The most important element in any estate plan is the will. With a will, you control the disposition of your estate. Without a will, your estate will be distributed under your state's intestacy law, which determines who gets what without regard to your wishes or your survivors' needs.
Frequently, these laws produce undesirable results. Under most state intestacy laws, if you were to die without a will leaving a spouse and children, only about one-third or one-half of your probate estate would go to your spouse. The rest would be divided equally among your children. However, you might want your spouse to get everything, or you might not want your children to get equal shares. You might want specific assets to go to certain individuals or special conditions to be met before funds are distributed to some individuals. You might want income from property to go to one person for a time, and the property ultimately to go to someone else. If you are not survived by a spouse or children, distant relatives or relatives from whom you are estranged might end up with your assets; your loyal friends, household employees, and favorite charities would get nothing. A will can take care of all of these and other problems.
Avoiding an Estate Tax Disaster
Distributing your property under state intestacy laws also might create an estate tax disaster. Property that passes to your spouse is not subject to estate tax. But the portion of your taxable estate that passes tax-free to others is limited. The amount exempted from tax by the unified estate and gift tax credit is $675,000 in 2000, and it increases over the next six years until it reaches $1 million in 2006.
If your estate is distributed under your state's intestacy law, too much of it might go to beneficiaries other than your spouse and be depleted by estate tax. With a will, there are many ways to pass property according to your intentions while minimizing estate taxes. Some of these strategies involve the use of trusts that may be created under your will. A will also allows you to direct which beneficiaries will bear the burden of the estate's debts and taxes.
Providing for Minor Children
If you have minor children, you need a will to appoint someone you know and trust as a guardian for them. And in your will, you usually can let that person serve without posting a bond. Without a will, the probate court appoints a guardian to hold and manage the children's property while they are minors. That person might not be the one you would want, and the expenses charged to the estate usually will be greater.
Naming Personal Representatives
Having a will also allows you to name an executor or personal representative to see that your plan is carried out. You can also name co-executors or alternative executors. These individuals (or institutions) gather the estate's assets, pay its debts, taxes and expenses, sometimes selling off assets, and distribute property and money according to the terms of your will. Without a will, the person appointed as your personal representative may not be someone you would want. And with a will, you can waive the usual requirement that the personal representative post a bond before serving.
A will cannot accomplish your objectives if it is rejected when filed for probate. To avoid this, certain formalities must be complied with when your will is signed and witnessed, and any person who could benefit under your will should not be a witness. In addition, affidavits and memoranda often are prepared as evidence of the will-maker's and the witnesses' competency. Taking care of these details correctly helps avoid expensive will contests, which, if successful, can thwart your wishes.
It is important to note that a will cannot dispose of property that passes outside of your probate estate. For example, property that you own jointly with right of survivorship passes directly to the surviving joint tenant on your death. Life insurance proceeds and your IRA and qualified retirement plan assets pass directly to the persons you name as beneficiaries under the policy or plans. However, if you name your estate as the beneficiary of a life insurance policy or retirement plan, those assets become part of your probate estate and are distributed as directed in your will. The disposition of your nonprobate assets may also have important estate tax consequences.
If you already have a will, you may need to make some changes to it. Estate tax law changes may require a rethinking of your estate plan. In addition, people's lives are rarely static. If you have moved to another state, had a change in your family's composition (through marriage, divorce, birth, death, adoption, etc.), or had a significant increase or decrease in net worth, you may need to change your will or make a new one. Changes in the financial, medical, or family status of your beneficiaries, or named personal representatives or guardians, also may require a change in some will provisions. Amendments cannot be made informally. Whether your existing will is revised by use of a supplement called a codicil, or your old will is revoked and a new one drawn up, the same important formalities must be observed.