Using wills in financial planning.by Feeney, Charles F.
Personal financial planning is more than a one-person game plan; in many situations it is family financial planning. A husband and wife, or a parent and children, are developing a game plan to benefit all parties. Death is inevitable and every family financial plan should consider the legal and tax ramifications when a member dies. As part of a practitioner's work, a client is asked to think about and define personal goals for the transfer of personal assets--the family home, a summer house, investments, a family business. A most effective way of transferring property at demise is with a will. The accountant should advise that the preparation of a will is a critical element of any long- range family financial planning. It may come to mind that a will may not be an essential part of financial planning if the estate is small, since no estate tax will be assessed. However, the general rule about small estates not being taxed may not always apply since the tax will vary depending upon the size of the estate, prior gifts, who inherits the property, and the state of domicile.
Even for clients whose estates will not be subject to federal estate tax, a will is nevertheless most desirable. Although the estate may not be subject to federal tax, it may well be subject to a state tax. In Massachusetts, estates over $200,000 are taxed and the marital deduction amounts to only 50% of assets transferred to the spouse. Careful planning may help eliminate some state taxes. Besides taxes, the issue of who inherits the estate is important, given changing family formats with remarriages, stepchildren and half-children. This article demonstrates some problems that can arise from not having a will. The authors have used Massachusetts law for illustration purposes in this article.
For example, if a Massachusetts client, married, with two children, should die without a will, state law will determine the distribution of the assets. Real estate, if held under tenancy by the entirely, will automatically pass to the spouse. But what of other assets? Massachusetts law requires that 50% pass to the spouse and 50% to the children. If a husband and wife have limited assets, passing 50% to the children may be the worst possible situation; this outcome could be prevented by a will. Readers should check their respective state statutes before rendering any financial planning concerning a will.
To allay a client's fears, the accountant should inform him or her that a will is not written in stone. It may be revoked completely or changed at any time before the client's death. Also, instead of drafting a completely new will, each time a change is desired a codicil may be attached thereto. The codicil may alter, restrain or revoke the existing will; it must meet the same requirements as a will but these rules are not so complicated.
A will must be in writing and it must be signed in the presence of at least two witnesses; some states require three witnesses. Most states require that the person writing a will (testator) be of a certain age-- at least 18 in Massachusetts--before making a will. Other than those requirements, the will may be prepared as the testator desires.
Because a will is a legal document which the client usually has an attorney prepare, it may be desirable for the accountant to review several legal terms with the client and his attorney before doing the financial planning. A few common terms used in connection with a will and with which a client may be unfamiliar are presented in Exhibit 1.
Some believe that putting all property in joint ownership eliminates the need for a will since, in the event of one owner's death, everything will pass to the joint tenant. But this action may have an undesirable side effect. Joint ownership is a permanent transfer of equity and in some instances cannot be reversed or taken back without the recipient's consent. In fact, the other joint owner recipient could force a sale at any time after joint ownership is effective. When placing the property in joint ownership, the parties may be friendly. The relationship may change, however, and the original owner may be forced to ask permission from the other joint owner to sell the property, or worse yet, may not receive the property at all. To illustrate: Harry and Jane are married and have three children. They own all their possessions jointly. Their marriage has been shaky for several years. Suddenly, Harry leaves Jane, taking the savings in their joint bank accounts. Jane, needing money to support her three children, is prevented from selling the family home since Harry's signature is needed to transfer the property. She would have to apply to the court for permission to dispose of the property.
Even if the relationship is amicable, the distribution of the property upon death may not be what testators would have intended had they lived, especially if they die simultaneously. Take, for example, William and Helen Young, a couple in their thirties with no children and both working. They own their home, two cars, furniture, IRAs, mutual funds, savings, company pension plans and a small amount of life insurance. Wherever possible they have everything in joint ownership. Their parents, brothers and sisters are still living. By owning all the property jointly and by not have a will, neither William nor Helen can leave any property to their parents regardless of their parents' needs. This is true because when a joint tenant dies, the property passes to the other joint tenant automatically. Thus, if Helen dies, the property will pass to William. If, subsequently, William dies, and assuming he still does not prepare a will, in Massachusetts the property would pass to his parents equally. Consequently, Helen's parents, who may be destitute, will inherit nothing from their daughter's estate. If both William and Helen die intestate simultaneously, as in a common accident, only then under Massachusetts law will the estate pass to their respective parents in equal amounts.
The need for a will is especially important when children are involved. If a parent dies intestate, the court will appoint an administrator, normally the surviving parent. This is usually satisfactory if the spouse is a natural parent of the children. The spouse, however, could be a stepparent who does not get along with the children. Worse yet, the decedent may have had children by the stepparent, and these children could be favored by the stepparent.
If no parent is surviving, the guardian and administrator will be chosen by the courts. To avoid having the courts determine who will raise the children and handle their finances, the decedent could specify the guardian for any children in the will. This eliminates relatives quarreling over being the guardian and/or administrator.
In another situation, David and Mary are married and have two minor children; their property is held jointly. David dies and Mary becomes the sole owner of all their assets. Several years later, Mary marries Husband #2. After a few years of marriage, Mary dies intestate. In Massachusetts, Husband #2 inherits one-half of Mary's estate and the children inherit the other half. This probably would not have been the intention of David or Mary. By drafting a will, David could have insured that his children, and not those of Mary's Husband #2, inherit his share of the property by granting Mary a life interest and the remainder to his children upon her death. Since one spouse has a marital claim on the other spouse's estate, it may be impossible for Mary at the time of her death to direct her estate to her children.
Minority and Spendthrift Concerns
A will also permits the testator to establish restrictions concerning the assets. As mentioned previously, most states require a person to be of a certain age to write a will. This presents a problem when one wishes to leave assets to a minor, but does not want the assets in the minor's estate to pass to the youth's statutory beneficiaries should the child die before becoming an adult.
Possibly the testator wants the child to have the assets, but does not want those who would inherit from the youth to receive the assets should he die before attaining legal age. A will by the parent could prevent this. Since the youth would be unable to draft a will until majority, the testator/ parent may direct how the assets should be distributed should the minor die before majority.
To illustrate: Lilian is a widow with a nine-year-old child; she has no other living relative. She has never liked her in-laws. She has a dear elderly friend, Mary, who is like a grandmother to her son and has helped raise him. If Lillian should die intestate her assets would go to her son. If her son should die before majority, the assets would go to his paternal relatives under Massachusetts laws of intestacy since he is legally prohibited from making a will and he has no maternal relatives. Lillian might prefer that Mary receive the assets. By drafting a will, Lillian could specify that the assets are to go to her son and if he should die before age 18, they are to pass to Mary. Therefore, Lillian has remedied the problem of her son not being of legal age.
In addition to these advantages of a will, Lillian could establish a trust and stipulate different ages (i.e., 21, 25, 30 years of age) at which her son would receive the assets. One way of accomplishing this is through a testamentary trust. At her death the assets of her estate are transferred according to the terms of the trust. This type of trust is also beneficial when the testator realizes that the beneficiary, regardless of his age, would dissipate the inheritance if received all at once.
Through the use of what is called a "pour-over will," the testator is able to have a certain degree of privacy as to the disposal of an estate. While living, the testator can establish a trust stating how the assets are to be distributed. The will is then drafted requiring the assets of the estate to pour over, (i.e., be transferred) into the inter-vivos trust.
Assume the client has three children, one of which was disinherited several years ago. If the client should die intestate or with a non- pour-over will, the general public would know of his not leaving any assets to the disinherited child since a will is public information. The testator can have all his assets pour over into the inter-vivos trust which specifies the two favored children as the only beneficiaries. The will would then require that the remainder of the estate be divided equally among the three children. Since there is nothing left, the third child would receive nothing. Since a will is open to the public, everyone may believe the testator treated his children equally when in fact he did otherwise. The terms of the trust instrument are private and not public information.
Multiple Marriages and Related Problems
With multiple marriages being more common today, a client should be informed as to who will inherit under intestacy. Stepparents and stepchildren do not inherit from one another under Massachusetts intestacy laws. Therefore, if a stepparent wants stepchildren to inherit from him (or vice versa) a will must be made. Also, half-bloods (i.e., children born from one of a parent's other marriages) are treated equally with whole-bloods. To illustrate: Richard and Joan have two children, Alice, 26, and Bruce, 24. After 30 years of marriage the parents get a divorce. Richard marries Wife #2 and they have a child, Charles. Many years later, after the death of her parents, Alice dies intestate leaving no children. Her brother Bruce and half-brother Charles will inherit equally from Alice's estate. If Alice wished that only Bruce should inherit, she should have made a will to that effect since a will can also be used to say who should not receive any of the estate.
Other Marital Status Problems
Financial planners should inform a client that wills are not just for the older person or for those with children. A living arrangement common today is two individuals living together as roomates. Although they may feel they are similar to married couples, most states do not consider them so. Therefore, without drafting a will, neither one will inherit from the other under intestacy law. The following example shows the need of a single person in this living arrangement for a will.
Mary is a 25-year-old single woman. Besides her parents, she has three siblings and a special friend. Although she does not own real estate, she has several investments, an IRA, a pension plan with her employer and a life insurance policy. If she died today, under Massachusetts intestacy law, her estate would go to her parents equally. This may not be what she desires. In a simple will her assets could be directed where she wished.
A divorce will have a major effect on a will under Massachusetts law. The sections pertaining to the former spouse are invalid but the remainder of the will is still valid. The entire will, however, is still valid if the couple is not divorced but only separated. Under Massachusetts law, a marriage after the drafting of a will (provided it was not written in contemplation of the marriage) will void the will. This could create havoc in some situations.
An individual running a professional practice or business has special problems. If the goal is to allow for a speedy sale of the practice or business upon death, there is one set of problems; if the goal is to allow the spouse, children or other heirs to continue the business, there is a different set of considerations. A will would allow the testator to spell out his wishes and, where desirable, to establish a trust. A delay of only one or two months after testator's death could cause an otherwise valuable professional practice to lose much of its value as clients and staff go to other professional firms.
Other Intestate Problems
The following example illustrates the situation where a person always believed that the distribution required under state law was adequate. Assume the client is a 70-year-old widow and has three married children. She wanted her estate divided equally between her three offspring. However, over the years, the children's lives and fortunes have moved in different directions. One child is financially secure and two are not. One of her children's marriage is weak and a divorce is expected. The client's estate could reach several hundred thousand dollars. If the client dies without a will, under Massachusetts law the estate would go equally to the three children without regard to individual need or the pending divorce of one child.
It is important for a financial planner to point out to a client that a will should be updated periodically. Take Richard and Susan Dove who are retired and in their early 60s. They have four children and 14 grandchildren. The Doves recently sold their business and have substantial assets. Their long-term goals are to help their children and several charities. Although they expect their children to provide their grandchildren with a college education, they are concerned about the long-term cost of private colleges. Depending on how long the Doves live, when the grandchildren go to college, and when the Doves make major contributions to their charities, many of their long-term goals could go unfulfilled under Massachusetts law. If they die without an updated will, they may have voided their wishes concerning the education of their grandchildren and the special charities. This is an example where frequent reviews of a will may be desirable. For example, if a substantial gift has been made to a specific charity, the couple may want to delete it from sharing in distributions of their estate.
It is impossible to plan for all future events with a will, but failure to make any plans can be expensive. The financial planner should stress that a family financial plan needs frequent reviews and revisions during the client's lifetime; the will also needs frequent review and revisions. Events such as the birth of a child, marriage, starting a business, death of major heirs and divorce will almost always require changes. Acquiring a vacation home in another state could result in being subject to estate tax in more than one state, which should be considered.
If a goal of the will is to create trusts, then a joint meeting early in the planning process between the client, the attorney, and the financial planner is strongly recommended. It is important that everyone understand the client's goals. It is also crucial that the client understand that today's planning is being done under today's tax laws. It would be advisable to highlight some of the significant changes in the tax law affecting estates over the last 10 years. This discussion would emphasize the need for frequent review of financial data and of the will, to allow the client to reach his or her objectives. The major point the financial planner should try to stress is the question: "Who do you want to write the rules regarding the distribution of your assets, you or the government?" With a will, one can usually find a way to achieve personal goals.
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