When a Basic Will Is Enough
By and large, if you are under age 50
and don't expect to leave assets valuable enough to be
subject to estate taxes, you can probably get by with
only a basic will. But as you grow older and acquire
more property, you may want to engage in more
sophisticated planning -- we go into these details
below.
Take a common situation where a husband and wife want to
leave their property to each other or, if they die
together, to their children in equal shares. They also
want to name a personal guardian for their children.
They can safely make simple wills themselves without
hiring a costly expert.
Here are a few other examples of real-life situations
where a basic will is all that's needed.
Heather and Jerome, in their late 30s, own a home, two
cars, and some savings. Their net worth totals $400,000.
They have one child, Mark, age 11. Each prepares a will
leaving all his or her property to the other. If they
die at the same time, Mark is to receive all their
property. Heather and Jerome agree that Heather's
brother will care for Mark and manage the property until
Mark turns 18.
Sam, a widower with three grown
children, owns property with a net worth of $510,000. He
creates a will leaving all his property equally to the
children. He specifies that if any child dies before
him, that child's share is to be divided equally between
the surviving children.
Barbara is a single mother with two
teenage children. Though she's not on great terms with
her ex-husband, he's a decent father and pays child
support more or less on time. Barbara's will leaves all
her property equally to her children. Because she does
not want her ex-husband managing money left to her
children if she dies, she uses her will to appoint her
sister Debbie to manage each child's property until that
child turns 18.
Will a Basic Will Avoid Probate?
No. If you leave anything more than a
small amount of property through a will, probate court
proceedings will probably be necessary after your death.
Although it varies from state to state, probate can take
six months or a year and eat up three to five percent of
your estate in lawyers' and court fees. And your
beneficiaries will probably get little or nothing until
probate is complete.
But if you need only a basic will, you have little
reason to concern yourself now with probate. If you're
relatively young and healthy and you don't have piles of
money, your real concern is to make legal arrangements
for the statistically unlikely event that you will die
suddenly and unexpectedly. You've almost certainly got
plenty of time to plan for probate avoidance later.
Is a Basic Will for You?
If the following statements describe
you, a basic will is probably enough:
- You're under age 50.
- You're in pretty good health.
- You don't expect to owe estate
tax at your death..
On the other
hand, if one of the following applies to your situation,
then you probably need something more than a basic will:
- You expect to owe estate tax you
die or when your spouse does.
- You want to control what happens
to property after your death -- for example, you
want to leave some property in trust for your child
and have it go to your grandchildren when your child
dies.
- You have a child with a
disability or other special need that you wish to
address in your estate plan.
- You have children from a prior
marriage and you fear conflict between them and your
current spouse.
- You think someone might contest
your will, claiming that you were not mentally
competent when writing it, or that the will was
procured by fraud or duress.
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Do I Need More Than a Will?
Learn whether you need a trust, power of
attorney, or health care directive in addition to a
will.
Most Americans don’t have a will, to say nothing of a
more comprehensive plan to avoid probate or save on
estate taxes. Do you need to start planning what happens
to your estate when you die? It depends on your age,
health, wealth, and innate level of caution.
We've sorted our tips into broad categories of family
situation and age. But keep in mind that age is an
imprecise proxy for life expectancy, which is affected
by all sorts of other factors -- smoking, extreme
sports, and driving a motorcycle, for example. It's up
to you to add or subtract a few years based on your
health and lifestyle.
You're in Your Twenties or
Thirties and Single
At your age, there's not much point in
putting a lot of energy into estate planning. Unless
your lifestyle is unusually risky or you have a serious
illness, you're unlikely to die for a long, long time.
If you're an uncommonly rich twenty- or thirty-something
though, write a will. (Bricks can fall on anyone.) That
way you can leave your possessions to any recipient you
choose -- your boyfriend, your favorite cause, the
nephew who thinks you're cool. If you don't write a
will, whatever you leave behind will probably go to your
parents.
You're
Paired Up, But Not Married
If you've got a life partner but no
marriage certificate, a will is a must-have document.
Without a will, state law will dictate where your
property goes after your death, and your closest
relatives will inherit everything. Unmarried partners
generally get nothing unless you have registered as
domestic partners or entered into a civil union (allowed
only in some states), in which case surviving partners
can inherit just like surviving spouses.
Another option to make sure that your partner isn't left
out in the cold after your death is to own big-ticket
items, such as houses and cars, together in "joint
tenancy" with right of survivorship. Then, when one of
you dies, the survivor will automatically own 100% of
the property.
You Have Young Children
First and foremost, get yourself a
will. A will allows you to leave your property to
whomever you choose and, more importantly, names a
guardian to care for your children. The guardian will
take over if both you and the other parent are
unavailable. If you fail to name a guardian, a court
will appoint someone, possibly one of your parents.
Note that if you don’t have a will, some of your
property may go not to your spouse, but directly to your
children. The problem with the children inheriting
directly is that the surviving parent may need to get
court permission to spend or invest the money -- a waste
of time and money in most families.
Second, think about buying life
insurance to replace your earnings, just in case. Term
life insurance is relatively cheap, especially if you're
young and don't smoke. You can shop for the best bargain
online, by consulting free services that compare the
rates of lots of companies.
You're in Your Forties
This is the time when most people
consider estate planning in earnest. Keep in mind that
your assets and what you want to do with them may change
in 10 or 20 years -- be prepared to revisit and change
your estate plan accordingly. First, create a will, and
then consider some of these other planning options:
Revocable Living Trusts
To save your family the cost (and
hassles) of probate court proceedings after your death,
think about creating a revocable living trust. It's
hardly more trouble than writing a will, and lets
everything go directly to your heirs after your death
without taking a circuitous and expensive detour through
probate court.
While you're alive, the trust has no effect, and you can
revoke it or change its terms at any time. But after
your death, trust property can be transferred quickly,
according to the directions you left in the trust
document.
Payable-on-Death Accounts
There are other, even easier ways to
avoid probate for some types of accounts: You can turn
any bank account into a "payable-on-death" account
simply by signing a form (the bank will supply it) and
naming someone to inherit whatever funds are in the
account at your death. You can do the same thing, in
almost every state, with securities and retirement
accounts.
Reducing Estate Taxes
If you have enough property to worry
about federal estate taxes, think about tax avoidance as
well. In 2008, only estates worth more than $2 million
are taxed. That amount is scheduled to increase to $3.5
million in 2009. (The estate tax is being phased out,
but its future is uncertain. ) If estate tax does take a
bite, it can be a big one: 45% of everything over the
exempt amount. Here are some ways to reduce estate tax:
Give your property away before death. One way to reduce
these taxes is to give away property before your death.
After all, if you don't own it, it can't be taxed. Gifts
larger than $12,000 per year per recipient are subject
to gift tax, at the same rate as estate tax. Still, an
annual gift-giving plan can reduce the size of even a
big estate, especially if you have a covey of kids and
grandkids. Gifts to your spouse (as long as he or she is
a U.S. citizen), direct payment of tuition or medical
bills, and gifts to a tax-exempt organization are exempt
from gift tax.
Create an AB trust (also called a bypass trust). Another
way to cut estate taxes is with trusts. Many older
couples use an AB trust to leave property to each other
for life, and then to their children. The surviving
spouse can spend trust income and, in some
circumstances, principal. An AB trust can shield up to
twice the exempt amount from estate tax.
Create a charitable or other trust. Charitable trusts,
which involve making a gift to a charity and getting
some payments back, can also save on both estate and
income tax. There are many other complex trusts; learn
about them on your own and then have an experienced
estate planning lawyer draw up the documents you want.
You're Over Fifty or Ill
Now is the time to take concrete steps
to establish an estate plan. First, the basics: Consider
a probate-avoidance living trust and, if you're
concerned about estate taxes, a tax-saving trust. (These
devices are discussed just above.) Write a will, or
update an old one.
Then take a minute to think about the possibility that
at some time, you might become unable to handle
day-to-day financial matters or make healthcare
decisions. If you don't do anything to prepare for this
unpleasant possibility, a judge may have to appoint
someone to make these decisions for you. No one wants a
court's intervention in such personal matters, but
someone must have legal authority to act on your behalf.
You can choose that person yourself, and give him or her
legal authority to act for you, by creating documents
called durable powers of attorney. You'll need one for
your financial matters and one for health care. You
choose someone to act for you (called your agent or
attorney-in-fact) and spell out his or her authority.
You can even state that the document won't have any
effect unless and until you become incapacitated. Once
signed and notarized, it's legally valid, and your mind
can be at ease.
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