While calling your attorney and scheduling an appointment to discuss your Will and estate plan may not be at the top of your “To Do” list, it probably should be. Many people think that having a Will is not necessary, which may explain why a recent Harris Interactive poll found that almost 60% of adults do not have a Will. But, there are many common misconceptions about estate planning and administration that, once corrected, may convince you that executing a proper Will – or updating your existing Will – should rank a bit higher on the To Do list.
1. If a person is married, their spouse will inherit all of their assets. Under the laws of North Carolina and South Carolina, if a person dies without a Will and is married, their spouse may not inherit all of their assets if survived by (1) a child or children, or (2) a parent. Thus, only if a person is married, has no children and is not survived by a parent does the spouse inherit all property.
Let’s assume a person dies owning a bank account with a balance of $150,000, and is survived by spouse and a parent. Under North Carolina law, the surviving spouse will receive $50,000 plus ½ of the balance – in other words, $100,000, and the parent will receive $50,000. For many people, this would not reflect their intentions. But without a valid Will, distribution of the property effectively is controlled by State law.
2. My spouse will inherit all of my assets and use the assets to take care of my minor children. Unless a person has a Will that directs that the assets of their estate be held in trust for the benefit of minor children, assets that are inherited by a child, as a minor, will be held in a custodian account until the child attains the age of 18 – and then the assets are distributed outright to the child. For many parents, the thought of their 18-year-old receiving a large sum or money is cause for concern.
Let’s use our example from above, but assume instead that the person is survived by a spouse and two minor children. In this case, the spouse receives the first $30,000 plus 1/3 of the balance, or $70,000. The balance of $80,000 will be divided equally between the two minor children (for $40,000 each) and held in a custodian account until each child attains the age of 18. Again, many people would find this distribution scheme to be contrary to their intention – as the surviving spouse in this case receives less than ½ of the assets of the estate, and the children receive a considerable amount at a fairly young age.
Additionally, consider that assets inherited by a surviving spouse are subject to claims of the surviving spouse’s creditors or may be inherited at the surviving spouse’s death by someone other than your children – such as may be the case if the surviving spouse remarries and/or has children from a prior or future relationship. For these reasons, individuals with minor children or who have had several marriages should strongly consider executing estate planning documents that protect the interests of their children.
3. The assets of my estate will be inherited directly by my spouse (or heirs) and the Court does not need to be involved. Very simply, probate is the process by which title to assets transfers upon someone’s death. Probate is a Court process and requires reporting and supervision by the Court – and certain costs and fees. Thus, if a person owns a single asset (a share of stock in a public or closely held business) or account (with a bank) in their name, alone, probate is required and Court involvement is unavoidable. Further, if a minor is a beneficiary of the estate, and there is not a Will waiving bond, the Court may require the executor to post a bond to administer the estate. A bond is costly to obtain, and non-refundable, and can easily be avoided by having a properly drafted Will. For individuals who strongly desire to minimize the probate process for their estate, more advanced planning may be necessary – including the execution and funding of a revocable trust.
4. My estate will not be subject to Estate taxes so I don’t need a Will. Yes, any assets inherited by a surviving spouse are not subject to the estate tax, and if your estate is less than $5 million it generally will not be subject to the estate tax. For those people with assets over $5 million, a proper Will is essential. And before you say “I don’t have $5 million of assets,” don’t forget to include: (1) the value of your house, (2) your IRA or 401(k), and (3) the death benefit on any life insurance.
Further, for individuals whose assets are valued in excess of $5 million, they should be cognizant that their estate may be subject to an estate tax because they do not have a Will. Let’s review our example from above, where a decedent is survived by a spouse and two children. However, assume, instead, that the estate is valued at $9 million. Again, the surviving spouse will inherit $30,000 plus 1/3 of the balance – or $3,020,000. The balance of $5,980,000 will be inherited by the surviving children, except that only $5 million of this amount will be exempt from estate taxes, so that the estate will owe taxes on $980,000. A properly structured estate plan could avoid the imposition of estate taxes in this case.
5. I can always change my documents later. A person must be alive and competent to change their Will or estate planning documents. Once a person becomes incompetent, their estate planning documents effectively become irrevocable. Incompetence can occur as a result of the decline of mental capacity due to age, or as a result of an accident. In addition to having a proper Will, without an executed financial power of attorney, a Court proceeding may become necessary in order to appoint a person to manage the financial affairs of an incompetent individual, which takes time and results in legal and Court fees. Therefore, maintaining complete and current estate planning documents is critical to the proper administration of a person’s estate after death and financial affairs during life.
In connection with the preparation and execution of any estate planning documents, careful review of asset ownership and beneficiary designations on qualified plan accounts and life insurance policies is essential and we discuss these matters with our clients as part of our estate planning services.
Because of the importance of these issues, we hope that you will take the time to call one of us to review your personal estate planning situation.