We often discuss the benefits of estate planning. However, a discussion of what can happen when a person fails to plan is perhaps a more powerful way to stress the importance of proper planning. Let’s look at a few potential consequences of not having a plan of your own.
If a person passes away without a will or trust, his or her estate assets are distributed according to what is known as intestate succession. It is important to note that certain assets are not subject to intestate succession laws. These can include funds in an IRA, 401(k) or other retirement account; property owned in joint tenancy or tenancy by the entirety; proceeds from life insurance policies; payable-on-death bank accounts; and securities in a transfer-on-death account.
Most other assets are transferred according to intestate succession. As a result, “who gets what” follows a strict formula, with no regard to the actual emotional relationships between you, your spouse, your children, and members of your extended family. What you would have wanted is irrelevant to the state. Your assets must be distributed, and the state has devised a formula to do so.
This is particularly problematic in situations involving blended families. If you are divorced, will your current spouse or your ex-spouse inherent your assets? Without a plan, the state will decide. If you have children from both your first marriage and your second marriage, will your “first family” or your “second family” receive an inheritance? Again, the state will decide not you. And what if some of your children are not mature enough to manage a significant amount of money on their own? Unless you take steps to protect assets against the poor decisions of your children, their inheritances may well be squandered by the children themselves or lost to predators who prey upon their naivety.
Next time, we’ll discuss some of the other reasons you need an estate plan.