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The Effects of Dying without a Will

Pittfalls of Homemade Wills


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Effects of Dying Without A Will and How a Will and Estate Plan can Save Money and Eliminate Problems

The effects of dying without a Will vary widely depending on how much property you owned, the value of the property, where your property is located, contracts that you signed with beneficiary designations, and who from your family survives you. In this document, we address several areas, including a societal perspective on Wills and estate plans, the effect of the law on your estate when you die without a Will, and then discuss common scenarios and issues associated with estates and the detrimental effect of dying without a Will.

The facts discussed in the introduction vary from case to case and the objective of this document is to explain some of the pitfalls of dying without a Will and to demonstrate how an estate plan could have provided at least one simple solution to eliminate the pitfall.

Acquiring Wealth and Passing it On:
Everyone works hard to save money, reduce costs, and acquire wealth and to provide for their families during their lifetimes. Yet, a substantial part of our society does little to pass on the wealth that they have acquired to their family. The United Way reports that no more than 40 percent of us have Wills. Research by the American Association of Retired Persons has found that only 60 percent of persons over age 50 has a Will. Surprisingly, a large number of us are dying without a Will and not passing our property to our heirs and beneficiaries in an efficient and low cost manner.

Estate planning is required to pass your property on in a low cost and efficient manner. Generally, dying without one can lead to a costly administration, paying unnecessary taxes, and costly court supervised guardianships of minor children. In addition to these costly effects, if you die without a Will, you lose the right to determine who receives your property and often fail to provide for your surviving family members. You lose this right if you do not have a Will that sets out a plan for your estate; the State where you reside has a plan for you. If you die without a Will in Texas, regardless of whether your property was separate or community, it will pass to your family or other heirs. If you seem content with the result that your property passes to your heirs, you may want to consider the scenarios below.

Dying Without a Will is Expensive: Dying without a Will can lead to a costly administration, paying unnecessary taxes, and costly court supervised guardianships of minor children. First, Dependent Administration is a court supervised default procedure and is perhaps the most costly of any type of probate proceeding available. Court approval is required for everything. The procedure begins with the appointment of an Administrator by a local court. The Court, selects this Administrator from a list of persons provided by Texas law. The Administrator could be a family member or one of your creditors. Once an Administrator is appointed, he will locate all of property of your estate and manage it during the period of administration. Regardless of whether the Administrator is a family member or creditor, the person selected by the Court may not be a person that you would have selected to handle your estate, and he is normally allowed to charge your estate a fee for his services. After receiving claims and paying debts, taxes, administration costs, and his fee, the Administrator will distribute whatever property is remaining according to Texas law. Add a taxable estate and minor children to this scenario, and guardianships make it even more costly.

Solution: Dependent Administration should be avoided because less costly procedures are available. In Texas, one of the easiest and least expensive alternative procedures is an Independent Administration. Independent Administration of your estate is created by simply requesting it by using special words in your Will and naming an Executor. Most people name a person or persons that they trust with their personal information and financial information as Executor. This trusted person will collect and distribute the property of your estate. Compared to a Dependent Administration, Court approval is not required for every action taken by your Executor. To the contrary, normally, your Executor and his attorney will only make one court appearance. Of course, other paperwork must be filed in an Independent Administration, but Court approval is not required for every action taken during the period of administration. Issues associated with minor children can also be addressed to avoid the costs of guardianship and avoiding death taxes.

The State’s Plan Does not Reduce Estate Taxes and You Do Not Choose Your Beneficiaries: As we mentioned above, if you do not have a Will and estate plan, the State has one for you. Fundamental objectives of most estate plans are to dispose of your property according to your wishes and to reduce or eliminate estate taxes to the extent possible. With regard to disposing of your property, the State’s plan attempts to give your property to the persons that you might have naturally selected. However, the State’s plan has no provision or plan elements to minimize or reduce taxes and the State has no real interest in taking steps to minimize your estate taxes. If you do not have a Will or other instrument that makes certain gifts and coordinates the use of the marital deduction and unified credit, your heirs may only receive what is due to them after any taxes, debts, and high administration costs are deducted. Current death tax rates are approximately 50% of everything over the exemption amount.

Solution: The plan created by the State does not use any tools and techniques that may be used to reduce or eliminate estate taxes, and it does not assure that your property passes to the persons that you would have wanted. Proper planning includes coordinated use of the marital deduction and unified credit to reduce or eliminate estate taxes. Bypass Trusts, QTIP Trusts, Irrevocable Life Insurance Trusts and a variety of other tax planning tools may be created or implemented in a Will. Additionally, other techniques may be used to make gifts and reduce the size of your estate to minimize or eliminate any estate taxes that would have otherwise been due. Additional discussion on these solutions are discussed in basic, intermediate, and complex estate planning.

Your Family has no Support; You had Cash and Life Insurance, What Happened? Cash and other liquid assets are essential to your estate plan. Checking, savings, brokerage accounts, and life insurance are a few examples of these types of liquid assets. The property that your surviving wife receives such as checking and savings accounts may be consumed in paying for your last illness, funeral expenses, and debts. Additionally, children of a former marriage may inherit a substantial part of your probate estate. Forget about the cash and children of a prior marriage; assume that you had life insurance.

Assume that you also had two life insurance policies. You paid for the first policy before you were married, and at the time named Girlfriend as beneficiary. You also never changed the beneficiary on this policy to your current Wife or children. However, for the second policy, your minor children from your marriage are beneficiaries. Thankfully, you provided for them. However, as is often the case, the insurance company will not pay the proceeds to the minor children without the appointment of a guardian. Now you have created the need for a costly guardianship and your wife cannot have access to your children’s inheritance. Your wife must support the children and is often required to do so from her own earnings despite the fact that the minor children have huge inheritances of their own. She must now work to earn money to pay living expenses. College costs are escalating and the insurance funds will not be sufficient to pay the costs of your children’s college education.

But wait, you still have the other insurance policy. Oops, Girlfriend is the beneficiary. She still thinks that you were great and, on the way home from your funeral, she thought long and hard about you and your family. She knows that your wife never liked her. She thought that your children were cute, but they are your wife’s children. Let’s face it, deep down Girlfriend was able to look past your children and your wife. She truly realized during the drive from your funeral that you would have wanted her to have something nice. That’s why she stopped at the local car dealership and now she drives a $250,000 Bentley. Fortunately, she collected $300,000 from the insurance company and had enough left over for plastic surgery and a membership to the local spa retreat.

Mom and the children have nothing.

Solution: Two major issues are present in realizing the solution to these problems: 1) payment of the debts and obligations that you created during your lifetime and 2) coordination of beneficiary designations. Over anyone’s lifetime debts are created. The extent of debts varies according to a variety of circumstances that a person encounters during their lifetime. Funeral expenses, debts, and administration costs as a matter of public policy, are required to be paid before any funds are distributed to heirs. If nothing is left for the heirs, it means that the decedent should have considered life insurance or other sources of property for his surviving family. Liquidity and cash available following death are important aspects of any Estate Plan. Needs of surviving family members should be carefully evaluated. Next, with regard to beneficiary designations and other types of transfers made under contracts, as a general rule the beneficiary designation or contract controls. If you forget to change a beneficiary designation the result can be a disaster and even lead to litigation. Life insurance, IRA’s, signature cards, contracts payable on death and other similar types of non-testamentary transfers should be reviewed. Clients decide, but it is often wise to review the beneficiary designations on life insurance policies, IRA’s and other non-probate types of assets. Life insurance is a commonly used tool to provide for these needs. Often, it should be purchased by or transferred to an Irrevocable Life Insurance Trust to avoid having the proceeds be included in a decedent’s taxable estate. By the terms of the Trust, you can provide for the support of your family and reduce or eliminate estate taxes.

A Court Appointed Guardian is Managing Your Child’s Property; The Court, Lawyers, and The Guardian are Consuming Your Child’s Property: The age of majority in Texas is 18. If your children are under age 18 and if they are your heirs at law, they will not receive their inheritance until they reach that age. That is a bit of a relief; they may not have been prepared or responsible enough to receive the property. However, this only poses a question of who has control of the money? The court appointed guardian, that’s who. The guardian is selected from a statutory order of preference and may not have been someone that you would have selected to manage your child’s property. Better yet, everything that guardian wants to do must be approved by the court. Attorney’s fees and expenses are costly in a guardianship.

Solution: These issues are easily solved by creating contingent trusts for the minor children that terminate at some age where you believe that the child is capable of being responsible with his or her inheritance. The trust can even be distributed in phases to afford the child an opportunity to gain experience in stages. Another alternative is a Custodianship created under the Uniform Gifts to Minors Act. Contingent Trusts or a Custodianship can be created in your Will.

Your 18 year-old Child is Managing his Fortune: If a child has reached majority, he is entitled to possession and control of the property that you left him according to the State plan. A court appointed guardian is not required. However, your 18 year-old has full control of his property; he should have most of it, if not all of it, spent in about a year! It is almost pointless to say that a substantial majority of 18 year-olds inheriting property would believe that they should be managing their money.

Solution: These issues are easily solved by creating contingent trusts for the minor children that terminate at some age where you believe that the child is capable of being responsible with his or her inheritance. The trust can even be distributed in phases to afford the child an opportunity to gain experience in stages. Another alternative is a Custodianship created under the Uniform Gifts to Minors Act.

Another Court Appointed Guardian is Caring for Your Minor Child; You Despised this Person and They are not Teaching Your Children According to Your Value System: That’s right; two guardians may be required. One serves as a guardian of the estate and manages property, the other serves as guardian of the person. In some circumstances they may be the same person; however, this is not always the case. Again, the guardian may not be someone that you would have selected to care for your child. When you select a guardian for your child, your primary considerations may be to select a guardian that has the mental and physical health to care for your child, as well as one that shares your values, is important.

Solution: Again, this issue is easily solved by appointing a guardian with the same values that you want your child to experience. Appointing a guardian is serious business. We have prepared a guide to assist clients in making this important decision.

You Left Plenty for Your Wife and Children, Your Wife’s New Spouse is Stealing Your Family Blind: Your wife survived you. You had the beneficiary designations on all of your life insurance made correctly to benefit your family. Your estate had plenty of money to pay taxes, debts, and costs of administration. Additionally, you had provided for some of the issues with the guardians, the pets, and your wife and children’s overall support. With your love and affection for each other you would not have wanted her to be alone, and she has remarried. Because you provided for her and the children, it is not necessary for her to earn income or rely on a new spouse for income and support. No one could agree more than your Wife’s new husband, Dead Beat Forever. He has never worked other than actively seeking out “Wealthy Widows.” Your Wife is his third. He is carefully and methodically spending your family’s wealth.

Solution: Generally, a trust would fix this problem. Trusts have many advantages, in addition to those that may be perceived to be tax advantages. A trust can provide centralized management of assets for several beneficiaries, which often results in a lower cost of managing the asset. In most cases, trusts often include a spendthrift provision that prevents the beneficiary from selling or encumbering his or her interest in the trust. A properly spendthrift provision, provided that the Settlor does not retain any interest in the trust, will prevent the beneficiary’s creditors from reaching the beneficiaries interest in the trust property. Finally, the trust property could be maintained as your Wife and children property is managed by the Trustee. During her life and marriage to someone like Dead Beat Forever, it would be difficult for him to access the trust funds. And, generally, on your wife’s death or divorce from Dead Beat, he would take nothing from the Trust property.

You Left Plenty for Your Wife and Child; Your Wife had an Automobile Accident: Your wife had $3,000,000 in assets. The family home was too large, and she always felt that money was tight. Feeling the need, she sold the home to raise cash, but only for her perceived family needs. Additionally, in her frugal nature, she sent a fax to your insurance agent requesting minimum insurance coverage limits on the family car. Later, she had a terrible automobile accident where two children were killed and their father received substantial and permanent injuries. The Mother and Father sued for the wrongful death of their children and Father’s personal injuries. Insurance Company defended Wife vigorously; however, the jury awarded $3,055,000 to the Mother and Father. Insurance Company paid the minimum coverage amount of $40,000 for the personal injuries and $15,000 for property damage and explained in a letter to Wife that this amount represented their obligation under the insurance contract. This leaves Wife owing a judgment of $3,000,000! Because Wife has no equity in the homestead, she only has her exempt personal property to the extent of $30,000. The $3,000,000 that Wife had is in cash, brokerage accounts, and other non-exempt assets subject to collection by Mother and Father. Mother and Father abstracted the judgment and have obtained the proper court papers to collect their judgment. When they are finished, Wife and Children will have virtually nothing.

Solution: Because Wife had substantial assets, she should have had adequate insurance coverage. Adequate coverage could have come in many forms, including an umbrella policy that increased coverage over and above the limits of the underlying policies. A substantial portion of her assets could have been placed in a Trust. Trust powers and instructions could have been given to the Trustee that provided for payment and maintenance of adequate insurance. Additionally, a properly drafted trust with a spendthrift provision would have protected the trust property from Wife’s judgment creditors, Mother and Father.

Your Valued Possessions are Sold, Stolen, and Thrown Away: Your personal property may be divided among the heirs in nearly any matter that they choose. If your house is vacant, an expensive vacancy endorsement will likely be required by your insurance carrier because they know that vacant homes are often vandalized, burglarized, and even the targets of arsonists. If your property is not stolen or destroyed, it may be sold to strangers for virtually nothing or thrown in the trash. This property could be your coveted pearl necklace that you intended your daughter to wear at her wedding; a favorite gun that you wanted your son to have; or other property that you had promised your grandmother or grandfather would “stay in the family.” What could be worse, if your property survives all of the above-noted risks and if your heirs can’t decide how to divide the property, is it could be ordered sold by the Court to the highest bidder.

Solution: Texas law allows you to make specific bequests of property. Your Will could provide that your daughter, Best Daughter, receives your 18-inch necklace comprised of 6 millimeter pearls, the pearl necklace that your great grandmother wore in her wedding in 1870.

Your Pets are Homeless: Fluffy, your favorite Kitty, and Fido, your favorite puppy, are homeless. One of your relatives had always told you that she would “care for them.” And, she did – for an entire week. After Fluffy scratched the furniture and Fido dug a hole in her yard – that was enough, care ceased, Fluffy and Fido are at the pound!

Solution: Texas law allows you to create a trust for the care of your pets. The trust terminates when the pets pass away. Additionally, you could specify that your pets move to a pet retirement home. Proper planning can assure the proper care for your pets.

The solution to all of these issues is a properly prepared Estate Plan. Even the simplest of Estate Plans could have included a Will that created Trusts. The Will and Trusts could have remedied most of the issues presented above. Your Plan can solve all of the problems and issues listed above and make for a cost effective plan to distribute your assets with taxes being minimized or eliminated.

Client Guide to Selecting a Guardian


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