Congratulations! You already have an estate plan.
Maybe you didn’t know it, but right now you already have an estate plan! Even if you’ve never written a Will or considered estate planning, you have a plan. Each state has developed an estate plan of last resort—called an “intestacy”—for residents who haven’t created their own plan.
The intestacy laws say that if you die and don’t have a Will, the state in which you live has a set system in place for distributing your assets. Many people believe that if you die without a Will the government will take your assets. Fortunately, this is not true! At the very least, your assets will stay within the family, but you’d better check the laws in your state—you might not like their plan for your hard earned assets!
What’s wrong with my default estate plan?
You do not want to be without an estate plan. Regardless of your state, their default plan is most likely not right for you. State laws vary, but in general they distribute your assets like this:
- Single without children. Most states give your assets to your parents. If your parents aren’t alive, your assets go to your brothers/sisters equally.
If you’d prefer your assets go to someone else, you need an estate plan.
- Single with children. There are two types of “assets” in this situation. There are your real assets (e.g., bank accounts, investments, real estate, etc.) and there are your children. All of your real assets go directly to your children equally. The more important question is always, “What happens to my children?” The answer to this question depends. If there is a living parent in the same household, he/she automatically becomes the guardian (assuming the child/children are under age 18). If this is not the case, it gets a little bit more complicated. If there is a living parent but he/she does not live in the same household, the court will most likely name him/her as the guardian, but not automatically. If there isn’t a living parent, a friend or relative will have to petition the court for appointment as guardian. If no one comes forward or the judge does not approve them, the children will be forced into foster care.
You might want your assets to go to your children, but do you want them to have complete control over them when they turn 18? On their 18th birthday, they can cash out and do whatever they want with the money. Most 18-year-olds are not mature enough to handle the responsibility of managing wealth. The very assets you worked so hard to accumulate and pass on to better their lives can be squandered very easily.
Larger sums can de-motivate a child. A friend in high school couldn’t turn 18 fast enough. His parents were both deceased and he was living with his grandparents. He skated by, getting mediocre grades and showing no interest in college or work. He rarely talked about it, but it would slip from time to time that he was going to have access to “a lot of money” soon. He was a smart guy. With a little motivation, he could have written his own check; instead he was just waiting for his birthday so he could cash the one that had been written for him.
The other issue to consider is the guardianship of your children. Wouldn’t you like to choose who has the responsibility of raising your children? Without an estate plan, you have little control over that decision.
- Married without children. This might shock you but, depending on your state of residence, only a third to half of your assets will go to your spouse. The rest go to your parents, if they are alive or to your siblings.
If you’re comfortable leaving only a third to half of your assets to your spouse, the state’s cookie-cutter estate plan may be right for you. Likewise, if you’re comfortable receiving only a third to a half of your spouse’s assets, the state’s plan might work for you. Most couples that learn that they could be “cheated” out of what they consider rightfully theirs are anything but comfortable with this formula. If you don’t agree with the state’s plan for your or your spouse’s assets, you need to create your own estate plan.
- Married with children. You might think that the surviving spouse gets all of the assets, but you’re wrong. Most states direct a third to half of the assets to the surviving spouse and the remainder to the children. If both parents die, a friend or relative will have to petition the court for appointment as guardian. If no one comes forward or the judge does not approve them, the children will be forced into foster care.
The married couple with underage children has some of the same problems facing the single person with children. In both cases, children get assets at age 18, which can de-motivate a child. If both parents pass away, both married and single parents face potential problems with guardianship. Again, if you like your state’s plan for your financial assets and your children, you don’t have to do a thing. On the other hand, if you’d prefer your spouse receive all of your assets, that your children have the guardian you choose rather than the one a judge appoints, or that your children are older when they receive an inheritance, you’d better develop your own estate plan.
On top of these disastrous problems, if you die without an estate plan of your own, you can’t eliminate or even minimize estate taxes.
The estate tax laws are pretty clear. They basically say, “If you put in the time to create an estate plan, you can reduce or eliminate the tax, but if you use the state’s cookie-cutter plan, we won’t give you any breaks.” Consider it a speeding ticket where you have two choices. You can do nothing and pay the entire fee or you can write a simple letter and get the ticket reduced or even waived. By crafting your own continuation plan, you can rest assured that your wishes and your goals are addressed during life and at death—and that you aren’t paying any more in estate tax than is legally required.
The proceeding blog post is an excerpt from The Six-Day Financial Makeover: Transform Your Financial Life in Less Than a Week!, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.