In the first sentence of his master work on families, Anna Karenina, Leo Tolstoy wrote, “Happy families are all alike; every unhappy family is unhappy in its own way.” The passing of another great artist, Aretha Franklin, who died without a will, prompts a solemn reminder that, while well-planned estates may all be alike in the happiness they bring to families, a poorly planned estate can bring unhappiness in countless ways.
In this alert we have summarized a few of the unintended and unhappy consequences that can result from not having a will and a corresponding estate plan. But each of these ill-fated paths and outcomes can be avoided, or made less burdensome, with proper estate planning.
Decedents without wills may impoverish their spouses.
When a married person dies intestate — without a will — many states now automatically transfer 100 percent of the decedent’s estate to the surviving spouse if the deceased spouse does not have children from another marriage. The default rules for blended families are different, however, and the rules in different jurisdictions vary greatly. If there is no well-thought-out estate plan, some states transfer almost two-thirds of a decedent’s wealth to the decedent’s children. Other states give money to a decedent’s parents — taken from the surviving spouse’s share — if a decedent dies without children. Often, only a carefully crafted estate plan can custom-tailor the percentages that a surviving spouse and surviving children, or others, will receive.
Decedents without wills subject their families to the court’s choice of personal representative and bond amounts.
Without a customized will, a probate court will appoint whomever it wishes, even one of the decedent’s creditors, as an estate’s administrator. Further, even if a trusted relative or friend is chosen, that individual may have to post a performance bond, with surety premiums to be paid out of the estate. That requirement generally can be waived by a decedent’s will.
Decedents without wills leave guardianship decisions up to the courts.
Without a will or other document naming a decedent’s preferred guardian for the decedent’s minor children, guardianship decisions are left to the courts. Such scenarios often lead to fights between family factions who disagree about who should serve. Contests related to the guardian’s compensation and the child’s upbringing are also common. Finally, even after the courts choose a guardian and determine if and how he or she will be compensated, the guardian constantly must seek court approval and permission for the decisions the guardian makes in raising and caring for a decedent’s children.
Decedents without wills subject their families to an inflexible probate system.
In addition to the shortcomings described above, intestacy rules and probate procedures are also extremely inflexible. They are one-size-fits-all regimes that apply in the same way to every person who dies. Wills and trusts, by contrast, can be changed when a family’s circumstances change, and can address in a personalized way the many necessary steps in settling a decedent’s estate.
Decedents without wills and trusts provide their families with no specialized attention.
Tolstoy said that every unhappy family is unhappy in its own way. But he also could have said that every child is different. Wills and trusts allow parents to make plans for how and when their children — who might have special needs or different maturity levels or might be struggling with addiction — will enjoy their inheritances. It is even possible to write detailed rules related to paying a child’s private school tuition or funding a child’s business venture.
Decedents without wills and trusts provide their families with no asset protection.
Many people erroneously assume that limited liability entities provide protection from victims or alleged victims of a person’s negligence or other wrongdoing — tort creditors — and other lawsuit-related claims. But individuals, like a teenager with a new driver’s license or a negligent family-business owner, are liable for their own torts, even if they commit torts while acting on behalf of a limited liability entity. In contrast, trusts established by third parties, commonly through a will that channels a decedent’s assets to a trust for the benefit of the decedent’s descendants, may protect beneficiaries from their own tort creditors and certain adverse legal judgments.
Decedents without wills and trusts miss out on significant tax savings.
It would take a treatise to discuss the ways in which a well-planned estate can reduce taxes. But here are just two little-known techniques — there are dozens more — that allow people to minimize their taxes.
First, because of the technical structure of the federal estate and gift tax regimes, even though both have 40 percent marginal rates, it takes $1.40 to transfer a taxable dollar to a beneficiary during life, while it takes approximately $1.67 to transfer a taxable dollar to a beneficiary at death — more, in fact, if someone dies in a state with its own estate tax. This is because during life one doesn’t pay taxes on gift taxes paid, while after death every dollar over the exemption amount gets taxed, even dollars used to pay estate taxes and gift taxes paid within three years of death. Estate plans make use of trusts and other estate planning tools that leverage this tax-structure difference to help people reduce their taxes.
Second, many people are surprised to learn that states levy what is essentially a probate tax on the value of a decedent’s probate estate, even when those states do not have an estate tax. Localities such as counties and cities often also have their own probate tax regimes, sometimes referred to as probate fees. Probate tax rates are much lower than estate tax rates. But the shock of having to pay probate taxes and fees can be a terrible one, especially because they must be paid close to the time of a decedent’s death, when emotions are still raw. Well-crafted estate plans avoid probate — and the little-known probate tax — altogether.
In summary, going back to Tolstoy, having a will at someone’s passing might help make the difference between family war and peace.