While many of today’s affluent, multigenerational families understand the importance of having an integrated estate plan, it isn’t always easy to make time to draft and update one. A complete estate plan includes a will, trusts, and key legal documents such as powers of attorney for financial and healthcare matters, and requires some real advance thought on what you would like to have happen if life takes a surprising turn. Perhaps you are busy with your business, career, charitable endeavors, family, or travel. The decisions required can be complicated and—if you are in good health—it may be tempting to put them off. But you never know what life has in store for you, and procrastination can have serious consequences for your loved ones and your assets. One of the best motivators for getting started is knowing what could happen if you don’t.
Let’s take a look at some hypothetical planning scenarios that illustrate the importance of acting now to protect your loved ones from the unexpected.
l. What if you don’t have a will?
Sally is a successful CEO and owner of her own business. She has substantial assets, is divorced from her estranged husband with whom she has no contact, and has two young children at home being cared for by her trusted nanny. She knows that drafting a will should be a priority, but she’s in the prime of her life and simply doesn’t have the time or the inclination to think about such things. While traveling on a business trip, Sally unexpectedly perishes in a tragic accident.
Perhaps the most important document that you will ever write, your will includes specific directions on how you wish your estate to be distributed after your death. In some states, creating lifetime revocable trusts to coordinate with the will is popular, often lowering the costs and burdens of the probate process. The will (or the will and the revocable trust) will include provisions for any tangible personal property that you may own—jewelry, furniture, and the like—and will also name guardians for any minor children. It also indicates what sources will be used to pay any estate taxes and debts that are due, and it names an executor who will be responsible for the settlement of your estate. If you don’t have one in place—which means if you die intestate—the state in which you reside will determine what happens to everything from your property, to your children, to your business.
The state must distribute your assets according to a mandatory default scheme based on who the court considers to be your next of kin, regardless of the quality of your relationship with those people. The court will also determine who gets sentimental family heirlooms. Not surprisingly, this can all lead to significant family strife as well as lawsuits. Even, as in Sally’s case, where her children are clearly the next of kin, the state cannot set up the long-term protections for her children that Sally might have wanted. Would she want significant assets going outright to her children at age 18 or 21? And who will supervise the assets while they are minors—her estranged ex-husband?
Guardianship of your children
If your minor children are left without a surviving parent, the court will be charged with naming guardians for them, after holding a hearing and deciding what it considers to be in the children’s best interest. It is possible that someone who shares neither your values nor your parenting style will raise your children. In Sally’s case, the court would likely determine that her ex-husband is the reasonable guardian, as he is the children’s father, if he is willing to accept that role. Knowing his strong reluctance to participate in their upbringing so far, Sally should name someone she believes more suitable in her will to prepare for the unexpected and secure the best alternatives for her children.
If a successor isn’t explicitly named, the process of transferring the business could get tied up in the legal process known as probate. The probate process generally is fairly straightforward—the executor presents the will, is authorized to administer the estate, determines the beneficiaries and creditors entitled to the money or other property, makes the distributions, files any tax or probate documents with the various government entities, and closes the estate, all within the prescribed and monitored timeframe. With a successful business as part of the estate, and no succession plan in place, the probate process can extend much longer, negatively impacting business operations and profitability. In some cases, such damage may be irreparable.
A will’s importance is clear regardless of your personal situation. Without a will, you have no input about the distribution of your property after your death or the persons involved in administering the estate. A local court makes those decisions, and it has no authority to deviate from state law. In essence, the state steps into your shoes and makes all of the decisions for you. This can be easily avoided with proper planning. By creating your will now, you can always add to the provisions or alter the document as your life evolves. It’s important to review your current will every five years to be sure that it’s up to date and still reflective of your current wishes.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
Please see additional important disclosures at the end of the article.