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EK Associates provides fee only comprehensive financial planning to help clients achieve financial independence.
“Why do I need a will?” is a question I get asked often by new clients. There are quite a few misconceptions circulating about why an individual might not need a will. Some people assume their assets are not large enough to warrant having a will prepared, and others suggest it is not important because they are not married. Others simply don’t understand all the things a will does to protect them.
Having a will, regardless of your age, is an important part of a comprehensive financial plan and is not just intended to facilitate who gets your stuff when you are no longer alive. A will also is used to appoint guardians for your children (if you have children) in the case that you (and your spouse) were to die before your children become adults.
While you may think that your will disposes of all your property at death, this is unfortunately not true. Not all property passes by the direction of your will. Assets you own jointly with rights of survivorship with another person do not pass through your will. Neither do IRA accounts or 401(k) accounts where you have named a beneficiary. Life insurance proceeds also do not pass through your will if you have named a beneficiary on the policy.
After taking into consideration all the items that do not pass through your will you may not be left with much property that the will actually directs. There are ways to change things so those items do pass through your will. Care should be taken when doing so, especially with retirement accounts — such as IRA accounts, 401(k) or 403(b) accounts — where making changes that result in those assets passing through your will can potentially result in adverse tax consequences. It’s worth noting that for retirement accounts, it is often better to just change the beneficiary designation on the account and let it pass that way.
A will not only names the people to receive your property at your death; it can also be used to say when they are to receive your property. There may be reasons why you do not wish to have someone receive their inheritance immediately. If you are concerned that someone will “spend it all,” then leaving instructions in your will to distribute their inheritance over time may be appropriate. While attaining a certain age is the most common factor used, other methods can be used as well, such as graduating from college, getting a job, etc.
Care should be taken if it is possible that some of the inheritance will go to a minor child or grandchild. Without any provisions in the will, an inheritance left to a minor will be controlled by the court. Not only will the investment of the assets inherited be determined by the court, but so will the ability to access the funds for the minor’s benefit. You can bet the court will be quite conservative with both the investment of the inheritance as well as any request for funds for the benefit of the minor. Therefore, a good way to handle this would be to include a provision for the inheritance to go into a trust for the minor until they reach a certain age. Done this way, you can name a trustee who can decide how the inheritance is invested and can approve the request for funds for the benefit of the minor.
Appointing guardians is an important element of a will. Nobody wants to anticipate a situation where their death may result in someone else raising their children, but naming the right guardian may be one of the most important decisions made in a will. A decision needs to be made as to who will raise the kids and where. Choosing the right person as a guardian can be a tough decision, especially if the people you likely would name do not live close by. It makes sense to let the people who you name as guardians know ahead of time, so they would not be surprised if the situation ever were to occur.
Another reason to have a will is to save estate taxes. A properly prepared will can indeed save estate taxes but should never override your desire to leave an inheritance to whomever you wish. Currently, not many estates would be subject to federal estate taxes or even state estate taxes (depending upon where you live). Consider leaving the estate tax question up to a financial planner or the estate attorney helping you draft the will. They can let you know if you should be concerned about estate taxes and if so, how to minimize the taxes while still distributing your inheritance to whomever you wish.
Wills do not have to be complicated to be effective. They do, however, have to be understandable to someone who is charged with carrying out your final wishes. This person is the executor and is named by you in the will. You should let the person you name as the executor know ahead of time they are being named. This way if they do not want the job, you can appoint someone else.
Finally, wills need to be reviewed and updated as things change in your life. Common reasons for changing a will include getting married, getting divorced or having children. A less obvious reason can be a change in the tax law that you do not realize impacts the inheritance you are leaving. That is why it is a good idea to have your will reviewed every few years, even if none of the life events mentioned above occur. You may need a new will or just an addendum (called a codicil), depending upon the complexity of the changes being made.
There are many important issues to consider, regardless of your marital situation or net worth, when preparing a will. The bottom line is that if you own anything, even a simple will is likely warranted.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.