Estate Planning for the Middle Class: Part 2—The Will

Although there are many complex estate planning strategies, it is often the simplest items that are overlooked.

The Will

First of all, what happens if you die without a will, or intestate? State intestacy laws would apply. These laws may not distribute your estate as you would have wished, but rather according to a formula devised by state legislators. All property that would not pass by rule of law or named beneficiary passes by law of intestate succession—the terms of which vary by state, but all depend on marital status and degrees of blood relation. You could also be partially intestate if there is a valid will, but it doesn't include all property.

Most people would assume that all of their estate would automatically go to their surviving spouse—and it's possible that a spouse may in fact need all of the estate's assets—but in fact a significant portion may go to estranged, ungrateful, or imprisoned children. It is then impossible to persuade the court to do otherwise; it must distribute assets strictly according to the law, in the absence of any declared wishes on the part of the deceased—in other words, a will!

Other problems can arise from intestacy, such as the failure of a single parent to name a guardian for their minor children. Wouldn't you like to decide who gets to raise your children, rather than let the court do it? The court may decide that your hard-working, drug-addicted sister is a better choice than your good-hearted, but unemployed, brother.

There may also be no way to get money to a favorite sibling, niece, or charity without a will. Obviously, it's preferable to have your assets go to whom you choose, rather than to whomever the state has chosen for you.

The state, however, is not totally heartless. All states set aside a family allowance for the care of a surviving spouse and minor children while the estate is being settled. Most states also allow a homestead allowance to protect real or personal property from unsecured creditors. This allowance varies widely. It could be $100,000 that's protected in Montana, for example, but only $5,000 in Ohio. However, note that your residence is not protected from secured creditors—for example, the bank that holds your mortgage.

Although many assets can and do pass outside of the will, you should not understate the importance of having a will. While it's possible to 'do-it-yourself' with online help and prepackaged software, it is inexpensive—and advisable—to have an attorney prepare one, since it's often viewed as a loss-leader for obtaining a new client (and an eventual estate).

What does a will need to include to be valid? First of all, only about a third of all states recognize a handwritten, or holographic, will as valid. Secondly, although oral wills (deathbed declarations, or nuncupative wills) may work in movies, fewer than half the states allow them.

Generally, a valid will must include a signature, a date, a statement of legal capacity to make a will, witnesses (preferably not someone with an interest in the estate), and typically a named executor (whose job it is to carry out the terms of the will, pay any debts and taxes due, etc.). A will may also include various kinds of testamentary trusts, which take effect and are irrevocable at death.

The probate process is the proving and execution of a will under the supervision of a court. Although there can certainly be delays, the process is not usually as difficult, costly or time-consuming as it is sometimes made out to be. It is basically an orderly way of making sure that your debts and obligations are settled, your assets are transferred, and your wishes are fulfilled.

Pros and Cons of Probate

There are many advantages to probate: The will is validated ("proven”), and an inventory and valuation are made of the estate's assets and liabilities. Real property title is proven as well. There is a legal process for settling disputes, as well as providing for minor children and others with special needs. The actions of the executor or administrator are supervised by the court, including the handling of creditors.

On the other hand, the public nature of the process means that all of the above issues—property disputes, creditors' claims, and family—are public knowledge. The process can sometimes be lengthy and costly, depending on many factors. If court supervision of guardianship is required, for example, there can be a great deal of added expense, along with a lack of flexibility. Property in other states or countries could be subject to ancillary probate, adding to the time and expense required.

However, the expense and duration of probate can be reduced with proper estate planning—including choosing your financial planner, attorney, and executor wisely.

FPA member Tim Sobolewski, CFP®, is President of The Financial Planning Center in Amherst, N.Y.