolios, should be reviewed every few years to ensure that the beneficiary designation reflects the account owner’s wishes. Over time, it is easy to forget who was named on accounts, especially retirement accounts from a prior employer or bank accounts opened many years ago. Make a complete inventory of all financial accounts and place it with essential documents to prevent assets from being lost. You’ll also save your executor countless hours of searching for missing assets.

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Divorce and Estate Planning

The risk of having an ex-spouse making critical medical decisions if one becomes incapacitated or inheriting a lifetime of wealth if a spouse dies while the separation agreement is being prepared should motivate both parties to update their estate plans before a divorce is finalized.

Power of Attorney Documents

Even when a divorce begins as an amicable breakup, these relationships can deteriorate unexpectedly. Documents, including Power of Attorney, Medical Power of Attorney and HIPAA release forms, should be revised immediately to reflect the change in the relationship. If a divorce is contentious, one spouse could use the Power of Attorney to empty financial accounts. The POA will need to be revoked and a new one executed. If living, a sibling, trusted friend, or parent is commonly chosen as POA. The named individual should be asked if they are willing to take on the role and provided with the necessary information.

Changes to Wills

Spouses usually name each other as mutual executors, taking on the tasks of administering an estate for one another. During divorce proceedings, it would be wise to have a will updated, even if only a few items are changed. For instance, another person besides the spouse should be chosen as the executor. If there are minor children, review the choice of the nominated guardian.

Trusts and Beneficiary Designations

The terms of the divorce property settlement will likely impact the ownership of trusts, insurance policies, investments and bank accounts. Whether changes can be made before the divorce is finalized will depend on each situation.

Assets in a revocable trust may be subject to equitable division. If the couple has an irrevocable trust, the assets in the trust are not considered marital or community property. A non-beneficiary spouse may trace the source of the assets in the trust to push back against how assets in the trust are divided. This is where estate planning meets divorce law.

Distribution of Non-Retirement Assets

Spouses may transfer property between themselves with no tax consequences. However, property divided incident to divorce should occur within one year of the divorce being executed. The IRS will consider transfers made within six years of the divorce as being related to the end of the marriage, as there are cases when property can’t be easily transferred, or one spouse may have hidden assets from the other.

Division of Retirement Assets

Certain assets, including pensions and retirement funds, require a Qualified Domestic Relations Order (QDRO) to direct how assets are divided in a divorce. This court order issued by a state court allows a person who is not the owner of the retirement plan or pension to receive all or part of the account.

Estate Planning Provides an Additional Layer of Protection

An updated estate plan ensures that your wishes are fulfilled, and the family is taken care of if something should happen during the divorce. Ensuring that an ex-spouse doesn’t receive assets and protecting your estate from claims after death is essential.

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How Does Elder Law Help Aging Family Members?

Even the healthiest seniors experience diminishing abilities as they age. A slower pace and more caution can help with mobility challenges. However, if cognitive losses are suspected, it’s time to put legal guardrails in place. Elder law helps older adults address the unique issues they face and helps them age with dignity and security.

Planning for Long-Term Healthcare in Advance of Need

Long-term care takes different forms, from having a healthcare aide at home to living in a nursing care facility. All are costly. Medicaid planning ensures that care can be provided, while protecting a well-spouse from becoming impoverished or losing a lifetime of earnings to nursing home costs. One way to do this is to create a Medicaid Asset Protection Trust. This irrevocable trust removes assets from personal ownership. However, it must be created and funded five years before applying to Medicaid or will be included as a “countable asset.”

Protecting Seniors from Elder Fraud

Seniors are vulnerable to thieves and are frequently targeted. An elderly parent who lives alone may be lonely, eager for companionship and willing to help a “friend” who needs money for fictitious family members. Scammers prey on elderly people because of their hefty retirement assets. Protection can come in the form of moving assets into trusts, having a family member added to accounts, setting up transaction notifications, or creating a safety net with a financial advisor to alert a trusted family member of any unusual transaction requests before they occur.

Power of Attorney and Healthcare Power of Attorney Documents

Both types of POA allow another person to be named to act on behalf of the elderly person if they become incapacitated. Couples often name their spouse for these roles. However, additional agents should be named for elderly people. If the husband is incapacitated while the wife is recovering from a serious illness, another person will be able to step in.

Guardianship When Mental or Physical Health Declines

If POAs are not in place and an individual begins to show signs of decline or dementia, immediate action needs to be taken. Once a person has been deemed incapacitated, they can no longer execute legal documents. Having a Power of Attorney in place is far easier than going to court to obtain a guardianship. Family members will need to petition the court for guardianship to take control of the person’s affairs. The possibility of “interested parties” seeking guardianship is real, as is the chance the court assigns a professional guardian instead of a family member.

Updating Estate Planning Documents

If an elderly person has not updated their estate planning documents, it’s essential to do so while they are healthy and competent. Necessary documents include a will, an advanced directive expressing wishes for end-of-life care, a HIPAA Release form and the healthcare and durable POAs.

Preparing for the Future

Elder law prepares the individual and the family for the inevitable events of aging. Having a plan for one’s later years provides protection and peace of mind for all concerned.

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Business Succession and Estate Planning

A business succession plan creates a roadmap in case of a business owner’s sudden death or incapacity. It defines critical roles, including who will take the lead to run the business. Without a plan, the business may struggle to remain operational, leading to disruptions, loss of revenue and even potential bankruptcy. A well-structured succession plan ensures that the business continues to operate in the short and long term.

Protecting the Business Legacy

For many business owners, the business is a significant part of their legacy. The owner can be confident their values, vision, and operational practices will continue to guide the business, even after their departure. A succession plan provides the opportunity to identify the right leadership to preserve the culture and direction of the business, avoiding potential conflicts that could arise in the absence of clear direction.

Minimizing Tax Implications

The transfer of business ownership can trigger significant estate and gift taxes. A succession plan minimizes estate and tax liabilities for the business owner and heirs. Without a plan, taxes could force the business to sell or take on debt. Through strategic planning, such as using family limited partnerships, trusts, or other estate planning tools, a business owner can minimize tax liabilities and ensure a smooth, tax-efficient transfer of assets.

Preserving Family Relationships

A succession plan is crucial for family-owned businesses to prevent disputes among heirs. Family members may have conflicting views about who should take over the business without a formal succession plan. Depending on its intensity, this could lead to the dissolution of the business. By involving family members in the planning process, the business owner can prevent misunderstandings and ensure a smooth transition with minimal animosity among family members.

Employee Security and Retention

Employees are integral to the success of a business. Retaining them during the transfer of ownership is more likely to be successful if they know there is a plan in place. When employees are confident that the business will continue to operate smoothly, they are more likely to stay, keeping their experience with the business rather than being lost to competitors. A succession plan can also be used to identify key employees who may be groomed for leadership positions, further fostering loyalty and a sense of purpose within the organization.

Avoiding Litigation

A succession plan can prevent family members or business partners from needing to engage in legal disputes over the future of the business. The likelihood of conflicts among vendors and clients is lessened when the business continues to operate smoothly during the transition process. If the ownership has not been appropriately structured, business assets can be subject to the probate process if the owner dies. Probate can be lengthy, expensive, and disruptive to the business. A succession plan helps avoid court intervention, by providing clear instructions on transferring ownership.

Succession Plan is a Strategic Plan for the Future

A succession plan is a strategic business tool, providing owners with the peace of mind of knowing that their company will continue to operate effectively, their legacy will be protected, and their family, employees, and successors will be prepared for a smooth transition.

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Why Organizing Your Estate Is Important

An organized estate plan is a gift to loved ones. It spares them the stress of not knowing your wishes for care in case of incapacity and outlines how property should be distributed after death. Organized estate plans minimize confusion and conflict among family members.

Review and Inventory Assets and Liabilities

Create an inventory that includes investment and retirement accounts, real estate, personal property and digital assets. For collectibles, it should document where they came from, purchase prices and estimated values. If there are any debts, include all relevant information. Failing to include debts as well as assets can create time and resource-consuming problems for the executor and heirs.

Plan for Incapacity

A comprehensive estate plan protects the living. A Power of Attorney document designates someone to make financial and legal decisions for you in case of incapacity. Similarly, a Healthcare Proxy names someone to make medical decisions and speak with healthcare providers if you are too ill to speak for yourself. Living wills outline wishes for end-of-life care. A HIPAA release is also needed. Without these documents, spouses and children may not be allowed to participate in medical decisions. Unmarried partners must have these documents to be involved with each other’s care.

Last Will and Testament

A last will is used to direct the distribution of assets upon death and nominate an executor to manage the estate. If there are minor children, the last will nominates a guardian if both parents die or become incapacitated. If there is no last will, the court will appoint an administrator to manage the estate and a guardian to raise minor children. The court is not obligated to appoint a family member to raise the children or to consider the family’s wishes when selecting a guardian.

Should You Have a Trust?

Trusts are excellent estate planning tools that serve numerous purposes. Depending on the type of trust, placing assets in a trust may remove them from the taxable estate, minimizing estate taxes. A special needs trust provides for disabled dependents without risking the loss of means-tested benefits. Trusts are also used to avoid disinheriting children from prior marriages. Unlike a last will, which goes through probate and becomes part of the public record, trusts not established under a last will are private in most states. However, last wills and any “testamentary trusts” created under them can be reviewed by family members, creditors and anyone wanting to take advantage of heirs.

Protect Estate Planning Documents

Once your documents are completed, keep them in a safe, easily accessible place. Consider a fireproof safe or a secure digital storage solution. Tell the executor (and any trustee) and family members where they can find your original planning documents. Don’t put them in a safe deposit box at your bank, since these are sealed upon death and won’t be accessible in a timely manner. If you do, however, ensure that your executor (and any trustee) can access the contents whenever necessary.

Keeping Estate Plans Up to Date

As your life changes, so should your estate plan. Reviews should be done after trigger events, like marriage, divorce, births, deaths, or relocation. Changes to tax laws may also make an estate plan review necessary. It’s wise to review estate plans every three to five years.

By following these steps and seeking professional assistance, you can create a comprehensive estate plan that provides peace of mind for you and your family.

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How Does Trust Administration Differ from Probate Administration?

When considering whether to use a trust or a will, consider how these two estate planning tools work during life and postmortem. Both are well-established tools. However, they serve different purposes.

Is a Last Will and Testament Enough for an Estate Plan?

A will is the foundation of an estate plan, used to direct the distribution of assets, name an executor overseeing the estate’s details during probate and a guardian to care for minor children.

The executor is a fiduciary responsible for a myriad of details concerning the estate. Their task begins with obtaining death certificates, submitting the will to the probate court and notifying Social Security of the person’s death. The executor is also responsible for the upkeep of any property until it is distributed to the heir and contacting financial institutions, including insurance companies and investment advisors.

Many of the tasks to be undertaken by the executor cannot happen until the court has reviewed the will, declared it valid and issued Letters Testamentary. These documents verify the executor’s authority to act on behalf of the estate.

Who is in Charge of a Trust?

A trustee is named in the trust to manage assets and carry out the trust’s directions. In a living trust, the person creating the trust is also the trustee, and secondary trustees are named in case the trustee is incapacitated or otherwise unable to act. The trust contains instructions for the trustee, outlining what they can and cannot do with the assets.

Why Would a Trust Be Preferred?

For families seeking privacy, trusts are better than wills. Once a will is submitted to probate, it becomes a public record, and anyone can read it.

The only people who can gain access to trust documents are the people who created the trust and heirs. Depending on where the trust is established, the trustee may not be legally obligated to provide a copy of the trust or information to beneficiaries.

Planning for Incapacity

A will is effective upon death and only after it has gone through probate and been validated by the court.  In contrast, trusts become effective once they are created, although they must be funded to function. If the grantor is incapacitated, the trustee (or successor trustee) has control of the trust. No court intervention is needed, and assets in the trust may be used as directed by the trust’s language.

Wills and Trusts

For most people, using a last will and testament and a trust is the optimal solution. The will provides the court with the testator’s wishes for executor and guardian roles while adhering to state law regarding the distribution of assets not contained in a trust. The trust allows for a far more efficient wealth transfer and provides privacy. They should be created in tandem to ensure alignment with overall estate planning goals.

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