For the past few months, we have discussed a myriad of insurances. Whether it be auto insurance, life insurance, disability insurance, or health insurance, it all boils down to managing your risk. One of the most basic aspects of business ownership is controlling the amount of risk you’re taking with your finances. That’s why each type of insurance is so important. Each type lessens the risk you’re taking.
So how do you protect your assets after you’ve passed away? That’s where personal planning and preparing your last will and testament come in.
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At its heart, a last will and testament is a legally binding document that expresses your final wishes. Your will lets the world know what you would like to be done with your possessions, your assets, and how to provide for your dependents. A will gives you the peace-of-mind that what you care about the most will be distributed to the proper beneficiaries.
Although your last will and testament allow you to decide what to do with your estate, there are limitations on what can pass under a will. This means that certain assets are not bound to your will and may defer to an overriding legal document or agreement. Your attorney will outline what limitations there are in your specific case as you draft your plan, but here are a few basics for your general knowledge.
Assets with a joint tenancy with rights of survivorship (JTROS) do not pass under a will. For example, if I were to buy the farm tomorrow, my dear, sweet wife Emily would automatically get the house. She would automatically take sole ownership of the bank account. JTROS assets are those that have shared ownership. Now, that doesn’t mean that all assets with a co-ownership are not governed by your will. Again, you will need to speak with your attorney to determine which of your shared assets do or do not pass under your will.
Other items that do are not governed by a will, include life insurance proceeds, pension plans, 401k plans, IRA’s, Roth IRA’s, basically anything with a designated beneficiary. Similarly, any type of trust, living, irrevocable, Totten, none of these pass under a last will and testament.
In the event that a person passes away and they haven’t created a will, the state will designate who becomes their executor. The government takes control, deciding how to distribute your assets. They even establish guardianship agreements to determine who is best to care for your children. Think about that for a moment. The state would choose where your children go to live, and who will care for them until they reach adulthood.
When I think about this, I’m reminded of the National Lampoon’s Vacation films. The family comes into town for holidays, they’re all gathered together, and there’s Cousin Eddie, standing in his bathrobe, pumping his septic tank into the storm drain out in front of the house. If you die, do you really want Cousin Eddie taking care of your kids? The possibility of this should be enough to make you run out the door, and straight to your attorney’s office right now. I cannot stress, enough, the importance, the necessity of having a formal last will and testament.
If you are the type of person that thinks, “Oh, I’ve got time,” just understand that none of us are guaranteed tomorrow. Every breath you take is a gift from God. I didn’t know that the last time I hugged my father was going to be the last time. I said goodbye and drove home to Knoxville. The next day, he was gone. We are all going to die and none of us knows when. Be prepared for the inevitable.
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There are four basic factors to consider when writing your will. First, who will be your executor/executrix? The executor (or executrix if they are a female) is the person that is responsible for carrying out your wishes. They follow the terms outlined by you, within your will, and are overseen by the probate court. When you have named an executor, make sure that you select a three-deep roster. I use the sports analogy here because it is a pertinent way of looking at your selection. Just like a football coach goes through his roster, selecting his best players to make up his starting lineup, second string, and third-string, you also need to be prepared with backups.
Suppose I name my wife as the executrix of my will, but we are driving along together and get into a wreck — God forbid — and we both die. Well, now I have a backup to carry out my final wishes because I made a three-deep roster. Apply the idea of choosing three people to each of the four factors.
The second factor to consider is your beneficiaries. Who will you leave all of your worldly possessions to? You might choose to leave it all to one person — though I would still include your backups — or maybe you would disperse it amongst many people. What percentage of your money goes to which beneficiary? It’s also possible that you decide to leave certain assets to a church, a charity, or even your pet, odd as that may be. The point is, when you create your will, you will have the final say in how your possessions are distributed.
A third factor and this is a huge one, is who will receive guardianship of your children? This is one of the largest reasons that most people put off creating a will. They just don’t know who to leave their kids with. You may not agree with every philosophy or the choices made by your family members, but you need to make a decision on this. Who will take care of your children is one of the biggest decisions you will ever need to make.
Finally, your will should contain a list of people that you appoint as trustees. A trustee manages money that is left for a beneficiary who is too young to make financial and legal decisions on their own. The trustee makes investments, and payments on the beneficiary’s behalf until such time they are able to do so on their own.
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In my time as a financial planner, I’ve seen many last will and testaments, and I’ve learned from experience that the devil is in the details. With that in mind, I’ve come up with a few areas that you really need to pay close attention to and be specific in your outlining of them.
This may sound like a no-brainer, but make sure that you use accurate names in your will. When you are naming an executor/executrix, a beneficiary, a guardian for your children, or a trustee, be sure that you are using their full legal names, and that the spelling is correct. I’ve seen many legal hurdles pop up during the execution of a person’s will because they misspelled someone’s name. It’s a headache that nobody really needs during an already difficult time.
When creating a legal document such as a last will and testament, the wording is extremely important. I tend to avoid the word “and” as though it were the plague when writing or updating my will. The reason is one that is so simple and obvious that it is easy to overlook. If I am naming an executor to my will and I appoint my wife “and” my brother, they now share the duties of executors to my will. I have seen cases where this is done intentionally, but it often makes things much more difficult than it needs to be.
When more than one person is charged with executing the will, it can be subject to holdups from disagreements between the executors themselves. Be careful when you are appointing an executor that you provide the three-deep roster, as I mentioned earlier, but you leave them as individual choices when listing them.
There are times when you may want to use “and” in your will, such as if you are leaving your children to John “and” Jane R. Relatives. In this case, they share custodial rights and guardianship of your children. Just be cautious in your phrasing when you create your will.
These are legal terms that are related but have very different intentions. Essentially, they are stipulations that you would apply to an inheritance. Per Stirpes means that you intend for the beneficiary’s share of the inheritance to go to their children, should the beneficiary be unable to take possession of the inheritance. A good example of this would be if my mother and I were in an accident and neither of us survived. Since I was named as a beneficiary in her will, my portion of the inheritance now passes on to my children.
On the other side of this coin, is per capita. A per capita designation is applied when you intend for the beneficiary and no one else to receive the inheritance. Your wealth would be distributed only to those who are named in your will and are living.
Once again, it seems that this should go without saying, but don’t forget any of your assets. I have actually seen people complete their will and realize that they forgot to list a tract of land or a timeshare. I know, most people actually want to forget their timeshares, but they are still an asset and should be accounted for. Take the time to be thorough when listing your assets. Failure to do so could result in major legal hassles for your family and friends after your passing.
One of the single most important pieces of your will is what to do for your minor children. Where are they going to live? How will they be provided for? How do you set up their trusts? These are questions that carry weighty answers.
What I have done for my children is I set up a testamentary trust that is irrevocable and goes into effect the moment I pass away. The instructions for this trust are created in my will. Under these instructions, I have made allowances for HEMS. That is health, education, maintenance, and support. So any needs that may arise will be covered out of this trust as long as it pertains to one of the HEMS categories.
What about the remainder of the trust? Well, I spoke with a very intelligent attorney — he was a great man — and he said, “Justin, whenever you leave this much money to your children, let’s be wise with it.” He suggested that rather than giving my kids a lump-sum payment when they mature, we give one-third of it to them at age twenty-five. This allows them to have the opportunity to make something of their own with what they have, while not becoming a “trust fund kid,” that has no drive or ambition. If they succeed, great, then I rest assured that they are well balanced and independent of the money I have left to them.
What if their endeavors don’t pan out at first? At the age of thirty-five, they receive another payment from the trust. They will have the opportunity to try again, or to increase their successes from their initial investment. Finally, the trust pays off at age forty-five and they can use that portion to go towards retirement or college tuition for their kids.
What I mean by this is, you’re going to sign the will, but again, pay attention to the details. I like to sign in blue ink because it is easier to differentiate the original from the copies. Furthermore, I initial every page. Doing so prevents anyone from slipping a revision into the original document without my knowledge. If it isn’t initialed, I didn’t authorize it.
Some states require notaries, some don’t. This is yet another area where your attorney is going to be helpful.
Your will should change frequently. Every time a major life change takes place, you need to make an updated will. If you aren’t keeping it up to date, it becomes easy to overlook necessary changes, such as your children’s needs or even having another child that isn’t named in your outdated copy. If you move across state lines or sell a property, document the changes accordingly. In short, your will should be updated regularly all the way up until your death.
Many people like to keep their will in a safe deposit box. I am not a fan of this because the moment your bank finds out that you have passed, they lock it down and your executor then requires a court order to retrieve your will. Other options include a home safe or even in a sealed envelope that you give to your executor. The latter option requires a fair amount of trust, and the former requires that someone other than yourself has the combination to the safe.
In some states, the probate court actually allows you to file your will in their system. This is a fantastic option, but make sure that you file it anytime you move to a different jurisdiction. Your final will and testament is one of the most important documents you will ever own and it is imperative that you treat it as such. I hope that I’ve given you something to consider as you prepare for you and your family’s future. Life is complicated but estate planning doesn’t have to be. Consult your attorney and make your will financially simple.
As a CERTIFIED FINANCIAL PLANNER™, I always implore to my clients that get have a will and if they don’t have one, hire an experienced attorney to draw up these critical estate planning documents.
Be sure to follow along as we continue our risk management series with other key estate planning documents.