Estate Planning: Last Will and Testament
A last will and testament is a legal document that outlines your final wishes in terms of where you want assets to go, as well as other important information such as naming a guardian for your minor children, taking over the management of your financial interests and accounts, and whether you want to make charitable donations.
Writing a last will and testament can give you some control over what will happen to your property and assets when you pass away. But even though a will is an important component of estate planning, having only a will won’t typically protect your loved ones from the expensive, public, and time-consuming probate process.
How a Last Will and Testament Works (and What It Won’t Do for You)
The instructions that you leave in your last will and testament are carried out after you pass away. Your will should name an executor who is responsible for administering your estate upon your death. The responsibilities of the executor include ensuring that all of the assets in your last will and testament are accounted for, as well as transferring these assets to the appropriate party (or parties).
There are numerous assets that may be included in your estate, such as:
- Stocks
- Bonds
- Money markets
- Mutual funds
- Real estate
- Collectibles
- Vehicles
The executor of your estate must be over the age of 18 and have no previous felony convictions. But as long as they meet these criteria, the executor can be anyone that you choose. If you do not name an executor, the court will appoint one.
It is up to the executor to estimate the total value of your estate. They may use the date of death value, with the value on an alternate date as provided by the IRS (Internal Revenue Service).
In addition to managing all of the assets in your estate, the executor must also ensure that all of the debts are paid. These could include a mortgage, utilities, credit card balances, taxes, and other debt obligations.
Likewise, the executor must also file a final income tax return on behalf of the deceased. Estate taxes – if there are any – will become due within one year of the date of death. If there are any assets left after taxes are paid, it is then up to the executor to distribute them. If you do not have any assets or property, the probate process may not be necessary.
What Happens If You Don’t Have a Will?
If you pass away without having a last will and testament in place, you are said to have died intestate. In this case, your estate will be settled by the courts – which includes the distribution of all your property and assets. When this occurs, the assets may not go to the intended individuals.
If you have no will or any heirs, then any of your remaining assets will go to the state. The process of transferring assets to the government is referred to as escheatment. This can also occur if you have assets that have not been claimed. The reason behind escheatment is that property and assets always have a recognized owner. Â
What is Probate and Why Should You Avoid It?
Even if you have a detailed last will and testament in place, your property and assets may still end up in probate. This is a legal process for reviewing the assets of a deceased person and determining who will inherit them.
Probate usually begins with analyzing whether or not you have a legalized last will and testament that provides instructions regarding the distribution of your belongings. Your executor (if you have named one) will have to file the last will and testament with the probate court. This typically initiates the probate process.
States have different rules regarding the deadline for filing a deceased person’s will. Once the probate process starts, it could take up to two years to get everything sorted out – including the asset transfer.
Probate can also be costly, sometimes taking up to 15% of the value of your estate in fees. This leaves less for your loved ones to inherit. It can also be a public process. This is because probate files are a matter of public record, so anyone is allowed to read this information.
While accessing this type of information used to only be done by going to the courthouse in person, people can now search these types of files online – and this could leave your estate vulnerable to more claims against the assets. So, it can help to have a good solid plan in place so that your assets remain protected, and that they ultimately go to their intended recipient(s).
Just having a will in place, though, can provide you with a false sense of security. That is because assets can still go to probate. With that in mind, there are many different types of trusts that may be used to reduce (or eliminate) taxes, as well as to keep your personal financial information private.
There are some ways that at least some of your assets could bypass the probate process. This is by adding beneficiary designations to certain financial vehicles, as well as establishing Payable on Death (POD) or Transfer on Death (TOD) on various items.
As an example, life insurance policies list one or more beneficiaries. Because beneficiary designations can bypass probate, the proceeds from a policy pass directly to the beneficiary/beneficiaries that you have named. (In addition, life insurance proceeds are usually received by beneficiaries free of income taxation.)
Many annuities will also include a death benefit that is paid out to a beneficiary in the event that the annuitant (i.e., the income recipient) has not yet received all of the contributions back before they pass away. (Unlike life insurance proceeds, though, death benefit funds from an annuity can be taxable to the beneficiary.)
Another strategy for bypassing probate – regardless of whether or not you have a will in place – is to add a TOD or POD. For example, some bank and investment accounts allow for a transfer on death designation that allows you to name a beneficiary or beneficiaries.
In this case, the named individual(s) will simply take over the account. The POD is similar to the TOD. However, the POD doesn’t pertain to investments like stocks, bonds, and mutual funds.
How to Draft a Last Will and Testament
Today, there are many websites that offer templates for drafting last wills and testaments. But even though these can be convenient and inexpensive, it is typically recommended that you have a professional (or team of professionals) draft a custom document that is geared towards your specific needs and objectives.
These team members should ideally include a financial, legal, and tax professional. You should also include some family members in the discussion so that they have an idea of what your intentions are, and they know what to anticipate in the future upon your passing.
Putting Your Comprehensive Estate Plan in Place
Having a last will and testament is important. But it is just one part of a comprehensive estate plan. Other key estate planning components include:
- Reducing – or even eliminating – estate taxes by establishing trust accounts and naming one or more beneficiaries
- Naming a guardian for any minor children and/or other dependents (such as a special needs loved one or dependent elderly parent)
- Naming beneficiaries on financial plans such as Individual Retirement Accounts (IRAs) and employer-sponsored retirement plans like 401(k)s
- Purchasing life insurance to pay for your funeral and other final expenses, as well as the payment of large debts (such as a home mortgage) and the replacement of income for your survivors
- Setting up (and pre-paying) funeral and burial/cremation arrangements
- Establishing annual gifting to loved ones and/or charitable organizations
- Setting up a durable power of attorney for directing other investments, property, and assets
- Regularly reviewing your plan in order to determine whether or not it is still on track with your current situation and objectives (your plan should be reviewed at least once per year, but more often if you have experienced a major life change such as marriage or divorce, the birth or adoption of a child or grandchild, the death of a spouse, and/or the purchase or sale of a home or business)
Because there is not a one-size-fits-all strategy that works for everyone across the board, it is recommended that you work with a team of professionals when you are drafting a will and setting up an estate plan.
If you’d like more information on how to get started, or even if you just have questions and would like to talk with an estate planning specialist, feel free to give us a call at or send us an email by going to [email protected]. We look forward to assisting you.
