What Really Happens if I Die Without a Will or Other Estate Planning Documents?
Most statistics indicate that over 50% of the U.S. population die without having a will or other form of estate plan. Are you in this category? Are you the kind of person that knows you should have an estate plan, but something always seems to come up to put it off.
So what really happens if a person dies without a will or other type of estate plan? The short and simple answer is it eliminates a person's right to choose. If you die without an estate plan, you lose:
- The right to determine who gets your property at death;
- The right to decide how people will get your property at death (meaning outright or in trust);
- The right to name guardians for your minor children;
- The right to name people to administer your estate;
- The right to name people to manage your assets after your death for loved ones;
- The right to name people to make your financial decisions if you become disabled;
- The right to specify your wishes regarding medical treatment;
- The right to name people to make your medical decisions if you become disabled;
- The right to employ techniques to avoid probate and the cost and delay of probate;
- The right to reduce estate taxes (depending on the future of the estate tax law);
- The right to reduce other expenses associated with your estate.
The list can go on and on. In fact, no matter what a person's net worth, there are always choices to make and things to protect. If you die without an estate plan, decisions and choices will be made ... they just might not be yours.
The purpose of this issue of e-Counsel is to educate you on what really happens if you neglect to do an estate plan. As always, this issue of e-Counsel is only intended to be an overview of the topic under discussion and is not intended to give specific advice regarding any person's particular situation. If you have any questions regarding this e-newsletter, please do not hesitate to contact us.
I. Intestacy - The Loss of the Right to Choose Who Gets Your Property at Death
If a person dies without a will or other form of estate planning documentation, such as a revocable living trust, that individual is said to have died "intestate." This means that state law determines how the person's property or estate will be distributed. In effect, the state drafts the deceased's estate plan and determines who gets what, according to what the state legislature determines is the most equitable way property should be distributed to its citizens.
Having property distributed according to the intestacy laws may or may not be what a person would want.
So exactly how is property left if a person dies intestate? In Missouri, if a person dies without a will or other form of estate plan, property owned in a deceased's (referred to as "decedent") individual name will generally be distributed as follows:
The part not distributable to the surviving spouse, or the entire estate if there is no surviving spouse is distributed as follows:
- If there is a surviving spouse, the spouse receives:
- The entire estate if there is no surviving child or parent of the decedent;
- The first $20,000 in value of the estate plus 1/2 of the balance of the estate if there is no surviving children, but the decedent is survived by one or both parents;
- The first $20,000 in value of the estate plus 1/2 of the balance of the estate if there is surviving children, all of whom are children of both spouses;
- 1/2 of the estate if there are surviving children, one or more of whom are not children of the surviving spouse.
- To the decedent's children, or their descendants in equal parts;
- If there are no children or their descendants, then to the decedent's father, mother, brothers and sisters and their descendants in equal parts;
- If there are no children or their descendants, father, mother, brother or sister or their descendants, then to the decedent's grandfathers, grandmothers, aunts and uncles and their descendants in equal parts;
- If none of the foregoing, then on to great-grandfathers, great-grandmothers and their descendants, in equal parts, and so on "in lineal ancestors and their children and their descendants in equal parts."
Is this the way you would want your property left if you die? Lets take a few examples.
Example 1: Husband and Wife With No Children, But Husband and Wife's Parents are Alive.
If Husband dies and is worth $1,000,000, then Wife gets the first $20,000 and 1/2 of the balance or $490,000 for a total of $510,000. Husband's parents get the other $490,000.
Example 2: Husband and Wife With Children.
If Husband dies and is worth $1,000,000, then Wife gets the first $20,000 and 1/2 of the balance for a total of $510,000. The children split the other $490,000.
The manner in which property is distributed under the Missouri intestacy laws is refined in a number of ways. For example, a "child" includes an adopted child and a child born out of wedlock. This means that in Example 2 above, if Husband had three children, one of whom was adopted, and one of whom was born out of wedlock, all three children would share equally (and the Wife would not get the initial $20,000 because the children are not all children of both Husband and Wife).
Missouri law also provides that where there are several lineal descendants all of equal degree to the decedent, they take "per capita." However, where a part of them is not living and a part of them are living, the take "per stirpes." Per capita means people take an equal split according to the number of individuals in the group. Per stirpes means that should a potential taker die before the decedent, the deceased taker's share goes to his or her lineal descendants. A couple of examples may help explain this.
Example 3: Per Capita Distribution.
Husband dies and is predeceased by Wife. At the time of his death, Husband has three living children. Each living child has two children of their own (Husband's grandchildren). If Husband died without a will, his property would be divided equally between his children. This is a per capita distribution. Since all of the children are alive, they take equally.
Example 4: Per Stirpes Distribution.
If one of Husband's children predeceased him, the two living children would each take 1/3 of the estate. The share that would have went to Husband's deceased child would instead be distributed to the deceased child's children, meaning they would each take 1/6 of Husband's estate. This is a per stirpes distribution. Since a potential taker has died, his or her share goes down the family tree. Note further that if the deceased child had no child, Husband's two living children would each take 1/2.
The manner in which property is owned can also determine who gets property at death. Spouses tend to own property jointly. Jointly owned property automatically passes to the surviving joint tenant by operation of law. Although owning property jointly may get the property to the person you want it to go to, it sometimes can create other problems. For example, if both joint tenants die together (like in an auto accident), the property would need to go through probate. In addition, if the joint tenants are husband and wife and their estate is subject to an estate tax, owning property jointly may lead to a higher estate tax being paid. These issues are discussed in more detail below.
The only way to be sure that your property will go to the people you want is to put your wishes in writing by developing and implementing an estate plan that takes into account your personal situation.
II. Trust vs. Outright Distribution - The Loss of the Right to Decide How Property Will Be Distributed at Death
If a person dies without an estate plan, they also lose the right to decide how their property will ultimately be paid out to their beneficiaries. What will happen is the property will be paid or distributed outright to beneficiaries if they are over the age of majority (generally age 18). If they are under the age of majority, the property will be held in a custodianship. When the minor reaches age 18, he or she will then get the property outright.
There are several drawbacks to outright distributions that a person should at least consider.
First, if a beneficiary is young, a lump sum distribution may lead to unwise decisions, like foregoing college, taking a trip to Vegas (or now even a St. Louis casino), buying luxury items like an expensive car, etc. In other words, a younger beneficiary may have the potential to "waste" the inheritance. Even older beneficiaries may be bad at managing money or may be otherwise financially irresponsible.
Second, if a beneficiary is in a bad marriage, the inheritance could be lost in a divorce settlement, or when the beneficiary dies, the inheritance might go to the beneficiary's spouse as opposed to blood relatives (such as the beneficiary's children).
Third, if a beneficiary is in a high risk profession, the inheritance could be taken in a lawsuit.
Fourth, if the beneficiary is already wealthy and has a taxable estate, the inheritance will only add additional taxes to their own estate tax bill, ultimately leaving less for loved ones.
Many people choose in their estate planning documents to leave assets to beneficiaries in stages. That is, instead of an outright distribution, property is held in trust for a beneficiary's benefit. If the beneficiary needs trust funds for their health, education or support, the funds are available. However, those funds are controlled and invested by a trustee who you choose (see below). Ultimately, the property is distributed outright to a beneficiary at certain times in the future. For example, a beneficiary may get a 1/3 of the principal outright when they reach age 25, another 1/3 at age 30 and the final 1/3 at age 35. Many people feel that by paying money out at staggered ages, the beneficiary is not as likely to waste the inheritance, or if they waste the first 1/3, they might have learned a valuable life lesson and not waste the other 2/3's when it is distributed.
Other people choose to leave a beneficiary's inheritance in trust for the beneficiary's entire lifetime. This could protect the assets from divorcing spouses, lawsuits, and, if a third party trustee is used, from the beneficiary's own bad decisions and outside influences. If there's anything left in the trust when the beneficiary dies, you can control who will receive what's left.
The bottom line is how property should be distributed needs to be thought about in terms of the beneficiary's age, experience, and family and financial situation. By not having an estate plan, you lose the right to address and resolve these issues.
III. Guardianship - The Loss of the Right to Name Who Will Take Over Upbringing of Minor Children
If you have children who are minors (under 18), preparing a will is especially important. In your will you can appoint a guardian for the day-to-day care and upbringing of your child or children in the event of your death. If you fail to choose to appoint a guardian, the probate court will do so in the way it sees fit.
The law generally provides that a court should consider the appointment of an adult sibling or other close relative before considering the appointment of a non-relative, but this is not obligatory. The true test is what is in the best interests of the minor. A court hearing may be necessary, especially if competing relatives are seeking guardianship (which may be possible if you did not state your guardianship choice in a will). It is not uncommon that competing relatives may each honestly think that you would have wanted them to be guardian based on something they think you or your spouse said or insinuated in the past.
There are also costs involved with obtaining a guardian if you fail to appoint one. These costs are usually charged to the estate. This means that less will be left for your beneficiaries (presumably the child you neglected to appoint a guardian for in the first place).
If you have minor children, the only real way to have peace of mind about who will take over the upbringing of your children if something happens to you is to state your wishes in a will.
IV. Personal Representatives - The Loss of the Right to Name People to Administer Your Estate
The personal representative (sometimes referred to as an "executor" or "executrix") is a person appointed to handle someone's estate after death. If you do not appoint a personal representative, the probate court will name someone to fill the role who may or may not be the person you would have chosen.
The main tasks of a personal representative are to:
- Obtain the will;
- Obtain certified copies of death certificate;
- Determine who are the beneficiaries and heirs entitled to receive assets from the estate;
- Determine and find the estate assets;
- File a petition with the probate court if probate is required;
- Identify, gather, and inventory the assets of the deceased;
- Receive payments due the estate;
- Pay bills, valid debts and expenses relating to estate administration;
- Figure out who is going to get what and how much under the will or by way of intestate succession;
- Value or appraise the estate's assets;
- Give legal notice to potential creditors;
- Pay income and estate taxes, if any;
- Distribute property in accordance with the will or under intestacy laws.
The personal representative does not have to do all of this alone. A personal representative is allowed to hire professionals when necessary and pay their fees out of the estate. A personal representative is also entitled to receive a fee for serving. This fee is also paid out of the estate unless it is waived.
Since your personal representative is given access to all property in the probate estate, the selection of a competent and trustworthy person is very important. It is wise to nominate someone who has business experience, intelligence, and the utmost integrity and honesty. Most states require the personal representative to post a surety bond covering his or her actions. This requirement can be waived if your will states that you want your personal representative to serve without bond.
V. Trustees - The Loss of the Right to Name People to Manage Your Assets After Death for Loved Ones
If a person does not have a will or other estate planning documents, property will be left outright to adult beneficiaries and held in a custodianship for minor beneficiaries. This was discussed in Item II above. Since property would be distributed outright or held in a custodianship, the lack of an estate plan means the loss of the right to form trusts for beneficiaries. If a trust or trusts were formed, you could appoint a trustee to manage the assets and give the trustee guidance as to when distributions should be made to beneficiaries, like for a beneficiaries health, education, and support.
VI. Attorneys-in-Fact and Agents - The Loss of the Right to Name People to Make Your Financial Decisions if You Become Disabled
I've seen some statistics that state a person is 3 1/2 times more likely to become disabled as opposed to die during their career. I've always been curious about this statistic, but lets assume it is somewhat accurate for purposes of this newsletter.
If a person becomes disabled and is unable to manage their affairs, they lose the right to appoint someone else to handle their financial matters.
A court proceeding would need to be established for the appointment of a conservator for the disabled person. This is sometimes referred to as living probate. Generally, the probate court will consider close relatives to act as conservator, but this may not always be the case. Once appointed, a conservator, under the supervision of the court, is responsible for the protection and management of the disabled person's financial estate. The conservator must properly and prudently invest the disabled person's assets and use such assets for the support of the disabled person. The conservator must account for all funds received and expended. Because of strict accounting requirements imposed by law and the necessity of obtaining a court order authorizing most expenditures from the estate, the conservator must work closely with an attorney in order to administer the disabled person's property, no matter how large or small it may be.
Executing a durable power of attorney for financial matters can avoid this procedure. If a durable power of attorney is implemented as part of a person's estate plan, they can name a person or persons to take over their financial matters in the event of a disability.
VII. Medical Wishes - The Loss of the Right to Specify Your Desires Regarding Medical Treatment
A living will or healthcare directive allows a person to state in advance what their wishes are regarding medical treatment if they are in a persistent vegetative state or death is otherwise imminent. Without a living will or other type of advanced healthcare directive, a person loses the right to choose what medical and/or life sustaining procedures will be implemented.
In Missouri, there is a public policy for protecting life. This was decided by the United States Supreme Court in Cruzan v. The Missouri Department of Health. In the Cruzan case, Nancy Cruzan was in an automobile accident. As a result of the accident she went into a coma and, medically was in a persistent vegetative state - a condition where a person can exhibit motor reflexes, but shows no indications of significant cognitive functions. After it had become apparent that Cruzan had virtually no chance of regaining her mental faculties, her parents asked the hospital to terminate the artificial nutrition and hydration procedures which would cause her death. The hospital refused to honor the request without court approval.
This case went all the way up to the United States Supreme Court. The Supreme Court found that Missouri has an interest in the protection and preservation of human life. The Court also recognized that the choice between life and death for a person in Cruzan's situation is a deeply personal decision. The Court found that in balancing a person's personal decision with Missouri's desire to protect life, the State can require clear and convincing evidence of what a person's decision with respect to life support actually is. In this case, Cruzan did not have a living will although she did apparently tell a friend that she would not desire to be a vegetable. The Supreme Court found this oral statement was not enough. Accordingly, Cruzan lost her right to choose her medical treatment because she did not execute a living will.
VIII. Medical Treatment - The Loss of the Right to Name People to Make Your Medical Decisions if You Become Disabled
In addition to losing the right to specify your medical wishes, without having an estate plan you can also lose the right to name another person to make medical decisions for you if you are unable to make them yourself. With a durable power of attorney for healthcare, a person can appoint a spouse, child or other loved one to make their medical decisions if they are otherwise unable.
IX. Estate Taxes - The Loss of the Right to Reduce Estate Taxes (Depending on the Future of the Estate Tax Law)
As of the date of this newsletter, for 2010, there is no estate or generation-skipping transfer ("GST") tax. In 2009, there was both an estate and GST tax. More importantly for future planning, in 2011, if Congress takes no further action, the estate and GST tax will come back. And when it does come back, there will be a bigger tax bite as compared to the law in 2009.
As currently scheduled, the law in 2011 will generally exempt the first $1,000,000 in assets before a person will incurr an estate tax. A husband and wife will be able to exempt or leave $2,000,000. Further, in 2011, a husband and wife can structure their estate plan so that no estate tax is due when the first spouse dies. This deferral or delay in paying the estate tax is important because the estate tax rate is scheduled to be as high as 55% in 2011.
Although the rules set forth above allow a single person to leave $1,000,000 at death and a married couple to leave $2,000,000, without proper planning, this exempt amount can be wasted. For example, if a husband leaves all of his property to his wife, there would be no estate tax when he dies, but the wife would only be able to shelter $1,000,000 on her subsequent death. The husband's exemption would have been wasted. And at a tax rate of 55%, this means lack of planning equates to the loss of the right to leave as much as $550,000 to family members. In effect, you could be paying $550,000 more in estate taxes then you have to.
The same is true for property held jointly. If a husband and wife own all of there property jointly, there would be no estate tax when the first spouse dies, but when the surviving spouse dies, one exemption was wasted and more tax may be due then necessary.
Not having an estate plan can also mean the loss of the right to defer taxes. As noted in Item I above, if someone dies without an estate plan and has a spouse and children, the first $20,000 goes to the spouse, and the spouse and kids split the balance. It is possible to have an immediate estate tax on property that goes outright to the kids. This result could also be avoided with a properly drafted estate plan.
Some people might say, well I don't have that much money. However, what is included in your estate when you die is very broadly defined. It includes life insurance (the death benefit), retirement accounts, stocks, bonds, mutual funds and the like. With only a $1,000,000 exemption currently set for 2011, the estate tax will not just be a tax on the "super rich." It will effect a lot more people then it has in the past. Therefore, planning becomes essential.
X. Probate - The Loss of the Right to Employ Techniques to Avoid Probate and the Cost and Delay of Probate
If a person dies without a will or other estate planning documents, then property owned in the deceased's individual name will be subject to probate unless some other technique is utilized to avoid probate. Probate can be an expensive and time consuming process. Therefore, not having an estate plan means a person has lost the right to choose a more administratively convenient and cost effective way to transfer property at death.
In Missouri, probate expenses are generally determined in accordance with a statutory fee schedule. This fee schedule is based on the value of the decedent's assets. The more an estate is worth, the higher the probate cost. The fee schedule for various size estates in Missouri is as follows:
If the Estate is Worth: The Statutory Fee is:
Over $2,000,000 $42,925 plus 2% of excess over $2,000,000
There is much to be gained by having an estate plan. Although it is something that is easy to put off, dying without a will or other type of estate plan can greatly increase both administrative and financial burdens for your survivng loved ones. By having an estate plan, you can ensure that your wishes will be followed and your loved ones protected.
We trust you have found this issue of e-Counsel to be interesting and informative. If you have any questions regarding anything contained in this issue or if you have any ideas as to how we can improve our newsletter, please do not hesitate to contact us.
Under U.S. Treasury Department guidelines, we are required to inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or by any party to market or promote any transaction or matter addressed herein without the express and written consent of the Richard C. Petrofsky Law Office and Helfrey, Neiers & Jones, P.C., (2) the Richard C. Petrofsky Law Office and Helfrey, Neiers & Jones, P.C. imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein, and (3) any fees otherwise payable to the Richard C. Petrofsky Law Office or Helfrey, Neiers & Jones, P.C. in connection with this written tax advice are not refundable or contingent on your realization of federal tax benefits from the advice contained herein.