Wishes Mean Nil without Estate Plans

By Mitchell J. Fielding
Analyst, mPower

In This Story What Happens without a Will? The Powers That Be The Estate Planner's First Step

Making choices now that protect your interests later is estate planning. The cornerstones of a secure future include a will or will alternative, durable power of attorney for property and/or health care, titling assets, guardianships, and trusts.

Knowing how these strategies work and who benefits from their use can help prepare you for crucial estate-planning decisions.

minute: read this article at a glance.

The best-known estate-planning tool, the one people usually ask about first, is a will. The question goes something like this: "Do I need a will for my property?"

Everyone should have a will. The most basic type is a holographic (handwritten) will. Drafting one is easy, since this type of will doesn't require a witness and is entirely written, dated, and signed in the will makers own handwriting. It can't be typewritten, word processed, dictated, or recorded on audio or video.

Intestate succession laws guide your state's probate courts on how to interpret your wishes. The courts distribute assets that are part of an individual's probate estate.

A holographic will is useful as a stopgap measure against the laws of intestate succession (probate). It prevents probate from applying to your estate, as long as your assets total under $60,000. If you would like your property to pass to a person unrelated to you by blood or marriage, to a charity or cause, or in a different proportion than your state's intestate succession laws provide, a holographic will provides a cheap, easy, and effective solution.

To find out what's included in your probate estate, as well as what the two other types of estates are, click here. (Estate Planning: Part One)

Probate court is a slow and public process, and assets distributed according to probate-court rulings usually got there in the first place because the deceased either had no will, or had a will but also had assets over $60,000. However, there are assets never subject to probate, as long as you name a person rather than your "estate" as beneficiary. 401(k)-plan assets, IRAs, and insurance policies will go to whom you want as long as you name them.

After calculating how much your estate is worth, keeping in mind what assets are included in your probate estate, you may find that your estate is valued over $60,000. If this is the case, you might want to think about drafting a statutory will. While a holographic will is effective for an estate of any size (Howard Hughes had one), it is not drafted by a professional and may not provide for the most effective distribution of your assets. Moreover, a holographic will may not repel challenges as successfully as a professionally drafted statutory will.

Statutory wills are designed to offer probate protection. Statutory wills comply with state requirements, are drafted by professionals, and are usually witnessed by two parties. They are more likely to withstand challenge in probate court and take advantage of tax law, thereby reducing costs to your estate.

What Happens without a Will?

If you don't have a will, the distribution of your assets will be decided by probate court. Besides the hassle factor, what's so bad about probate?

Probate horror story no. 1: Your children may squander their inheritance.

Imagine your children, as soon as they reach age 18, having complete rights to their entire inheritance. They can spend their assets as they see fit, with no supervision. No one can prevent your competent 18-year old from opting to purchase a Ferrari instead of college tuition.

Probate horror story no. 2: Your spouse may not get all your property.

Most individuals desire to leave all their property to their spouse, but intestate succession laws transfer all your community property and only one-third of your separate property to your spouse.

The remaining two-thirds goes to your children, parents, siblings, or next of kin. If your sole asset is your home, your spouse may find it necessary to sell this property in order to meet expenses.

Probate horror story no. 3: Your final wishes will not be recognized.

Intestate succession laws (and therefore, probate courts) completely ignore your charitable intentions and significant others.

Property only passes to blood relatives or spouses. If you die without a spouse or blood relative, your property, in its entirety, transfers to the state in which you live. No matter how much you'd like a certain organization, or individual, including a fiancé or domestic partner, to be the beneficiary of your estate, the state recovers it all.

One advantage of probate is that there are no planning costs. Simple state-statutory code (which instructs probate court) may be entirely sufficient for many individuals. For example, a 25-year-old unmarried person, with no assets other than an insurance policy with a named beneficiary, probably does not need the super-charged power of a formal estate plan.

The Powers That Be

There are estate-planning options that avoid probate and make your wishes known.

Titling your assets: Simply changing the title of your assets removes them from your probate estate.

This ensures that your assets, upon your death, will go where you wish, without being contested. Any property held as "Joint Tenancy with Right of Survivorship" is automatically titled exclusively in your co-owner's name upon your demise. For example, let's say you and your spouse own a house together. The house can be held in Joint Tenancy with Right of Survivorship, which essentially means you've titled that asset to your spouse. It will not be part of the probate estate.

Revocable living trusts: A trust is a transfer of authority over property.

The trustee must manage and distribute the trust property according to the terms of the trust.

In a typical living trust, the trustor would transfer all property to the trust and continue to manage it until death or incapacitation, and then the trustee would distribute the property as instructed.

A living trust is a will alternative and also revocable. This means it can be changed as often as you like during your life or even completely revoked.

Living trusts offer these advantages over wills: complete privacy and protection in the event of incapacitation. Living wills are, however, tax neutral, which means they do not have tax and/or asset-protection benefits, such as protection against creditors or lawsuits.

Pour-over will: For those who opt for a living trust, a pour-over will should be drafted.

This document controls the distribution of property not included in the living trust — for any reason. It acts as a safety net, limiting your estate's exposure to accidental omissions.

Living wills: These wills govern the withholding or withdrawal of life-sustaining support for an individual in the event of incurable or irreversible conditions.

Living wills are drawn up to make clear your wishes regarding medical treatment, are recognized in most states, and are not filed with a court. They can be handwritten and a copy can be held by friends, family, or the executor of your estate. In addition, living wills are expensive. They should only be drafted by an attorney who specializes in estate planning because state-trust laws differ and can be very complex.

The drawback to living wills is that they are highly contestable. Your friends and family could potentially challenge each other, saying that since you wrote the living will your wishes had changed; or, they could disagree regarding the actual intent of your wishes.

Durable power of attorney: For health care and property.

Health care: This document enables you to appoint someone to act on your behalf in making health-care decisions if you are unable to do so yourself.

It is frequently signed in conjunction with a living will. A durable power of attorney for health care authorizes the person you appoint to withdraw or withhold life-sustaining treatment if there is no hope of recovery.

Property: This document allows the person you appoint to make decisions regarding your property.

For example, the person you appoint could complete a real-estate transaction for you. Many banks and title companies require this document if you are unable to sign a deed yourself.

A power of attorney, for either health care or property, is called "durable" because it is effective even if you become incapacitated.

Appointment of guardians: A guardian is a court-supervised arrangement to manage the property of an incapacitated client.

The guardian is required to give periodic accountings to the court and obtain court approval before engaging in most property transactions. Guardians can be appointed to work in conjunction with a durable power of attorney for property or living trusts.

It is important to note that these estate-planning options are mutually exclusive, and the choices you make are sometimes irrevocable. Gifting assets to someone, or titling assets, with the Joint Tenancy with Right of Survivorship, is irrevocable estate planning.

The Estate Planner's First Step

Before deciding which option to use, you should have already decided on an estate-planning professional.

Feel free to interview several attorneys, and ask for references and referrals. A good advisor should ask you questions, customizing a plan for you. Estate-planning law is highly complex, continually changing, and provides a tremendous array of options.

Your state's bar association can help you find an estate attorney, and financial planners can also advise on estate-planning matters. Contact the Financial Planning Association for a reference at fpa@fpapanet.org.

A good advisor can help you design an estate plan that acts as the guardian of your wishes.

Another way to guard the value of your estate is by planning for estate taxes — the third, and final, article in this series will be dedicated to estate-planning tax strategies.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Wishes Mean Nil without Estate Plans

By Mitchell J. Fielding
Analyst, mPower

In This Story What Happens without a Will? The Powers That Be The Estate Planner's First Step

Making choices now that protect your interests later is estate planning. The cornerstones of a secure future include a will or will alternative, durable power of attorney for property and/or health care, titling assets, guardianships, and trusts.

Knowing how these strategies work and who benefits from their use can help prepare you for crucial estate-planning decisions.

minute: read this article at a glance.

The best-known estate-planning tool, the one people usually ask about first, is a will. The question goes something like this: "Do I need a will for my property?"

Everyone should have a will. The most basic type is a holographic (handwritten) will. Drafting one is easy, since this type of will doesn't require a witness and is entirely written, dated, and signed in the will makers own handwriting. It can't be typewritten, word processed, dictated, or recorded on audio or video.

Intestate succession laws guide your state's probate courts on how to interpret your wishes. The courts distribute assets that are part of an individual's probate estate.

A holographic will is useful as a stopgap measure against the laws of intestate succession (probate). It prevents probate from applying to your estate, as long as your assets total under $60,000. If you would like your property to pass to a person unrelated to you by blood or marriage, to a charity or cause, or in a different proportion than your state's intestate succession laws provide, a holographic will provides a cheap, easy, and effective solution.

To find out what's included in your probate estate, as well as what the two other types of estates are, click here. (Estate Planning: Part One)

Probate court is a slow and public process, and assets distributed according to probate-court rulings usually got there in the first place because the deceased either had no will, or had a will but also had assets over $60,000. However, there are assets never subject to probate, as long as you name a person rather than your "estate" as beneficiary. 401(k)-plan assets, IRAs, and insurance policies will go to whom you want as long as you name them.

After calculating how much your estate is worth, keeping in mind what assets are included in your probate estate, you may find that your estate is valued over $60,000. If this is the case, you might want to think about drafting a statutory will. While a holographic will is effective for an estate of any size (Howard Hughes had one), it is not drafted by a professional and may not provide for the most effective distribution of your assets. Moreover, a holographic will may not repel challenges as successfully as a professionally drafted statutory will.

Statutory wills are designed to offer probate protection. Statutory wills comply with state requirements, are drafted by professionals, and are usually witnessed by two parties. They are more likely to withstand challenge in probate court and take advantage of tax law, thereby reducing costs to your estate.

What Happens without a Will?

If you don't have a will, the distribution of your assets will be decided by probate court. Besides the hassle factor, what's so bad about probate?

Probate horror story no. 1: Your children may squander their inheritance.

Imagine your children, as soon as they reach age 18, having complete rights to their entire inheritance. They can spend their assets as they see fit, with no supervision. No one can prevent your competent 18-year old from opting to purchase a Ferrari instead of college tuition.

Probate horror story no. 2: Your spouse may not get all your property.

Most individuals desire to leave all their property to their spouse, but intestate succession laws transfer all your community property and only one-third of your separate property to your spouse.

The remaining two-thirds goes to your children, parents, siblings, or next of kin. If your sole asset is your home, your spouse may find it necessary to sell this property in order to meet expenses.

Probate horror story no. 3: Your final wishes will not be recognized.

Intestate succession laws (and therefore, probate courts) completely ignore your charitable intentions and significant others.

Property only passes to blood relatives or spouses. If you die without a spouse or blood relative, your property, in its entirety, transfers to the state in which you live. No matter how much you'd like a certain organization, or individual, including a fiancé or domestic partner, to be the beneficiary of your estate, the state recovers it all.

One advantage of probate is that there are no planning costs. Simple state-statutory code (which instructs probate court) may be entirely sufficient for many individuals. For example, a 25-year-old unmarried person, with no assets other than an insurance policy with a named beneficiary, probably does not need the super-charged power of a formal estate plan.

The Powers That Be

There are estate-planning options that avoid probate and make your wishes known.

Titling your assets: Simply changing the title of your assets removes them from your probate estate.

This ensures that your assets, upon your death, will go where you wish, without being contested. Any property held as "Joint Tenancy with Right of Survivorship" is automatically titled exclusively in your co-owner's name upon your demise. For example, let's say you and your spouse own a house together. The house can be held in Joint Tenancy with Right of Survivorship, which essentially means you've titled that asset to your spouse. It will not be part of the probate estate.

Revocable living trusts: A trust is a transfer of authority over property.

The trustee must manage and distribute the trust property according to the terms of the trust.

In a typical living trust, the trustor would transfer all property to the trust and continue to manage it until death or incapacitation, and then the trustee would distribute the property as instructed.

A living trust is a will alternative and also revocable. This means it can be changed as often as you like during your life or even completely revoked.

Living trusts offer these advantages over wills: complete privacy and protection in the event of incapacitation. Living wills are, however, tax neutral, which means they do not have tax and/or asset-protection benefits, such as protection against creditors or lawsuits.

Pour-over will: For those who opt for a living trust, a pour-over will should be drafted.

This document controls the distribution of property not included in the living trust — for any reason. It acts as a safety net, limiting your estate's exposure to accidental omissions.

Living wills: These wills govern the withholding or withdrawal of life-sustaining support for an individual in the event of incurable or irreversible conditions.

Living wills are drawn up to make clear your wishes regarding medical treatment, are recognized in most states, and are not filed with a court. They can be handwritten and a copy can be held by friends, family, or the executor of your estate. In addition, living wills are expensive. They should only be drafted by an attorney who specializes in estate planning because state-trust laws differ and can be very complex.

The drawback to living wills is that they are highly contestable. Your friends and family could potentially challenge each other, saying that since you wrote the living will your wishes had changed; or, they could disagree regarding the actual intent of your wishes.

Durable power of attorney: For health care and property.

Health care: This document enables you to appoint someone to act on your behalf in making health-care decisions if you are unable to do so yourself.

It is frequently signed in conjunction with a living will. A durable power of attorney for health care authorizes the person you appoint to withdraw or withhold life-sustaining treatment if there is no hope of recovery.

Property: This document allows the person you appoint to make decisions regarding your property.

For example, the person you appoint could complete a real-estate transaction for you. Many banks and title companies require this document if you are unable to sign a deed yourself.

A power of attorney, for either health care or property, is called "durable" because it is effective even if you become incapacitated.

Appointment of guardians: A guardian is a court-supervised arrangement to manage the property of an incapacitated client.

The guardian is required to give periodic accountings to the court and obtain court approval before engaging in most property transactions. Guardians can be appointed to work in conjunction with a durable power of attorney for property or living trusts.

It is important to note that these estate-planning options are mutually exclusive, and the choices you make are sometimes irrevocable. Gifting assets to someone, or titling assets, with the Joint Tenancy with Right of Survivorship, is irrevocable estate planning.

The Estate Planner's First Step

Before deciding which option to use, you should have already decided on an estate-planning professional.

Feel free to interview several attorneys, and ask for references and referrals. A good advisor should ask you questions, customizing a plan for you. Estate-planning law is highly complex, continually changing, and provides a tremendous array of options.

Your state's bar association can help you find an estate attorney, and financial planners can also advise on estate-planning matters. Contact the Financial Planning Association for a reference at fpa@fpapanet.org.

A good advisor can help you design an estate plan that acts as the guardian of your wishes.

Another way to guard the value of your estate is by planning for estate taxes — the third, and final, article in this series will be dedicated to estate-planning tax strategies.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.