We all know that we‘re supposed to do at least a minimal amount of estate planning, but not all of us get around to it. If you do not have even something as basic as a will, you are not alone. As a matter of fact, no less than four past Presidents of the United States of America died without a will: Abraham Lincoln, Ulysses S. Grant, James Garfield and Andrew Johnson. But, you have one up on them; there’s still time for you to mend the error of your ways by having a will prepared.
So what happens if you don’t have a will when you die? Your estate will be distributed according to state law, which may or may not conform to the way you want your assets and possessions disbursed. Each state has inheritance laws that determine what happens if a person dies without a will.
If you’re married, most states award one-third to one-half of your estate to your spouse, with the rest divided among children. If you have no children, assets will go to other relatives such as your parents or siblings.
If you are single, most states provide that your estate will go to your children, or to other relatives if you don’t have children. If you have no living relatives, then your property will go to the state. However, jointly held assets, such as bank accounts or houses, will go directly to the co-owner. If you are unmarried but have a partner, your partner will not inherit anything from your estate without a will naming him or her as a beneficiary.
Life insurance policies, annuity contracts and retirement accounts such as IRAs and employer-sponsored savings and pension plans will go to the beneficiary named by you on the beneficiary form. When there is no beneficiary form on file (companies frequently “lose” them), the proceeds will be paid pursuant to default language contained in the underlying policy, contract, or account agreement. In many cases, the default beneficiary is your estate, which generally is the least favorable one for tax-advantaged assets such as these.
Trust assets will pass to your beneficiary(s) in the manner and mode you establish by the terms of the trust. A trust becomes irrevocable when you die so you must make sure its terms and provisions always reflect your current wishes and desires. As with your other beneficiary-type accounts, it’s important to periodically review your trusts to make sure they’re keeping up with life events going on around you such as births, deaths, marriages, divorces, adoptions and, unfortunately, family squabbles as well as changes in the tax laws on both the federal and state levels.
The best way to ensure your estate will be distributed in the way you want it is to plan your estate with a will and, if prudent, a trust. And while you’re at, it make sure you have a current beneficiary designation form on file for your retirement accounts, annuities and life insurance policies, with both primary and contingent beneficiaries accounted for.
By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC