What Happens If You Have No Will?
Most people believe they should have a will. Most people also know they should eat better, but that is not always the case. My favorite day to start a diet has always been tomorrow. Like a diet, there is no immediate benefit to creating a will, so it is easy to delay. The benefits of estate planning are often not realized for many decades so we think there is “plenty of time” to get it done. Unfortunately, the “right time” often isn’t realized until it has long passed.
Thinking about the end of one’s life is a daunting task
In many cases, individuals feel overwhelmed by the thought of executing a will and think they are not ready to make end of life decisions. Who knows if your children will want to inherit the family vacation home? How can we possibly think of someone else raising our children? Many of the worries that prevent the creation of these vital documents can be eradicated when you remember your will is not irrevocable and can be easily amended to accommodate changes. It is better to do something imperfectly than to do nothing flawlessly.
What about minor children?
If no parent is left to raise the kids, even though you think your sister, Mary, is a good choice, you are leaving this decision to the court. Having a will empowers you to make the decision as to who will care for your children.
Another common reason for not having a will is the belief that it isn’t necessary and it is expensive to create. However, when compared to the potential outcomes, inaction can be far more costly. Is it necessary? Perhaps not, but it certainly gives you and your heirs the most optimal results. In the absence of a will drafted by your attorney, the government has been kind enough to make rules on how to distribute your estate that are rarely optimal.
What does happen if there is no will?
Assets held jointly like a bank account will pass to the surviving owner. Accounts that name a beneficiary like an IRA, life insurance policy or 401k, will pass by contract to the designated beneficiary. Everything else will pass through the probate process. This article could become a book if we discussed everything that could go wrong or has gone wrong during the probate process, so we won’t delve into the horror stories, except for one. Remember when Minnesota’s beloved Rock star, Prince, passed away? Did you know that 195,000 people made claims to be related to Prince? A lot of time, expense, and frustration could have been saved with a will.
Having a will can avoid unnecessary taxes
The first $5.49 million ($10.98 million for a married couple) passes to your heirs free of federal estate tax. That excludes approximately 99% of the population. But the threshold for estate taxation is much lower in Minnesota. In 2018, estates of $2 million or more ($4 million for a married couple) could incur a Minnesota estate tax at a rate of 10% -16%. Let’s consider this hypothetical example: Bob and Susie have a $4 million estate. Bob dies unexpectedly. Everything passes to Susie free of estate tax, leaving Susie with $4 million in total assets. The following year Susie has an accident and dies when the estate tax exemption remains at $2 million. Unfortunately, Susie will incur an estate tax on $2 million after her $2 million estate tax exemption is applied, which equates to a Minnesota estate tax of $240,000.
If planning had taken place before Bob died, what could have been the result with properly executed estate planning documents? Bob could have left some of the assets to a Trust instead of directly to Susie. By leaving assets in Trust, Susie could have been able to use income generated by the Trust assets or enjoy any property owned by the Trust, and Susie wouldn’t have been subject to estate tax on her death. In practical matters, by having a will, Susie would have had the same use of the assets and the same income, but avoided taxes. At Susie’s death, her taxable estate could have been $2 million instead of $4 million. With Susie’s remaining $2 million estate tax exemption, zero dollars would have gone to the Department of Revenue.
Do you have charitable intentions? Do you own a business? Do you have dependent children? Do you have art or pets for which you want to make special considerations?
Wills provide order in a time when order is most needed. Wills are a tool to allow you to be a good steward of your life’s hard work, but more importantly they are a way for you to let your wishes be known. You have the opportunity to decide how your assets are divided and by extension you have the opportunity to immortalize your values for future generations. Someone sitting in the shade today is only possible because someone else planted a tree a long time ago.
We’ve briefly discussed some topics that can be addressed in a will. Each family has unique needs. Here is a list of other common situations wills can be tailored to address:
Special needs children/ trusts
Probate court avoidance
Tax avoidance/ apportionment
Having a will, provides a game plan for life’s unexpected events.
Your will can be amended to keep up with changing circumstances. Equally as important as creating a will is the process of periodically reviewing your important documents with your advisers. Your adviser’s job is to keep up with current laws. For instance, Minnesota recently approved new trust laws, which provide even more flexibility in drafting your important documents.
Time and planning allow you to take advantage of the tools available, but planning with limited time removes many of the tools advisers use to put you and your family in the best situation.
This information is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor or plan provider.