There is no denying that thinking about death, as well as planning for it, is unpleasant. The emotional burden of merely considering it often discourages one from engaging in financial or legal planning. However, the lack of a will and basic estate plan can have disastrous effects on your loved ones. The following is a brief case study of what could happen:
Tom, age, 46, was a successful businessman, providing for his family with a six-figure income. He and his wife Susan lived in a large home and sent their eight-year-old son, George, to a private school. Tom also had a 13-year-old daughter, Maggie, from a previous marriage. Tom and Susan’s lifestyle consumed all of their income, leaving only a modest savings account. Tom and Susan assumed that they would have time to save for retirement later in life. Then the unthinkable happened: Tom died of a heart attack.
The results of Tom’s lack of planning will be felt by his family members for the rest of their lives. Tom’s estate consisted primarily of the equity in the family home and a $1 million life insurance policy. Unfortunately, Tom never wrote a will, the house was titled solely in his name, and he had named his estate as the beneficiary of his life insurance policy. Because Tom died “intestate” (without a will), his assets were administered and distributed according to state law. The proceeds of the insurance policy were paid into Tom’s estate at death, but such funds remained tied up in probate for several months while a personal representative was appointed to settle Tom’s debts and distribute his assets; during this time legal and administrative fees consumed $50,000 of value from Tom’s estate. Even worse, Massachusetts law dictated that Susan was to receive only the first $100,000 of Tom’s estate while the remainder was to be split evenly between Susan and Tom’s daughter Maggie. In order to retain the home, Susan paid half of its net equity value of $200,000 to Maggie. Ultimately, after fees and expenses, Susan wound up with the (mortgaged) home and $425,000 in cash (the first $100,000 of the estate to which she was entitled, plus half of the remaining value of the life insurance policy’s cash proceeds, minus fees and expenses); Maggie wound up with $525,000 cash (her $100,000 payment in consideration of the home, plus half of the $900,000 insurance payout, minus fees and expenses).
Susan’s after tax income from the $425,000 cash and social security payments amounted to less than $40,000 per year. The current mortgage payment on their home was $30,000/year and George’s private school tuition amounted to another $6,000 per year. Susan, having been a stay at home mom the past 10 years, found the job market offered her little opportunity. She ultimately had to sell the house, pull George out of private school, and move to a more affordable community.
Despite receiving a sizeable inheritance, Maggie’s situation was equally tragic. Under Massachusetts law Maggie became an adult upon turning the age of eighteen. By that time, her account had grown to over $700,000, to which she gained unrestricted access on her eighteenth birthday. Maggie, as most young adults, knew little about managing money and seemed to have little use for her mother’s advice. Within a few years, the $700,000 was gone and the relationship between mother and daughter was forever damaged. All of the foregoing could have been avoided if Tom had taken a little time to develop a simple estate plan.
A will is a fundamental way to ensure that your estate is settled, managed, and distributed according to your wishes. A properly drafted will specifies who will receive your assets and can prevent unanticipated disagreements after your death. The old saying that “you do not know your relatives until you have shared an inheritance” really does hold true as arguments can and often do occur. A precise and clear will can prevent intra-family disputes by leaving little room for interpretation.
It is important to regularly revisit and update your will to verify its applicability with current law: a will created ten years ago may no longer provide the protections that it did at the time it was drafted. A review is also advisable when there is a change in your personal situation, such as: births of additional family members, deaths of beneficiaries named in the will, marriage or divorce, moving from one state to another, significant increases or decreases in the value of your property, changes in the tax laws, and lastly, if you want to change the way your property is distributed. Not every major life event means your will needs to be updated, but it is wise to discuss your specific situation with an experienced attorney.
In addition to a will, a complete estate plan will minimize the impact of probate through the use of trusts and other contractual devices, appoint a guardian for minor children, plan for incapacity, and shelter larger estates from state and Federal estate taxes. To discuss how best to draft a comprehensive will or an extensive estate planning strategy, contact the experienced attorneys at Freed Law LLC at jared@freedlawllc.com.
