Will Basics

Over 70% of Americans do not have a will

Introduction

A will is a document you create to control who gets your property, who will be the guardian of your children, and who will manage your estate upon your death. 

The importance of a will cannot be overstated. More than likely a will is perhaps the most important legal document the average person will ever sign. Yet, over 70% of American adults do not have a will. Not enough time, can't afford an attorney, too busy to think about it - - are all common reasons why people do not prepare wills. Certified Document Solutions eliminates these reasons. 

Through our interview process, you will be asked a series of simple questions in plain English. We will generate a legally binding will ready for you to sign that is valid in all states. 

 

What Happens if You Die Without a Will

If you die without a will (known as "intestate"), the state, and not you, will decide how your property is to be distributed. In many states, your property will be distributed as follows: First, all of your joint property will pass to your spouse (if you have one). Second, your separate property will pass according to these rules:

  • If you have a spouse, your spouse receives:
    • All of your property if you leave no children, parents, siblings, nieces or nephews
    • Half of your property if you leave one child or one or more parents, siblings, nieces or nephews
    • One-third of your property if you leave two or more children
  • All property not given to a spouse is distributed to the following persons, in this order:
    • Your children
    • Your parents
    • Your brothers and sisters, or, if they are not living, their children
    • Your grandparents, or, if they are not living, their children (i.e. your uncles and aunts)
    • Children of your deceased spouse
    • Relatives of your deceased spouse
    • The State of your legal residence

Probate

Probate is the legal proceeding in which a court determines how an estate will be divided. The court will look at your Last Will and Testament in deciding how to distribute your property and will follow the will unless it is contested by your heirs. 

Some people think that a will precludes probate. This is not the case. A will is used in probate to determine who receives what property, who is appointed as guardians to any minor children, and who will be responsible for carrying out the wishes contained in the will. 

Generally, if an estate includes real estate or minor children, a formal probate action in court is required. In many states, however, if the value of the estate does not exceed $50,000, probate is not mandatory because other legal remedies are available. 

Probate can become very expensive if you do not plan correctly. For instance, if you do not have a will, the court will need to appoint an administrator. This can take a long time and cost a significant sum of money. The court will often charge a hefty fee (sometimes 5-15% of the value of your property) to probate your estate. 

To avoid probate, other estate-planning devices should be used. Joint tenancies, pay-on-death accounts and living trusts are some of the most common estate-planning methods.

 

Leaving Property to Heirs 

In a typical will, there are two types of gifts: specific gifts and general gifts. Specific gifts, which leave a particular object to someone, are optional – but they are the first gifts that are bestowed from a will. For example, a specific gift might read: "I leave to my daughter Cynthia my engagement ring." You can also choose to forgive a specific debt that someone owes you. 

A general gift leaves a percentage of all that remains after the specific gifts are made. The people who receive these general gifts are known as "principal heirs" because they usually receive the bulk of the estate after the smaller gifts and valuables are distributed. Usually, the principal heir is the will maker's spouse or closest relative. Each will must have at least one principal heir. For example, the principal heir clause might state something like, "All the rest of my property I leave to my spouse, Sarah." 

The personal representative you appoint in the will (known as the "executor") is responsible for dividing up the gifts and making sure that your wishes are carried out. 

However, there are certain types of property and accounts that are typically not distributed through a will. Instead, beneficiaries are named directly in their governing documents, and a contrary provision in your will naming a different beneficiary will have no effect. These include:

  • Life Insurance: The proceeds from a life insurance policy go directly to the beneficiary named in the policy.
  • Retirement Plans: Many people designate a beneficiary directly in their 401(k) and IRA accounts. Upon the death of the account holder, the funds will go to the named beneficiary.
  • Pay-on-death Bank Accounts: If your bank account has a designated beneficiary upon death, then generally speaking, that person will become the owner of the account upon the passing of the depositor.
  • Real Estate held in Joint Tenancy or Community Property: If the deed to your real estate indicates that title is held in "joint tenancy" or "community property," it means that two co-owners hold identical interests in the property at the same time. Joint tenants and owners of community property each have a "right of survivorship" to the other's share. As a result, if one joint tenant dies before the other, the deceased person's share automatically goes to the surviving joint tenant.

 

If you have questions or would like to change beneficiaries for your life insurance, retirement plans or bank accounts, please contact a representative from your insurance company, brokerage or bank.

 

Guardianships

 

If you have minor children, naming a guardian for them is one of the most important considerations in your will. Typically, if one parent dies, the surviving parent will remain responsible for the children. However, complications arise if both parents die simultaneously, or if one parent has re-married. Unless you name guardians for your minor children in your will, the court decides who takes custody of the children in those situations. 

If you have a spouse who is legally the mother or father of a child, then in most cases you should appoint the spouse as guardian. If you choose to appoint someone else, the court will balance your desires with what is in the best interest of the children. For example, if you are remarried and you want your current spouse (and not the natural parent of the child) to be the guardian, you may want to state your reasoning on why your current spouse would be better for the children. You have the option of writing these instructions in the Special Directives Clause. 

Guardians are responsible for a child's health, education and other daily needs. They are also responsible for managing a child's property (unless a testamentary trust has been created for the child – see "Testamentary Trusts" below).

 

Debts

Upon death a person's property is first used to pay for probate and funeral expenses, then to pay debts. Generally, all debts must first be paid before assets are distributed. Your outstanding credit card balances, for instance, will be paid before gifts are distributed to your heirs. 

A major exception to this general rule is for "secured debts," such as home loans or auto loans. In the case of secured debts, property can be distributed with its debt. In other words, let's say you have a car worth $10,000 and have a loan on the car of $5,000. You can leave the car to someone, but it will be that person's obligation to pay off the loan. 

What happens if you owe more than you own? In general, people cannot inherit another person's debts. If there is not enough cash to pay your debts, then all property will be sold to pay the debts, and no one will inherit anything. For example, say that you owe $12,000 in credit card debt but only have cash and property worth $10,000. In that case, the property will be sold by the court, and only $10,000 will be paid to the credit card issuer. 

You might be able to imagine a situation in which some property would have to be sold to pay off debt but there would still be assets left to distribute. This could lead to some difficult decisions that have to be made. The executor named in the will is responsible for making these decisions as to which pieces of property are sold. The Last Will and Testament contains a clause that directs your personal representative to pay off all debts and obligations as soon as practical, including all estate and gift taxes. 

What if someone owes you money? This money would usually be collected and added to your overall estate. However, you can always choose to forgive debt in a will. This would be similar to a specific gift, but instead of leaving something to someone you would be forgiving a specific debt.

 

Homes and Family Residence

A homestead is the permanent home of a person who: (1) is married and/or has minor children; and (2) owns the property in his or her name alone. Homestead laws generally state that the family home will become the property of the surviving spouse and minor children, free of the claims of creditors. 

If you have real estate that is a homestead, your will has no control over it. Upon your death, your homestead will automatically pass as follows:

1.     If you have both a spouse and minor children, your spouse gets the right to live in the home for the rest of his or her life, and your children get the home upon your spouse's death.

2.     If you have a spouse and no minor children, your spouse gets the home, no matter what your will says.

3.     If you have minor children but no spouse, your children get the home in equal shares, no matter what your will says.

An exception to the above rules occurs when you have a spouse and adult children. In this case, you may leave your home to your spouse alone. 

Whether a home is legally a homestead can be a difficult legal question. Because homestead property is property owned by one person alone, any property held jointly, as community property or in trust does not fall under these rules. If you do not want your home to be considered a homestead, you should set up title to the home jointly, or set up a living trust. It might be a good idea to consult an attorney if you cannot determine whether your home is homestead property.

 

Testamentary Trusts

If you are leaving property to minor children, you may want to consider leaving the property to them in a testamentary trust. This trust is used to hold property for the benefit of another. For instance, if you leave $10,000 to your child who is 12 years old, you could have the property placed "in trust" and name someone to take care of that property for your child until he or she reaches a certain age or finishes school. 

The person you name to take care of the property is called the trustee of the property, and your child is the beneficiary. The trustee is usually the person you appoint as the guardian to your children, but it can be someone else you appoint instead. 

Many rules apply to the trustee. For example, the trustee must act in the best interest of the beneficiary. The trustee cannot mishandle the property or use the property for his or her own benefit.

 

Amending and Revoking Your Will

You can make changes to your will or revoke your will at any time. There are, however, some very important rules to follow. One way to make changes to a will is to make a codicil, which is an amendment to a will. Another way is to make an entirely new will, which revokes and takes precedence over any older wills. A codicil is a separate document and must be signed and witnessed just like a regular will. Because of these formalities, it is usually easier just to make a new will. 

Be sure not to make any changes or markings on your will after it has been witnessed and signed. This is absolutely vital. If you cross out a person's name or add writing to a will that has already been signed, you risk making the whole will invalid. 

To revoke a will without making a new one, all you have to do is intentionally tear it up, deface it, burn it or destroy it. If this is done accidentally, then the will is not revoked. 

An old will cannot be revived once it has been revoked. If you make a new will (which revokes all prior wills) and then decide that you like your old will better, you would need to make a whole new will that replaces the new one and mimics the old one. Otherwise, all old wills are invalid.

 

Marriage, Divorce and Children

Certain events will automatically change your present will. These events are: (1) getting married; (2) getting divorced; and, (3) having or adopting children. 

If you get married after making your will and do not rewrite it, your new spouse automatically gets a share of your estate. The share is the same as if you never wrote a will in the first place. Exceptions to this rule are if you have a prenuptial agreement, if you made a provision in your will for your spouse, or if you wrote in your will that you specifically intended not to mention your prospective spouse. None of these exceptions are considered in the Last Will and Testament. Therefore, in the event an automatic change occurs, you should rewrite your will or seek the advice of an attorney. 

If you get divorced after you write your will, your ex-spouse is automatically deleted from his or her share of the will. However, you should probably not rely on this and rewrite your will. Otherwise your ex-spouse may contest the will, costing your estate a lot of money to defend. 

If you have a child after making your will and do not rewrite it, the child gets a share of your estate as if the will were never written in the first place.

 

Estate Taxes 

Estates are subject to two kinds of taxes: Federal Estate Tax and State Death Tax. 

The Federal Estate Tax has a minimum of 18% and a maximum of 55%. There is, however, an exemption from this tax if the value of your estate is below a certain threshold. In 2005, for example, an estate worth less than $1,500,000 would not be subject to estate tax. This exempt amount is increasing annually as follows:

  • 2005 - $1,500,000
  • 2006 - $2,000,000
  • 2007 - $2,000,000
  • 2008 - $2,000,000
  • 2009 - $3,500,000
  • 2010 - unlimited

The future of the estate tax is uncertain. Under current law, there will be no estate tax in 2010 – in other words, the exempt amount will be unlimited. This phase-out, however, could be short-lived; the estate tax is scheduled to be reinstated in 2011 unless further legislative action is taken. 

In some states (such as California), if you do not owe Federal Estate Tax then you do not owe state death taxes either. If you do owe Federal Estate Tax, then a portion of that amount would be paid to the state to satisfy the death tax. Your total tax liability would therefore remain the same. 

Example: If your estate is worth $1,600,000 in the year 2005 (thus, $100,000 over your exemption), then your total tax liability would be $23,800, divided in the following manner: $23,240 in federal taxes and $560 in state death tax (for a total of $23,800). The exact amount of these taxes is based on schedules provided by the government and varies state by state. You can go to the following website to figure out your tax liability: www.IRS.gov.

 

Credit Shelter Trusts

If you are married and your combined estate exceeds the federal estate tax exemption, then a credit shelter trust could reduce your inheritance taxes. With a credit shelter trust, each spouse can use their full estate tax exemption, which could effectively double the exemption. 

For example, consider a couple with $3,000,000 in total assets that wants to leave their property to each other if one should pass away. Upon the death of the first spouse, all property that is left to the surviving spouse passes tax-free. However, this leaves the surviving spouse's estate at $3,000,000. When the second spouse passes away, tax would have to be paid on the amount over the exemption ($1,500,000 taxed at a combined rate of 34.58% in 2005). 

With a credit shelter trust, the beneficiaries of the trust are the deceased spouse's other heirs -- usually the children. This way, if $1,500,000 is placed in the credit shelter trust by the first spouse, then all of those assets can pass to the children tax-free. However, the surviving spouse still obtains a life estate in those assets, which means that the surviving spouse can use it during his or her lifetime. In addition, the surviving spouse will have full use of all income generated by the assets, and can even use the principal for heath and maintenance. 

Upon the death of the second spouse, the remainder of the estate ($1,500,000) would fall below the exemption. Therefore, no tax would be owed. 

Due to the uncertain future of the estate tax, the credit shelter trust is discretionary. In other words, the surviving spouse can has the option to fund the credit shelter trust at the time the first spouse has passed away. Here's how it works: Under the IRS Code, the surviving spouse has the choice to disclaim, or reject, any property and assets left to him or her. All property that is disclaimed (up to the estate tax exemption limit) then would go to the credit shelter trust. 

With a mandatory credit shelter trust, the inheritance would automatically be placed into the trust, and the surviving spouse would not have any discretion to make a decision based on the tax laws then in effect.

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