Frequently, my new clients inquire, “Why do I need a will?” This question often arises from various misconceptions surrounding the necessity of having a will. Some believe that their assets are too modest to warrant such legal documentation, while others assume it’s irrelevant because of their single marital status. Additionally, many individuals are unaware of the comprehensive protective role a will plays in their lives.
A will, regardless of your age, constitutes a crucial component of a holistic financial strategy. It extends beyond merely designating the distribution of your assets after your passing. A will also serves as the instrument to appoint guardians for your children, particularly important if both you and your spouse were to pass before your children reach adulthood.
While it may seem that a will covers the disposal of all your assets upon your demise, this is not entirely accurate. Certain assets bypass the will’s direction. Assets held jointly with rights of survivorship with another individual, IRA accounts, and 401(k) accounts with designated beneficiaries, for example, don’t go through your will. The same applies to life insurance proceeds if a beneficiary is named in the policy.
When you account for assets exempt from your will, you may find that the will’s scope of direction narrows. It is possible to make changes to ensure these assets pass through your will, but caution is essential, especially with retirement accounts such as IRAs and 401(k)s. Modifying these assets to pass through your will could have adverse tax consequences. For retirement accounts, it’s often more suitable to adjust the beneficiary designation on the account.
A will doesn’t solely identify beneficiaries; it also outlines when they are to receive their inheritance. There could be reasons why you prefer that someone doesn’t receive their inheritance immediately. If concerns exist about impulsive spending, instructing the will to distribute their inheritance incrementally may be apt. While reaching a specific age is the conventional criterion, alternative methods, such as completing college or securing employment, can also be used.
When minors are potential beneficiaries, it warrants special consideration. Without provisions in the will, a minor’s inheritance will be subject to court control. This entails the court determining not only investment decisions for the inherited assets but also access to funds for the minor’s benefit. Establishing a provision for the inheritance to enter a trust for the minor until they reach a certain age is a prudent approach. This way, a trustee can manage how the inheritance is invested and approve requests for funds in the minor’s interest.
Appointing guardians represents a pivotal aspect of a will. No one wishes to contemplate a scenario where their passing leads to someone else raising their children, yet nominating the right guardian ranks among the most crucial decisions made in a will. You must determine who will care for your children and where they will reside. Selecting the appropriate guardian can be a challenging decision, especially if your preferred choices do not live in close proximity. It’s advisable to inform potential guardians in advance, so they are not caught off guard if the situation arises.
Another motivation for having a will is estate tax mitigation. While a properly prepared Will can indeed reduce estate taxes, it should never supplant your desire to bequeath your assets to your chosen beneficiaries. Currently, only a minority of estates are subject to federal or state estate taxes (dependent on your residence). The matter of estate taxes can be left to a financial planner or the estate attorney assisting with your will drafting. They can advise if estate taxes should be a concern and, if so, how to minimize the tax burden while still adhering to your beneficiary preferences.
Wills need not be intricate to be effective. However, they must be comprehensible to the individual tasked with executing your final wishes, known as the executor, as designated by you in the will. It is prudent to inform the chosen executor in advance to confirm their willingness to fulfill the role. This way, if they decline, you can appoint an alternative.
Lastly, Wills necessitate periodic review and updating in response to life changes. Common triggers for altering a will include marriage, divorce, or the birth of children. An inconspicuous yet significant motive could be alterations in tax laws that may impact the inheritance you intend to leave. Therefore, it is advisable to have your will reviewed every few years, even if you haven’t encountered any of the aforementioned life events. Depending on the complexity of the changes required, you may need an entirely new will or just an addendum (referred to as a codicil).
In conclusion, irrespective of marital status or net worth, creating a will demands careful consideration of several significant factors. The bottom line is, if you possess any assets, even a basic will is highly recommended.
