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Estate Preservation: Wills

A will to an estate plan is like blueprint is to a house. A financial blueprint of your assets, a will clearly states what happens to your estate after your gone. It's your right to choose how to distribute your money, or taxable assets.

At death, the court rules on the validity of your will. If the will is valid, the court instructs your executor, or the person you appoint to distribute your assets, to carry out the terms of the will according to your wishes.

Without a will, you increase the likelihood of conflicts, bitterness, and disputes between your children and other family members after you have gone. There's even a legal term for it: "dying intestate." Essentially, you give up the right to choose how your estate will be distributed. The state will make the decision for you. If there are problems, your assets can be tied up in the probate process for months or years.

It can also be more expensive to die without a will, as the state-picked administrator (typically the spouse) must furnish a bond in most states. Premiums for the bond, while protecting the beneficiaries and creditors, must be paid out of the estate. Also, the administrator may need to go to court to seek approval to sell property in the estate. The cost for these proceedings is paid out of the estate as well.

Here, you'll read about:

Willpower: 3 Misconceptions
Many Americans (including Abraham Lincoln!) die without a valid will, making it much more difficult for their loved ones after they are gone. Some may have had these misconceptions, which are addressed below:

  1. "My estate is too small." Federal law says that estates over $1,000,000 are taxed in 2003. But generally, people are worth more than they think. Add together the value of your home, car, furniture, jewelry, savings account, and investment portfolio. Subtract your personal debts. See if you need to create an estate plan.

    Also, even if some items do not hold great monetary value, they could hold an enormous amount of sentimental value. Failing to indicate who receives these treasures in your will can cause friction between family members that could last for a long time.

  2. "My spouse will inherit my assets." If the assets are jointly owned, they will pass to the spouse. But what if the spouse dies at the same time? What happens then? Do your children, or beneficiaries, have the financial know-how to manage the family wealth? Also, if your spouse remarries, some or all of your spouse's assets may wind up in the hands of his/her new spouse. In addition, if your assets are in your name, your spouse may be entitled to from one third to one half of your estate, depending on the state of where you live. In fact, in some states, a widow's share is equal to a child's share. And, if the couple is childless, the intestate distribution laws of some states mandate that the survivor shares the estate with the spouse's parents, siblings, even cousins.
  3. "I'll write my own will and save money." "Do-it-yourself" wills often do not contain many components as required by law and are frequently ruled invalid by the courts. A vaguely-worded clause can result in lengthy legal battles. Also remember that anyone who might benefit from the invalidation of your will can contest it, and if the courts decide in his or her favor your estate may be required to cover all legal costs. The few dollars you save now can cost your loved ones thousands of dollars later.

Picking Beneficiaries
This is a little more complicated than you may think. First, distributable assets include both taxable and nontaxable items. This property could include a living trust or your spouse's half of jointly held property. Also, some members of your family may have special needs or disabilities and require more assets than others.

Some beneficiaries may be minors or incapacitated and require guardianships. Guardianships can be over the person (care and welfare) or the estate (handling assets).

Establishing Liquidity
When creating a will, make sure to consider how your will estate will provide liquidity to pay taxes.

If your portfolio has U.S. Treasury Bonds, you may be able to use them to pay the taxes. Certain bonds, owned by a decedent, may be redeemed at par to pay estate taxes. The Federal Reserve publishes a list of them. The estate may even realize a profit — if the interest rate is below the going rate, they sell below par. The difference between the purchase price and par is profit, but it is not subject to capital gains if used to pay estate taxes.

Other Items to Consider in Wills
Drafting a will is a highly technical task that is best done by an inheritance-planning lawyer. Here are some basic items you may wish to address:

  • Does my will take advantage of the unlimited marital deduction?
  • Have any precautions been taken to minimize the double taxation of the estate — once at the death of each spouse?
  • Have arrangements been made to establish who legally died first in the event of the apparent simultaneous death of both spouses?
  • How are estate taxes allocated among beneficiaries?
  • Should the executor of my estate have the power to run or dispose of my business?

  • Did You Know...?
    You can disinherit anyone, except your spouse, except in Louisiana. In that state, children are guaranteed a portion of the state, depending on the number of children.

  • Did You Know...?
    Frank Sinatra had one in his will. Newspaper icon William Randolph Hearst did, too. Billion-dollar heiress Doris Duke didn't have one and her estate paid for it — in whopping legal fees. For years, wealthy people have inserted no contest legal clauses in their wills, seeking to prevent heirs from contesting the wills' provisions. A no-contest clause basically disinherits any heir who contests provisions of the will. While few, if any, states recognize a no-contest clause when it pertains to spouses, the clause is usually upheld when it pertains to other heirs.

  • Did You Know...?
    The federal estate tax is due within nine months of a person's death.

  • Did You Know...?
    In 2000, 28 states still allowed handwritten, or holographic, wills. Some are limited to members of the armed forces.

  • Did You Know...?
    A living will — not to be confused with a living trust — address life-prolonging choices. Most living wills require the signatures of two to three witnesses.

  • Did You Know...?
    Sonny Bono, the singer/songwriter turned Congressman, didn't have a will, making it hard on his survivors, including three wives and several children.

What is Probate?
Probate is a process for determining heirs, paying creditors, and distributing assets. Probate courts in the U.S. are not just for estate, but also for minors and incompetent individuals. You can't avoid probate with a will. Any contractual asset (bound by contract) payable to the estate of the owner must go through probate court. It also only applies to individual or jointly-owned property. Typically, after your death, your estate executor will file the will with the court, who will determine its validity. If you die without a will, a personal representative will file a petition with the court. Then the court appoints an administrator, usually the nearest relative. Notice of probate proceedings are published in the local newspaper to alert anyone with claims against the estate to file them, usually within five months.

  • Did You Know...?
    Established in 1969 and adopted by 18 states, the Uniform Probate Code specifies the rights of a surviving spouse when their spouse dies without a will or trust. Their rights include:
    • If there are no parents, children, or grandchildren of the deceased spouse, the surviving one inherits the estate.
    • If a parent survives, the surviving spouse inherits the first $50,000, then splits the remaining half of the estate.
    • If a child or grandchild survives, the surviving spouse inherits the first $50,000, then splits the remaining half of the estate.

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Estate Preservation: Wills

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