Many people have a Last Will and Testament, (“Will”) which serves as a written disposition of your assets. In the case of a widow, her Will may state that all property she owns at her death is to be distributed equally to her three children. It sounds easy enough, but can you answer the questions below with certainty?
- When you think of passing your estate to your children, will each child ultimately have an equal share?
- Who will pay your funeral expenses?
- Who will pay any income or estate taxes you may owe?
While you may think you know these answers, the end result may surprise you.
Think of our hypothetical widow who does not have any estate tax liability, but is concerned that her three children share equally in her moderate estate. She has a Will drafted with instructions that all children are to share equally. But looking at the actual ownership of the assets, she owns her primary residence in joint ownership with one child, her three certificates of deposit have different balances and different children as owners, and one of the children is the beneficiary of her life insurance policy. The Will states all assets are to be distributed equally to the three children.
The problem: They won’t be. The only assets that pass through the instructions of your Will are probate assets. All the assets listed above are non-probate assets as they will pass outside the Will under operation of law and go directly to the named beneficiaries.
The result: One child owns the house, each child owns a certificate of deposit with a different balance, and one child receives the proceeds of her life insurance. Needless to say this was not what she intended.
So what did this typical Will accomplish? In this very real situation it accomplished very little. Your intentions were to equalize your estate between all your children, but the way you held title to your assets created an unequal distribution of your estate. Furthermore, if one child pays your funeral expenses and income taxes owed, there is no way to force the other children to contribute, potentially creating a rift among siblings.
The Solution: Have your assets owned and all beneficiaries listed as your Living Trust. This way, your primary residence, certificates of deposit, and life insurance would all be held by your living trust upon your death. The living trust will avoid probate, just like joint ownership and naming a beneficiary, but more importantly your wishes of estate equalization will be met. You would also appoint a trustee, (analogous to an executor in your Will), in the Living Trust to pay your final expenses and any income tax owed before any distributions are made to your three children equally. Keep in mind, a living trust should be set up and funded prior to your death.
If you have questions on the effectiveness of your will, or to see how a living trust may benefit you situation, please contact me to discuss your situation.