1. Why you need a will
We all hope this won’t be for many years yet, but it’s always best to be prepared in order to protect both yourself and your family in case the unexpected should happen.
Why Write a Will?
No matter what your age, if you have anyone who depends on you in any way, it’s a good idea to line up life insurance and write a will. The average cost of a funeral in the US is about $16,000. End of life medical expenses can really mount up even if you have good insurance.
A will is therefore one of the best ways to plan ahead for these end of life costs, and to make sure your family or those taking care of your estate (that is, what you leave behind) aren’t stuck with a mess to try to sort through.
What Is a Will, Exactly?
Generally speaking, a will is a legal document that states how you wish your property to be distributed after you die. If you have young children or pets, a will can also stipulate who will be their guardian in the event of your death.
Why You Should Make a Will
There are a number of key reasons why you should make a will. The first is to use it as a means of detailing your wishes clearly and precisely so there is no misunderstanding. This will mean a lot less chance of people fighting over the will – that is, contesting it – once you have passed away.
It also helps protect those who rely on you financially. For example, pets can’t care for themselves, and far too often they are thrown out on the street or dumped in a shelter to be killed.
Young children will not be independent for many years and therefore need to have their interests protected until they come of age. In addition to guardianship and living expenses, your will could also make provisions to ensure that if they wish to go to college, money will be available.
What Happens If You Don’t Have a Will?
Without a will, the state or country in which you reside will decide how to distribute your assets to your beneficiaries according to its laws. In some cases, the spouse is the beneficiary, in others the children.
Dying without a will is referred to as being intestate. Due to divorce and to mixed families, the results of the settlement process may not benefit those you wish it to. Therefore, it is better to try to control the process with a will than leave your survivors at the mercy of a judge who knows nothing about your family situation.
2. Do you need an attorney to make a will?
Do It Yourself, or Get an Attorney?
These days, you can do just about anything online, including making a will. The question is, will the document be legal? In case you have any doubts, hiring an attorney is your best option. If you have a complicated family or financial situation, an attorney would also be a better bet than trying to do it all on your own.
The Pros and Cons of Having an Attorney
The biggest disadvantage of hiring an attorney is the cost. However, the money you spend can more than pay for itself in terms of the amount of time and money they can save you by making sure your will is water-tight and advising you on the best ways to protect your estate from excessive taxes. This will ensure that there is more for your family to inherit.
Another disadvantage might be not hiring the right lawyer. Most can handle simple wills, but the more complicated the will, the more you need an attorney that specializes in wills. You should also hire someone you like and trust. They should handle your paperwork and all business associated with your will in a timely manner for a reasonable fee.
An attorney who specializes in what is called estate planning can ensure you get your ducks lined up in a row when it comes to your will and the key financial considerations related to your estate – that is, the money and possessions you leave behind. They can also serve as the executor of your will (meaning the person who handles the estate until it is settled) if you don’t have any next of kin or anyone you think will deal with the issue in an honest, fair and/or responsible manner.
What You Need to Put in Your Will
Regardless of who writes the will, there are several essential elements that can help reflect your wishes:
1. The designation of an executor, who will carry out the provisions of the will.
2. A list of the beneficiaries — those who will be inheriting the assets.
3. Instructions related to what the assets are for each person, and how and when the beneficiaries will receive the assets.
4. Naming a guardian for any minor children and/or pets.
5. A list or inventory of the assets. This should include tangible goods, such as clothes, cars and so on, and financial assets, such as 401ks, and insurance policies. Note that you are usually required to state the beneficiaries in the 401k accounts, keep them up to date, and ensure that your designations match what is in your will.
3. Living wills
What Is a Living Will?
A living will outlines the way you want your health care and end of life decisions to be handled. We can never predict what is going to happen to us, but being prepared can take a lot of guesswork out of the situation for your distraught relatives and for your health care providers if something bad ever does happen.
A living will can involve a number of aspects related to your health care. One aspect you have probably heard of is a Do Not Resuscitate order, or DNR. A DNR states that you don’t want extraordinary means to be used in order to keep you alive in the event that something serious happens. For example, you might be in an accident and end up unable to speak and therefore to make your own health care decisions.
Your living will can serve as your input into the decision-making process. If you are so badly injured or ill that you lapse into a coma, for example, emergency medical staff would not put you on a respirator (that is, a device that breathes for you) or do cardiopulmonary resuscitation (CPR) to get your heart going again.
In addition, you can outline your preferences with regard to procedures such as tests, surgery and so on, and even food, water and painkillers. Many people who are concerned about maintaining quality of life rather than duration, and dignity in the face of death, might refuse these means of sustaining them in order to die more quickly.
In some cases, it is even an instance of economics. End of life care can be expensive and people who feel there is no hope don’t wish to leave behind a lot of expenses in relation to something they feel to be hopeless anyway.
Organ Donation
Some people feel strongly about organ donation even though family members might be squeamish. Organ donation can benefit around 50 people.
Donating your body to science
This is a lot less common than organ donation, but of huge benefit to medical schools, which always need teaching and research materials. Once they have finished, you would be cremated.
Choosing an agent for your living will
Once you have created a living will, choose someone who will be assertive and respect your wishes. In this way you can be sure they will be the best advocate for you and do as you request, not act on their own personal preferences.
4. Choosing beneficiaries in your will
Choosing Beneficiaries
You can designate anyone you wish as a beneficiary in your will. Who you include and who you decide to leave out is entirely up to you. Having said that, there are a number of practical considerations that should determine your list of beneficiaries.
If you are married, your spouse might go at the top of the list. If you have children, you might wish to make separate provisions for them if you feel it is necessary; for example, if you and your spouse are separated or divorced. You could set up a trust for each child so they will have money as needed, such as if they go to college.
Some people leave money to their parents or siblings. It is important to note, however, that if you don’t keep your list of beneficiaries up to date and you then die, circumstances could change significantly. For example, imagine you decide to leave money to your brother under the assumption that if he dies, your nephew would receive the money.
Depending on what state you live in, that may or may not be true. In some cases, the wife would be seen as your brother’s beneficiary, so she would receive the legacy – not your nephew. This might or might not be okay depending on whether you think she would be responsible and use the legacy for your nephew’s best interests, or do as she wished with the money without any regard for her son.
Charities
If you have no living relatives, or think that they are wealthy enough to not want or need your money and possessions, you could leave them to charity. However, if you do have relatives, ignoring them complete in your will could be very hurtful.
Particular Bequests
You can outline specific bequests as you choose, such as your coin collection to Uncle Ted or your clothes and furniture to the Salvation Army. To be sure nothing is left out, an inventory which is kept up to date can help.
Conflict of Interest
Do not add anyone to your will who would have a conflict of interest. For example, you shouldn’t name your lawyer or your health care agent because they could be seen to benefit from your death.
5. Finding an executor for your will
One of the most important decisions you will make is who you want to be the executor of your will – that is, the person who oversees it and makes sure it is acted upon in accordance with your wishes.
Choosing an Executor for Your Will
There are a number of important considerations when choosing an executor. You can choose a family member or friend if they have good common sense and are a reliable person who follows up on things without procrastinating. In addition, they should have the sense to know when they need help with things they can’t handle and where to go for assistance.
They should also be someone reasonably local and a person who is likely to outlive you. In addition, they should be someone you get along well with, who you trust and respect, and who feels the same about you. They should be someone you are likely to maintain a relationship with, such as a son or daughter. If you are choosing someone close to your own age, you could also name a successor – that is, another person who would take over as executor if your first choice was ill or deceased.
A third choice would be a corporate executor – that is, a bank or other financial institution or lawyer who would administer the estate. This is a good option if the estate is going to be very complicated or there are any personal or family issues which might cause problems.
An Impartial Executor
When there is a lot of wealth at stake, or a long-term administration situation such as a trust for each child, who are all very young when you pass away, a corporate executor and trustee might be your best option. The executor you name might not live long enough to see the trust through if the children are toddlers and their money will be held in trust until they are 18 or 21.
A second consideration is human nature. If you don’t have an ironclad will and an executor with backbone, one or other of the beneficiaries may start a catfight and contest the will. This can seriously deplete the value of the estate’s assets in a very short amount of time, leaving little or nothing for anyone at the end.
A third concern might be what your surviving spouse will do once you are gone. Think of Cinderella being left at the mercy of her stepmother and treated like a servant because her stepsisters ended up with the best of everything. With divorce so common and all sorts of family combinations, an impartial executor would be your best option to ensure your children’s interests are protected.
6. Tips on minimizing inheritance tax
Inheritance Tax Basics
The first thing to remember is that inheritances are not considered income for federal tax purposes, whether you inherit cash, investments or property. However, any earnings from the inherited assets are taxable. You will be taxed on the interest paid in related to inherited cash in a bank account, for example, or dividends on inherited stocks or mutual funds.
Any gains when you sell inherited investments or property are generally taxable. In some cases, you can claim losses on these sales. State taxes on inheritances vary, so it is important to check the rules with your state’s department of revenue, treasury or taxation for details.
Set Up a Trust
A trust allows you to pass assets to beneficiaries after your death without having to go through probate – that is, legally settling the estate. Trusts are similar to wills, but avoid state probate requirements and the associated expenses.
Use a revocable trust so you can take the money out at any time. An irrevocable trust is a bad idea because it will tie up the assets until you die. Also avoid putting your assets into joint names with your child, since this will actually increase the taxes the child will have to pay once you die.
Place Your Insurance Payout into a Trust
When you die, your insurance payout will be treated as taxable. However, arranging for the money to be placed in a trust will avoid this.
Minimize Retirement Account Distributions
Inherited retirement assets are not taxable until they’re distributed. Certain rules may apply when the distributions must occur, however, if the beneficiary is not a spouse. In most cases, the surviving spouse can take over the IRA. Remember that required minimum distribution requirements would still apply; for example, once you turn 70.
Give Away Some of the Money
It may seem counter-intuitive, but sometimes it makes sense to give a portion of your inheritance to others because of the tax benefits involved. In addition to helping those in need, you could potentially offset the taxable gains on your inheritance with the tax deduction you receive for donating.
Gifting
If you’re expecting to leave money to people when you die, consider giving annual gifts to your beneficiaries while you’re still living. You can give a certain amount to each person, for example, $14,000 per year per person, without being subject to gift taxes.
Talk with an estate planning professional to ensure you’re staying current with the frequent changes to estate tax laws.
7. Benefits of setting up a trust
What Is a Trust?
A trust is traditionally used to minimize estate taxes and gain other benefits as part of a well-crafted estate plan. It is a financial arrangement in which a third party, or trustee, holds assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.
The Benefits of Having a Trust
There are a number of benefits to setting up a trust:
* Low or no taxes and fees – Trusts avoid taxation and probate fees (that is, the legal settling of your personal estate when you die), and they can also gain access to the money more quickly than having to wait for your entire estate to be settled.
* Control of the wealth – You can specify the terms of a trust so as to control when and to whom the money will be paid. There are two kinds of trusts, revocable and irrevocable. With a revocable trust, you can revoke the money if you choose, meaning that the assets in the trust are still accessible to you during your lifetime. An irrevocable trust ties up the money so that it will only be freed up once you die.
* Protection of your legacy – A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management. Basically, you set the terms so they can’t blow through all the money on a trip to Vegas. A trust is also a good way to set aside money for a college education.
Things to Be Aware Of
There are a couple of things to be aware of when setting up a trust. The main one is to not put your name jointly on the trust, because whoever you are leaving it to will have to pay taxes on it in relation to how the asset has grown in value in the time it has been in trust.
Trusts can be set up for all sorts of contingencies you would like to cover to make sure your loved ones are cared for once you are no longer with them. Check with a qualified legal and financial representative for more information.
8. Do I need to worry about probate?
What Is Probate?
Probate is a legal process for settling an estate according to the will of the deceased. The deceased’s taxable estate is made up of all of the assets in which he or she holds an interest at the time of death. Generally speaking, only the assets they held individually in their own name will have to go through probate.
Probate, or Not?
Whether or not an estate has to go through probate depends on the state requirements.
For example, many states set a threshold such as $25,000 or less, so an estate in that bracket won’t have to go through the process of probate and the estate can be settled quickly with fewer taxes and fees.
Some assets are exempt from probate court, while others are subject to probate. A good will can prevent a probate tangle. So can good organization, with you naming beneficiaries to your important accounts such as your 401k and other investment accounts. You can name more than one beneficiary and indicate a percentage split, such as 50/50 between your spouse and child, or 25% each for your spouse and three children.
Or, you can fill out a transfer on death (TOD) designation so that the account will go straight to your beneficiary without going through the probate process.
Trusts are also exempt from the probate process. This means they don’t get caught in any legal tangle in relation to the estate, so that your beneficiary can access the money more quickly compared to having to wait around for the probate court to settle the will.
Which Assets Pass through Probate?
The following are usually subject to probate:
* Cash, cash accounts without TOD designations
* Personal property, including valuable items
* Real estate
* Assets held as tenants in common
If you haven’t set beneficiaries for your accounts, take the time to do so now. If you have life insurance, make an arrangement to deposit the payout into a trust so that some of money does not tip you over the threshold of probate and ends up taxable and not accessible until the will is settled.
9. Common mistakes when making a will
1. Not having a will
More than half the US population has no will. This is just asking for trouble for any loved ones you leave behind.
2. Trying to do it all by yourself
You can find sample drafts of wills, and there are websites that can help you put together a basic will, but the more complicated your situation is, the more you need professional help. Issues in relation to a large number of assets or a complicated family situation (such as having had two marriages and two sets of children or step-children) are good reasons to have everything checked over carefully by a lawyer who specializes in estate planning and estate management.
3. Not knowing the rules in your state or country
There are quite a number of rules with respect to wills which vary from state to state as well as from country to country. Filing the document and having it recognized as legal and binding are two of the most important issues.
Another is that of probate – the process of dividing up the estate and making sure everyone, including the tax man, gets their share. In some states, the probate cap is $25,000, in others $50,000. If the estate is worth less than the cap, there’s no need for probate court, which will make things a lot easier for your family.
4. Not appointing an impartial executor
Your executor will oversee the whole process. An impartial one who has no vested interest in your estate can help eliminate disputes that could lead to your will being contested.
5. Not listing all your beneficiaries
People assume that their family will be covered, but unless you name names specifically, they might not get what you intend them to.
6. Not setting up trusts
A trust is a great way to save on taxes so that your loved ones will get more of the estate you wish to leave them.
7. Trusting people to do the right thing
There’s nothing quite like a will and the prospect of inheriting to bring out the worst in some people. A well-written will administered by a professional who is an impartial executor can stop the feeding frenzy that would put sharks to shame if your relatives all try to fight for what they consider to be their “fair share”.
10. When should you change your will?
When Should You Change Your Will?
The short answer to this is whenever you like. After all, it’s your money and possessions to do with as you choose. Having said that, you don’t want to run back and forth to a lawyer and/or notary every week because you’ve tweaked your will yet again.
There are several occasions when it does make sense to change your will, though. These include:
1. A major change in your life
This might include:
* Marriage
* Divorce
* A new child
* A step-family due to remarriage
* A new asset of significant value
* The death of a spouse
* The death of one of your beneficiaries
* The death of a dependent, someone you were caring for who no longer requires care
* Significant changes in the value of your assets, such as your stock going up or down
2. Opening one or more trusts for your beneficiaries
This will have a significant impact on the estate because trusts are usually not subject to probate court and the fees and taxes involved in settling the estate.
3. Using various strategies to reduce the tax burden on the estate
You can give away money each year up to a certain sum without your beneficiary having to pay tax on it. You could also make a donation to a charity to reduce the value of the estate, to decrease the taxes on it and/or get it below the value that would require the entire estate to go through probate. In New York State, for example, probate starts after $30k, but in New Jersey it is a lot less, at only $10k.
4. Leaving money to a charity or cause in your will
This helps you support a cause you feel passionate about. Check the http://www.charitynavigator.org/ site to see which charities are ranked most highly in terms of how well they put their donations to good use. The ASPCA, for example, only spends 75% of donations on the animals. The rest is salaries and marketing.
5. Leaving specific items in your will
If you don’t give them away before death and don’t state which beneficiary you want to give these items to, the executor of your will might have a fight on their hands, and/or probate won’t know your wishes and everyone will be upset.
When NOT to Change Your Will
You should not change your will if you are emotionally upset and want to hurt someone because they have hurt you. Keep a cool head and don’t try to use your will as a weapon or blackmail people with it.
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