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All About Wills and Probate

Understanding Wills

The Last Will and Testament (Will) is a document that we’re all familiar with.  It is the cornerstone of a good John Grisham novel, the source of gossip after a celebrity passes and central to the plot of many Hollywood productions. Its purpose is to set out the disposition of assets for someone who has died. Therefore, a will is not made official until (a) the maker dies, and (b) a probate proceeding is filed to confirm the validity of the will and appoint the executor (when needed). Many people falsely believe that if you make a will, you avoid probate. This is not correct; in most states, the law says that the heirs inherit at the moment of death, but the identity of those heirs and the specific assets that they will inherit must be decided by a Court of Law.

A guide to writing your will and avoiding complications that might tie your assets up in probate.

Understanding Probate

Probate is the process by which a Will is submitted to a Court. The Judge then reviews the document for compliance with the laws for execution of such documents in that state, and appoints an Executor to handle the details of administering the estate. This person may also be called an Executrix, if female, an Administrator or, in some states, a Personal Representative. The Executor’s responsibility is to collect the assets of the decedent, distribute the assets as directed by the Will and account to the Court that they’ve done their duty in a fair and honest manner. The probate process is specific to the state that the decedent lived in or where the decedent held property. Because bank/brokerage institutions are generally so ubiquitous as to have presence in every state, this tends to only be an issue when a decedent owned out of state real property. For decedents owning a vacation home, rental property or, in some cases, even a time share – a probate proceeding is first required in the state where the decedent lived, and secondly, an ancillary probate proceeding is required in every other state where the decedent owned property.

The down side of probate is

  1. Time – The probate process is intended to be a slow and public process so that an Executor has fewer opportunities to make mistakes and/or commit fraud, and the heirs and creditors have time to ensure that their claims against the estate are heard
  2. Public Record – Any document entered into a court record can be searched. Measures, of course, are taken in probate cases to block certain information, such as social security numbers and account numbers, but once information is filed into a Court’s records, such as an inventory of the decedent’s assets (a required filing in most probate cases), you no longer have control over who can review/use that information.

If a Will is improperly executed under State law, it is completely void. Tweet: If a Will is improperly executed under State law, it is completely void. (It may be used as evidence of intent in a later Will Contest, but that is the best you can hope for). Every state has developed default rules of heirship, so if you leave no Will or your Will is void, the State will decide your heirs. This is also true if your Will does not cover all of your assets. Therefore, the second, thing you want to be sure your Will contains is a residuary clause or a catch-all provision.  This says ‘… all the rest, residue and remainder goes to…’ which ensures that nothing is left out and possibly subject to the statutory default.

It’s also important to list people by their legal names (the name that matches their ID) to prevent confusion. The difference between Scott Fitzgerald and F. Scott Fitzgerald can be an important distinction, especially in families who pass the same names down to younger generations.

The subject of Disinheritance can be a full article on its own, but for now, remember that certain family members must be specifically disinherited in your Will. It is not always enough to simply leave their name out of your Will.

Limitations of a Will

Once the Executor makes a final distribution of assets pursuant to the decedent’s Will, it is final, and each beneficiary can spend their inheritance however they see fit. For example, imagine the typical case of a second marriage where, for simplicity sake, both spouses make Wills that leave everything to each other and privately agree between them that neither will ever do anything to disinherit the other’s children on the second death. It sounds easy and certainly avoids the tough conversations, but unfortunately, death, time and money do funny things to people. It happens all to often that a few years after the Husband has passed, the Wife chooses an unfair split among the children (or no split at all), or worse, she marries again and leaves everything to the new spouse. In this case, there’s no recourse for the other heirs to force the distribution that the Husband would have wanted.

Access Free Financial EducationIn a further effort to simplify matters, people use certain non-probate methods to avoid probate and complication. These methods include joint tenancy accounts or payable on death (POD) accounts (also known as transfer on death (TOD) or in trust for (ITF) accounts). Both can be very effective methods and are most appropriate for the more simple situations. Pitfalls to be mindful of include: 1) these accounts are subject to the same “final distribution” rules that we saw above with Wills.  So parents who add one child to their accounts anticipating that the child will split the account fairly with the siblings upon the parent’s death may be surprised to learn that the split is completely at the discretion of the child; 2) be sure that both parties are owners of a joint account. Simply being a signer on an account is not ownership, so you need to be sure that both parties are owners; 3) none of these types of accounts protect you if the joint owner or POD beneficiary predeceases you (or you are in a common accident). If both joint owners are deceased or the POD beneficiary is deceased, the institution will require a court order before they will release the account.

As noted above, a Will is not made official until the maker dies. The up side is that you can change your Will as many times as you like during your lifetime (provided you follow your State’s requirements for making a Will).

As discussed earlier, once the decedent’s assets are distributed under his Will to the heirs, that distribution is final and the heirs can spend their inheritance however they see fit. Statistics tell us that regardless of a beneficiary’s age or the dollar amount inherited, most people will have exhausted the whole of their inheritance within 2-3 years. Additionally, there’s a reason that we have coined the saying when it rains, it pours. The death of a parent is an awful and traumatic experience, but financially speaking, it can also have be terrible timing when if an heir is going through a divorce, bankruptcy, or other lawsuit. Once an inheritance is distributed to an heir, it may be seizable subject to seizure by a creditor or carved up as part of the a marital estate.

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.