To begin, I will explain a legal process called probate. Probate is where the court ascertains the validity of your will and distributes your property per your instructions; or, if no will is in place, determines what to do with your property.
For simplicity’s sake, when you die, everything you own is separated into probate property (things that need to go through probate) and non-probate property (things that do not need to go through probate). This dictates how the property is distributed to your spouse, children, parents, distant relatives, and anyone else you deem deserving.
This is distributed by what your will says or by what the court determines if you have no will:
- Land (if titled solely in your name - more to come later)
- Personal effects, like your clothes and jewelry
- Who will parent your children
- Taxable investment accounts which do not have provisions for asset transfer upon death
As you can see, having a will is important. It is considered the most important estate document. It names the person (called the executor or personal representative) who is responsible for settling and distributing your estate. It also names a legal guardian, who would care for your children if they are under the age of 18. If you do not have a will, the court will appoint these two positions, likely choosing someone you would not have selected. Let me reiterate - if you do not have a will, the court, not you, will choose who will raise your children.
This is distributed by how the asset is titled, what the contract says (think life insurance), or the terms of the trust you may have set up. These assets pass directly to the individual noted and do not pass by the terms of your will or through probate:
- Property owned by Joint Tenants With Rights of Survivorship (JTWROS) or Tenancy by the Entirety - this can be a home, land, or taxable investment accounts
- Retirement plans, Individual Retirement Accounts (IRAs), or Life Insurance - this passes based on who the beneficiary is on file
- Assets owned by a trust, revocable or irrevocable
Note one important item with regard to non-probate property. The beneficiary that you have listed for your IRA or 401(k) receives the money at your death. This trumps whatever is listed in your will. I’ve heard many horror stories about people failing to change their beneficiaries after a divorce. The 1st spouse is listed as the beneficiary on the IRA when their former spouse dies. The new spouse doesn't get the money in that account, the first spouse does.
Durable Power of Attorney and Advance Directives
There are two other documents that every person should have: Durable Power of Attorney and Advance Directives. These appoint someone to act on your behalf with regards to all financial matters and healthcare-related matters, respectively. A future post will expand on the importance of having all three documents in place.
Remember, estate planning isn't only for the wealthy. It’s important for anyone, especially those who recently experienced a life event: new child, change in marital status, or a death in the family. Plan for the inevitable. Make a wise investment by acting to have these documents in place!
Thank you for reading, and please reach out with any questions!