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Last Will and Testament is the most basic of estate planning
documents, but also one that is often misunderstood. Many think that
if they have a Will they don’t have anything to worry
about—everything will go to the persons they specify. That’s not
true, though, and it’s important you understand why a Will sometimes
Won’t.
Let’s test your knowledge of how a Will works. Here are the basic
assumptions. Husband and Wife own a home, they have a checking
account, a Certificate of Deposit, a life insurance policy on
Husband and an IRA for Wife. They have two children, Son and
Daughter. They each have a Will that says everything gets divided
equally between their Son and Daughter.
The home is in both Husband’s and Wife’s name. Since they are
getting up in years, and because Daughter lives close to them,
they’ve added Daughter’s name to their checking account and
Certificate of Deposit so those funds can be used to help care for
them. Husband has had his life insurance policy for decades and when
he set it up, he named Son as the beneficiary. Wife wants Husband to
have the money from her IRA in case he needs it, so she has named
him the beneficiary. Lastly, Son and Daughter don’t get along very
well.
Here’s the quiz:
Question: If Husband dies first, who gets the life insurance money?
Answer: Remember, the Will says it should be divided equally between
Son and Daughter. Is that what will happen? No. Since the Son is
named as beneficiary on the life insurance policy, the Son will get
100% of the death benefit. In this situation the Will doesn’t
matter—it won’t.
Question: Who gets the home after Husband and Wife both die?
Answer: In this situation, the Will determines that the ownership of
the home will be equally divided between Son and Daughter.
Question: Does the home have to go through Probate?
Answer: Yes, anytime the Will decides how something is passed on, it
must go through Probate. Probate is the legal process of proving the
authenticity of the Will and that the assets are handled
accordingly.
Question: When both Husband and Wife die, how soon with the money
from the Certificate of Deposit and the checking account be divided
between Son and Daughter?
Answer: Never. This is another situation in which the Will won’t.
Since Daugther’s name is on both the Certificate of Deposit and the
checking account as a co-owner, Daughter gets all of that money. It
doesn’t have to pass through Probate, it’s hers right away.
Imagine how happy Son would be when he finds out that even though
the Will says everything is split equally, that Daughter gets all
the Certificate of Deposit and checking account. At least he got the
life insurance money—but it was a small policy--much, much less than
what the Certificate of Deposit and checking account were worth!
Question: Husband dies first, then the Wife passes away. Who gets
the IRA?
Answer: It is split between Son and Daughter, but much of it is lost
to taxes. This one is more tricky. The husband was named the
beneficiary. There weren’t any contingent beneficiaries named. Since
she died after him, the IRA doesn’t have a beneficiary!
When an IRA doesn’t have a beneficiary, it becomes a part of the
overall estate and is handled by the Will. As a part of the process,
though, all the money is taken out of the IRA and taxes have to be
paid on it. Whatever is left then gets divided between Son and
Daughter.
This situation could have cost Son and Daughter tens of thousands of
dollars. If Wife had named them as beneficiaries after Husband died,
then they would have inherited the IRA and could have continued to
defer most of the taxes over their lifetimes.
How’d you do?
The main thing to understand is that assets are transferred 3
different ways—by ownership, by beneficiary or by Will. It doesn’t
matter what the Will says if the asset will pass by ownership or
beneficiary.
The bottom line: review your life insurance and IRA beneficiaries,
verify the ownership of your investments and home, and make sure
your Will is up to date. Because many times, your Will won’t.
Nationally-syndicated financial columnist and Certified Financial
Planner® Jeffrey Voudrie provides personal, in-depth money
management services and advice to select private clients throughout
the USA. He’ll answer your financial question – FREE at
www.guardingyourwealth.com. |
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