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When You Don't Plan, You Let the Courts Decide
Most people are reasonable and know that an estate or inheritance plan is important. Still, it's hard to take the time to make it happen. Why? Well, the term estate planning generally leads to images of sitting around a lawyer's office discussing the many ways you might die, and the many things that might happen to your heirs and assets when you do. As if that weren't uncomfortable enough, it also means taking the time to draft, organize, and sign the legal documents, such as wills and trusts, that dictate who will get what when you die. A trip to the dentist is almost more appealing.
There is also a sense of futility to inheritance planning. After all, why plan for something you will never see to fruition? Even worse, some people believe that planning for death is akin to inviting death to the door.
One thing that can help get procrastinators back on track, however, is knowing what might happen to their heirs and their assets when they don't plan, or when they plan poorly. When you don't plan, you let the state decide who gets what. Thatmeans the court system will distribute your assets according to predetermined laws and decide who gets to take care of your minor children.
Who Gets My Money if I Die Without a Plan?
To learn what might happen if you don't plan, take a look at Frank's story. Frank was a fun-loving guy who never drafted a will. He wasn't married and had no kids, so he didn't see the need. Also, while Frank worked hard enough to live and play, he never really had a lot of money.
All that changed, however, when Frank suffered an accident on the job. He damaged his spinal cord and several of his vertebrae. His doctors said he would never regain full control of his body movements. His suffering resulted in $6 million in damages and restitution.
With $6 million in the bank, you might think Frank would decide to draft an estate plan and decide who would get his money if he should suddenly die. Well, he did seek legal counsel after some cajoling from a friend, and a plan was hammered out-but Frank decided to put off implementing the plan until after he returned from a scuba-diving vacation.
Unfortunately, Frank died while on his vacation. His heart gave out during a scuba outing. So what happened to Frank's millions? Without a plan of his own, the state was put in charge of doling out his assets. According to the laws of Frank's state, his money would go to his closest living heir, who was his father. For many of us, that would be a fine solution. But Frank's father was a broken man with several million dollars in legal judgments against him. Between the judgments and the estate taxes, Frank's entire estate was about to disappear into the pockets of strangers.
The estate was saved when Frank's father wisely agreed to "disclaim" the inheritance. In other words, he simply said, "No, I don't want it," and it passed on to the next eligible heir: Frank's sister. The plan went through without a hitch, but another fight ensued when Frank's father accused his daughter of not caring for him the way she should have after having received Frank's money. The situation was eventually resolved, but not without a good dose of heartache and bickering, all of which could have been avoided had Frank simply signed his will before he left on his last vacation.
Each state has its own distribution rules for an intestate estate, or one without a will. The process is pretty similar throughout the country, however. Often, the surviving spouse gets everything, especially if there are minor children involved. Some states will divide the assets between the spouse and the children, with the spouse getting one-third and the children inheriting the remaining two-thirds, for example. If there is no spouse and no children, as in Frank's case, the parents generally get everything. In the absence of parents, the siblings would most likely divide the assets, and so on. If the state cannot find any living heirs, it will take possession of the money and property.
Translation: If you don't plan, you let the state decide who gets your money. It won't care whether you dislike your sister, Susie. If she's your closest kin, she will benefit from your lifetime of hard work.
DICTIONARY Intestate: A situation in which a person has died without a will. Intestate succession: The legal distribution process that occurs when someone dies without a will.
Other Pitfalls of Not Planning
You may agree with your state's succession laws, and that would make sense. Most states try to draft their rules to represent what the average person would want. Generally speaking, most married couples would want their spouse and young children to have first dibs. Most single people, meanwhile, probably want their parents to benefit first, followed by their siblings.
Even if you agree with your state's succession plan, however, you should not leave these decisions to the state. This tactic can result in a number of other not-so-obvious problems that could have been controlled with proper planning.
Here are some of the commonly ignored pitfalls of state control:
Your teenage children are rolling in dough: If the state leaves your assets to minor children, it's theirs to spend as they please once they reach the legal age of majority-generally eighteen years old. You may have wanted Junior to spend his inheritance on college, but the state won't stop him from spending it on fast cars and trendy nightclubs (or worse) if he so chooses.
The family heirlooms are callously divided: The state doesn't care that you promised your little sister she could have Mother's coveted pearl necklace if you die. Personal belongings will be divided in the same manner as the other assets: The spouse gets first dibs, then the children. If heirs fight over your belongings, the state could order that everything be sold and the family divide the profits, in which case sentimental value takes a backseat to monetary value and that priceless pearl necklace is just another dollar figure.
The tax bill is as high as it could be: The state doesn't care about minimizing estate taxes-and for good reason: Death taxes go straight to the state coffers. If you are lucky enough to have a lot of money, your heirs can pretty much be sure that they'll see the maximum possible tax rate levied against the estate.
Your beloved pet is left homeless: Pets are legally considered property and, therefore, dealt with in the same way as property. Whoever gets control of your companion animal can do with it as he or she pleases, including sending Fluffy to the pound where she may be put to sleep.
Your family is left penniless: By not planning, you also risk leaving your family in financial trouble. Estate planning isn't just about dividing your property. It's also about making sure you leave your family members with the financial support they may need in your absence. You may not have enough money to ensure your family's lifestyle if you die. Planning gives you the opportunity to tally your assets-including debts-and determine whether your family's financial needs could be met if you died tomorrow. (And if not, you may need to consider life insurance to fill in the gaps.) People with young children often find that they don't have enough to provide for their kids, especially if that equation involves college tuition.
The new spouse gets all your money: If your spouse remarries, your replacement spouse may have free rein to spend the inheritance as he or she pleases. If your former spouse dies before your replacement dies, your assets could become part of his or her estate. In other words, you and your former spouse's intended beneficiaries (meaning the people you actually want to get your stuff, like your kids) could get nothing.
Probate costs more: Dying without a will can result in a more costly probate process, because it can create barriers to simpler probate proceedings. (Probate is the court-supervised process intended to ensure that your wishes are carried out when there's a legal will, and that your estate is handled according to state law if there isn't a will.) Formal probate is more expensive because, as one lawyer put it, you can't sneeze without permission from the court. (See chapter 9 for more information.)
Appointing a Guardian for Your Minor Children
Perhaps even more important than deciding who gets what from your property is deciding who gets to take care of your minor children if you die. If you don't name someone to raise your young children, the state will do it for you.
The person who gets the job may not be the person you wanted. Furthermore, you risk opening the door to nasty custody battles. Relatives from both sides could present equally compelling cases as to why they should be granted custody. It would be up to a judge to listen to the various cases and decide who'd be best suited to raise your family.
Hopefully, it won't come to this. And it usually doesn't. When one parent dies, the other parent will generally take over. But what if both parents die simultaneously? It's rare, but it does happen. That's not all. You need to plan for an alternate caretaker if you're the only living parent, or if the other parent is alive but unfit to take care of your children. (See chapter 3 for more information.)
No matter your situation, you should not delay drafting a will and naming a third-party person to be your children's guardian. The guardian will act as their new parent, feeding them and putting a roof over their heads until they're legal adults. You should also name a custodian (or trustee) to manage the children's inheritance and monitor their spending. (The guardian and the custodian can be the same person, but there are a lot of good reasons to name them separately. I'll get to that later.)
Excerpted from What Your Lawyer May Not Tell You About Your Family's Will by Kaja Whitehouse Copyright ©2006 by Kaja Whitehouse. Excerpted by permission.
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Posted June 20, 2006
This book really helped me understand all the basics of estate planning. The author explains in very plain terminology each aspect of this very complicated task. I couldn't even begin to think about discussing my needs with my attorney because I wasn't sure what I needed to think about. This book really helped me organize my needs and avoid dangers that never occured to me.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.