Getting Wills Right
No one likes to think about dying, but it's very important to be ready for it. That means preparing a will, so everyone knows what you want done with the assets you leave behind to avoid battles over who gets what.
On The Early Show Thursday, financial guru Ray Martin explained how to go about it, and cover all your bases when you do.
DOES EVERYONE NEED A WILL?
Many of us figure we don't have enough money and assets to worry about a will, and assume it's something we only need when we're older or wealthy. But this isn't something to put off.
If you're single and have little other than your car and a few bucks in a 401(k) account, you can probably get along without a will. Get married, title all assets jointly, and have each spouse designate each other as beneficiaries on life insurance and retirement accounts and again, a will may not necessary.
But have a child, remarry, or build up some assets outside of your home and retirement accounts, and you need to get serious about getting a will. Who will care for the children if both of you pass away? How will assets for children be managed, and by whom? How do you ensure your spouse or children won't be disinherited?
WHAT HAPPENS IF A PERSON WHO PASSES AWAY DOESN'T HAVE A WILL?
If you don't have a will, the state takes charge of the distribution of your assets. When a person dies without a will, his or her property gets distributed by what is called "intestate succession." All 50 states have laws specifying how this works. Basically, these laws are intended to be a default option, and attempt to distribute assets in a manner similar to what the average person would have designated. Under these laws, assets are distributed to relatives.
Typically, the surviving spouse is entitled to all or most of the estate if there are living children or the decedent isn't survived by parents. But if there are children of another marriage or the deceased's parents are alive, these laws may distribute a share of the deceased's assets to his or her parents and children.
That may not be acceptable for most families, who may want all assets to go to the surviving spouse. The way to avoid relying on your state's "one size fits all" will is to get a will of your own.
DO WILLS ONLY AFFECT A FRACTION OF WHAT YOU OWN?
That's right. Most assets will pass outside of the will though joint ownership (houses and bank accounts) and accounts where beneficiary designations are made (401(k) plans, IRAs, and life insurance).
But if the beneficiary forms aren't up to date with family changes, the unintended consequence is that the wrong person will inherit these assets, regardless of what your will may say. And that can lead to some nasty battles over the estate. For example, an ex-spouse can receive the proceeds from life insurance or an IRA because you failed to change the beneficiary after a divorce.
HOW DOES A PERSON'S 401(K) FACTOR INTO THIS WHOLE EQUATION?
Many of us don't give much thought to this. It doesn't matter what beneficiary you have. For a 401(k), federal law states that if you're married, the money automatically goes to your spouse.
You might ask, why would you want anyone but your spouse to get the 401(k)? Well, say you have a second marriage. You might want your adult children from your first marriage to receive the money in your 401(k). If that's the case, then your spouse has to sign a written, notarized consent form authorizing you to leave your 401(k) to someone other than your spouse. If you don't complete this process, guess what? Your spouse gets all the money in your 401(k).
TO MAKE SURE YOUR ASSETS GO TO THE RIGHT PEOPLE:
"Absolutely" Name a Beneficiary
By failing to name a person as your beneficiary, your assets will usually go to your estate, and that can cost your heirs money.
If you hadn't already started taking required distributions yourself by the time of your death, the IRA assets must be distributed to your estate's heirs within five years of your death.
Or, if you had started, distributions must be paid out to the heirs over what would have been your remaining life expectancy. Either way, this deprives the heirs of "stretching out" the tax-deferred assets over their own lives, and creates a bigger tax bite.
Also, make sure you're naming the right beneficiary. Your spouse isn't always the best choice to name as the primary IRA beneficiary. An adult child might be a better choice. Or a trust, such as for a minor child, might be the best choice, though that's a complicated decision requiring professional guidance.
Also, consider naming children as contingent beneficiaries in case you and your spouse pass away at the same time. And don't forget to change, in writing, your beneficiary in the event of a marriage, divorce, birth of a child, death of a beneficiary, or similar circumstances.
Consider multiple IRAs
If you have a single, large IRA but want to bequeath its assets to multiple heirs and a charity, consider splitting the IRA into separate IRAs: one for the charity, and perhaps one for each heir, especially if their ages are significantly different. Naming multiple beneficiaries of a single IRA can accelerate the required taxable distribution of the IRA to the heir(s) rather than allowing them to take taxable distributions over longer periods of time.
On the other hand, if you have multiple IRAs but not multiple heirs or charities, consolidating them can reduce paperwork and custodial fees, and make it easier to track investments and calculate minimum distributions.
OVERALL, THE BEST COURSE IS TO GET HELP FROM A LEGAL PROFESSIONAL
The best advice is to seek the counsel of a qualified adviser or lawyer to help you write a will. But don't just stop there. The process should also include a review and recommendations on the titling and beneficiary designations of all your property, life insurance, and retirement accounts, to ensure that these designations, which can affect the majority of what you own, are consistent with your wishes.
Also, an adviser can help you plan for special situations, such as the care of an aging parent or disabled child.