Estate Planning Done Right: Don’t Leave Your Heirs a Headache

When I pitched this article to Ed Coburn, Cabot Wealth Network’s President & Publisher, he said something that really resonated with me, “Every day, we get closer to death.”

Clearly, that’s true. But most people are afraid to think about it, face it, plan for it, or discuss it with those they love.

Sticking your head in the sand and refusing to talk about what you want to happen with your finances, possessions, health or death directives, in case you become ill or die, is not just silly, it’s negligent.

Yes, negligent—for those you leave behind. Legal lore is teeming with cases of unresolved estates, undiscovered or unwritten wills, fighting relatives, kinfolk that you didn’t even know about looking to score part of the estate, and to me, the biggest detriment to your heirs—taxes. Taxes that, with some diligent planning, could have been drastically reduced or even eliminated, thereby leaving a larger estate for your loved ones.

Even the simplest of estates need planning. I come from a modest family with five children. My parents did have a will that left everything to my mom when dad passed. But when mom died, I spent a year and a half in court with my brother and oldest sister to settle the estate, because my parents’ simple will just split the estate into five portions, without any details as to how to do so (it was mainly real property).

Multiply that trouble by voluminous amounts in the case of larger estates. The parents of a good friend helped a widow from their church over several years, taking her back and forth to services, the grocery store, and medical appointments. They had no knowledge of her finances and it never occurred to them that they would need to. But when she died, she left her estate to them—which was worth several million dollars. You see, she had no children and no close relatives. But wouldn’t you know, a couple of estranged nieces and nephews came out of the woodwork to claim her estate, and my friend’s parents spent several years in litigation. They ultimately settled and came away with an unexpected windfall, but the legal system took a toll on them.

And what about Howard Hughes? The reclusive aviator, engineer, and film producer, died on April 5, 1976, without a will. It took 34 years to settle his estate after 11 cousins and many fraudsters claiming a part of the estate fought it out in court.

It’s amazing to me that with all their money and the legion of attorneys on hand that many celebrities die intestate (without a will). Just consider these folks:

• Heirs of famed guitarist Jim Hendrix spent 30 years settling his estate.
• Artist Pablo Picasso’s eventual estate settlement (after six years) cost his family $30 million in legal fees.
• Musician Prince left an estate of $300 million, and after many false claims, it was eventually paid out—after six years.

Even President Abe Lincoln died without a will.

What Happens When You Die Intestate?

It depends—mostly on the state where you live. Here’s a link to the appropriate laws by state: https://www.findlaw.com/estate/planning-an-estate/intestate-succession-laws-by-state.html

Every state decides via its own intestate succession laws who your true heirs are and how your assets will be distributed. Most of the time, your property will be divvied up among your family members, including a surviving spouse, adult or minor children, adopted children, parents, siblings, aunts, uncles, nieces, nephews, cousins, and distant relatives.

However, you should know that the following folks probably won’t get anything if you die without a will: Stepchildren, long-time partners, and loved ones who are not family members.

And should the state not be able to find your relatives, your entire estate typically passes (“escheats”) to the state—which means everything you have worked so hard for your entire life will go to the government, not anyone you know or love!

Another important fact to know, the court will divide your property into Non-Probate Assets and Probate Assets. Let’s look at both, but first let’s talk about probate:

Probate is a court of law whose purpose is twofold:

1. It verifies your will is legal and that your wishes are carried out; and
2. If you don’t leave a will, a probate court will decide how to distribute your assets. Probate can take a few weeks or months, if your estate is small, or for larger estates, it can take years. Probate is where anyone who wants to contest a will files a petition. And the legal fees can quickly add up. Not only that, but once probate is filed, those records are available to the public.

Non-Probate Assets

Transfer of Real Property with a Deed is not subject to probate, but will transfer as follows:

Tenancy by the Entirety, or Joint Tenancy with Right of Survivorship means that both you and your spouse own the property equally. When one of you dies, the other spouse automatically inherits the deceased spouse’s share (as was the case with my mom and dad).

In Tenants in Common, each spouse owns a share of the property, and those shares may be unequal. When one spouse dies, the surviving spouse keeps their share, but the other share is divided among the decedent’s heirs. This is the case in many blended families, or folks who are unmarried that jointly own real estate.

It’s also important that you know that, should you own real estate in a state other than the one in which you live, the property will be subject to the intestacy laws of the state where the property is located.

Transfer of Property with a Named Beneficiary, which includes the following assets:

Life insurance policy with a named beneficiary(s).

Bank accounts, retirement accounts, and IRAs. For instance, one of my sisters and I were named beneficiaries on my mom’s accounts, so when she died, we would be able to access those accounts to pay her funeral expenses, as well as other estate-related bills.

Assets in a Living Trust will immediately pass to your named beneficiaries.

A last note, if you divorce and/or remarry, remember to change your beneficiaries.

Probate Assets

The probate court will appoint a personal representative to administer your estate, who will make determinations about your estate, based on the following common scenarios:

You Die without a Will, and You Are Not Married. According to Findlaw.com, many states do this:

• If you have children, your entire estate is divided among your children in equal shares. If any child has died before you, and that child has children, then the deceased child’s share will go to your grandchildren.
• If you do not have children, your estate is awarded to your parents equally.
• If one parent has died, the state divides your estate between your surviving parent and siblings (including half-siblings).
• If you have no surviving parents at the time of death, then your entire estate will be divided among your siblings in equal parts.
• If there are no surviving parents or siblings, the state divides your estate among the descendants of your siblings (nieces and nephews).
• If there are no close relatives, then cousins on your mother’s side would inherit one-half of the estate, and cousins on your father’s side would inherit the other half.
• In some cases, if the state can’t find your heirs, then your entire estate escheats to the state.

You Die without a Will, and You Are Married. Depending on if you live in a community property or separate property state, how your assets are titled, and your state’s intestacy laws, the law varies:

• In a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), your estate will go entirely to your surviving spouse.
• In a separate property state, the rules vary depending on the state’s intestacy laws. In some separate property states, if you are married and have children with your current spouse, your entire estate will go to your surviving spouse. Otherwise, your surviving spouse could receive up to one-half of the estate, with the remaining portion passing to your surviving children from another partner. If you do not have children and live in a separate property state, your surviving spouse could receive one-third to one-half of the estate, and your parents and siblings could divide the remaining share.

You Die without a Will, and You Are in a Domestic Partnership. (A legally recognized unmarried couple living together in a relationship.)

Since not all states recognize domestic partners, you’ll need to consult state law to find out how your state distributes property upon your death. In states that fully recognize domestic partnerships — California, District of Columbia (D.C.), Connecticut, Hawaii, Maine, Nevada, Oregon, Vermont, and Washington — a registered domestic partner inherits the same as a married surviving spouse. Please note: Federal tax law does not recognize domestic partnerships, so you will want to consult a tax expert when creating your estate plan.

You Die without a Will, and You Are Cohabiting or in a Common-Law Marriage. Common-law marriages are only recognized in Colorado, Iowa, Kansas, Montana, New Hampshire, Oklahoma, Rhode Island, South Carolina, Texas, Utah and the District of Columbia. A common-law spouse may inherit in one of these states (and possibly in states that recognize the common-law marriage of another state). But you will have to prove your common-law relationship.

If you don’t reside in a common-law state and since intestacy laws only recognize relationships by blood, marriage, or adoption, you or your partner could be thrown out of your home and lose access to financial assets without a will.

Contesting a Will Isn’t Cheap

My family was lucky. It only cost us a couple of thousand dollars in legal fees to resolve my mom and dad’s estate issues. But as I mentioned earlier, it took a year and a half of my time!

The average cost to contest a will is $5,000 to $10,000. But as I indicated earlier, those with hefty estates can pay out much, much more. And while a simple probate case may take just six months to a year to distribute, a protracted contest can last for decades.

Ensuring Your Wishes Are Honored

Are You Ok with (and Can Afford) Home Healthcare, Assisted Living, or a Nursing Home?

Do you have long-term care insurance, an annuity, or funds stashed away for these critically important options? Do your heirs know where to find these funds or which facility you may have already checked out?

Very few of my friends have this sorted out, except my friend Carol. Over the past 15 years, she has lost her mom, dad, husband, and sister. At 68, she has had long-term care insurance for at least 10 years and has already made a down payment on a senior living facility (which has a five-year waiting list). And while many folks would think she was an overachieving planner, as she always says, “I’m pretty much alone now (except for a couple of nephews), so I have to make sure I’m taken care of.”

Who Gets Your Children?

Another issue that parents need to consider immediately is what happens to your children if you should die intestate?

If you have not left detailed legal instructions regarding the guardianship and care of your children, the state can decide who gets to raise them, based on “the best interests of the child.” And those laws vary by state. Some states will consider the wishes of your child; some don’t.

There are four primary types of custody arrangements:

• Joint custody
• Physical custody
• Legal custody
• Sole custody

Your children are your most important assets, and you do not want to leave their fate to “fate.”

There are so many horror cases of the wrong relative being awarded custody; grandparents being cut off from seeing their grandchildren; abusive foster parents … you’ve heard them all.

But you can remedy this uncertainty by planning ahead. And know that if you don’t include provision for this and guardianship of your children is contested, it will deplete your estate further, with contested guardianships running $10,000 to $30,000.

Where Will Your Pets Go?

My friend, Sarah, and I have agreed that we will take each other’s dogs, but we need to plan further. After all, she’s the same age as me. Will you set up a fund to make sure your pet is living the life to which she is accustomed? Do you have a back-up plan?

Burial or Cremation?

When I was a kid, almost everyone I knew was buried. That statistic has rapidly changed. According to the Cremation Association of North America, the U.S. cremation rate was 3.56% in 1960 and is thought to be around 59% today.

Still, I know a lot of people who still prefer a burial. But do your heirs know what you wish to do? Do you have certain cultural or religious rites that you wish to be performed? Do you have a burial plot? Have you prepaid for your funeral, burial plot, or cremation? Do you have life insurance that will cover the cost of burial or cremation? And what about the service—do you even want a service? It’s creepy to think about, sure, but wouldn’t you rather be the one to decide if “You Can’t Always Get What You Want” or “Amazing Grace” is on your funeral playlist?

Are You an Organ Donor?

More than 170 million Americans are signed up to be organ donors. Before I researched that, I just assumed that almost everyone would be a donor. But I just had this conversation with a friend last week who mentioned how upset she was when her husband died and the hospital asked her if she would donate his organs. She refused and also told me she wasn’t a donor.

I’m not sure if it’s a generational thing (she’s quite a bit older than me), or if it’s simply a personal preference.

Just make sure your heirs know where you stand. And, by the way, most states will allow you to check the organ donor box on your driver’s license, in case you are so inclined.

Other Documents You Need

Besides your will, there are some other documents or advanced directives that you should have. Right now, only about a third of the people in the U.S. have completed advanced directives, but I encourage you to do so as soon as possible so that your wishes are known.

You Need at Least One Power of Attorney

We like to think that we will always be able to care for ourselves and make our own decisions. But for many of us, as we age, we may need some help. And that’s where a power of attorney comes in. It allows a person you appoint—your “attorney-in-fact” or agent—to act in your place for financial, medical, or other purposes when and if you ever become incapacitated or if you can’t act on your own behalf.

You can have your attorney create the necessary documentation to name your attorney-in-fact and there are many forms and online tools to enable you to do it yourself.

Here are the four types of powers of attorney you can confer:

Limited—allows someone else the power to act in your place for a very limited purpose and is usually valid for a specified time period. For example, to sign a deed to property for you on a day when you are out of town.

General—is comprehensive and gives your attorney-in-fact all the powers and rights that you have yourself. For example, you can have a financial power of attorney which enables your representative to sign documents for you, pay your bills, and conduct financial transactions on your behalf. It ends on your death or incapacitation unless you rescind it before then. You can also create a medical, or healthcare, power of attorney which designates a representative to make medical decisions on your behalf. The healthcare power of attorney goes further than a living will, which is only valid if you are incapacitated.

Durable—can be general or limited in scope, but it remains in effect after you become incapacitated. If you become incapacitated, no one can represent you unless a court appoints a conservator or guardian. A durable power of attorney will remain in effect until your death unless you rescind it while you are not incapacitated.

Springing—can allow your attorney-in-fact to act in the case of “triggering events,” such as if you become incapacitated, but it does not become effective until you are incapacitated. Be sure to specifically detail the standard for determining incapacity and triggering the power of attorney.

If you don’t have a power of attorney, you have no idea who is going to be making financial and medical decisions for you and no power over which decisions they make if you are incapacitated.

Don’t Forget about a Living Will

A living will has nothing to do with your will or how your assets are distributed. Instead, it’s a legal document in which you express your wishes for any medical care that you may need in case you’re incapacitated and cannot direct your own care. It tells your medical professionals whether or not you agree to resuscitation or life support to prolong your life. A living will may be attached to your will as an addendum; that way, in case of a medical emergency, it will be easily accessible.

If you become incapacitated and don’t have a living will, it will be up to the medical professionals to determine what life-prolonging care you will receive. A living will may also be called a declaration regarding life-prolonging procedures, an advance directive, or a declaration.

Did you know that the only treatment ever administered for which no consent is needed is CPR? That’s why it’s essential to have a living will.

And even if you have a living will or advance directive, you should know that they are legally recognized but not legally binding. Sometimes, circumstances dictate the path that a medical professional must take—such as in a complex medical situation. And while your healthcare provider will do his or her best to make sure your wishes are carried out, they may not always be followed exactly. That is why conversations with your loved ones are critical—before a healthcare crisis occurs.

The requirements for a living will vary by state, so many people hire a lawyer to prepare their living will. But there are also software applications that you can use. But like your regular will, in most states, your living will must also have two witnesses and be notarized, so make sure you follow those directives. Please consult your own state regulations for exact requirements, and if you have moved since completing one, you will need to find a form that is applicable to your state.

You May Need a Trust

Trusts are legal documents that can be set up prior to death and they survive a person’s death. They can also be created by a will and formed after death. A trust is a fiduciary relationship in which one party, the trustor (also called trustmaker or grantor), gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. The primary reasons to form a trust are to:

• Ensure your assets are distributed as you desire
• Provide legal protection for your assets
• Save your heirs time and streamline the paperwork of the estate
• Avoid or reduce estate and inheritance taxes.

Once your assets are placed in the trust, they belong to the trust itself, not the trustee. There are lots of different types of trusts, but the two basic and most common types are revocable and irrevocable.

Revocable Trusts are created during your lifetime, and you can change them or revoke them at your discretion. They may also be called living trusts. The mechanics are this: You establish the trust, put in the assets you desire, and you serve as the initial trustee.

You are the only person designated to add or remove property from the trust during your lifetime. The big advantage: any assets you transfer into the trust during your lifetime are not subject to probate (more on that in a little while), which can save you and your heirs a lot of money.

However, asset protection is not a major advantage, as with a revocable trust, your creditors may possibly still access your assets within the trust (with a court order).

When you die, typically, your revocable trust becomes an irrevocable trust.

An Irrevocable Trust cannot be changed or revoked after you create it. It’s permanent—until you die, and your assets are given to your heirs.

An irrevocable trust has a couple of advantages: 1) It protects the assets in the trust from lawsuits and judgments. Often used by business owners, doctors and attorneys, the assets in the trust cannot be removed by court orders and judgments; and 2) If you have a large estate and you have already reached your lifetime tax-free gift limit, and you are leaving additional funds (above the limit) to your heirs, the trust will exempt your estate from the 40% federal tax levy that it would normally be subject to for gifts above the exempted amount.

There are additional types of trusts, including Asset Protection Trusts, Charitable lead trusts (CLT) and Charitable Remainder Trusts (CRT), Special Needs Trusts, Spendthrift Trusts, Tax By-Pass Trusts, and Totten Trusts. I cover these trusts in more detail in my March 2020 issue, Estate Planning: Uncle Sam Hopes You Won’t Do It.

Of utmost importance, if you do create a trust, fund it promptly. Otherwise, if you die before it is funded, it will be useless.

A will and a trust go hand-in-hand. Whereas a will generally covers the totality of your assets, a trust provides for dealing with specific assets, such as life insurance or a particular piece of property. Make sure all the assets that you want to be in the trust are put into it. Any asset that is not retitled in the name of your trust are subject to probate.

The Consequences of Not Planning for Taxes

In the first section of this article, I said, “taxes are the biggest detriment to your heirs,” and in the previous section, I underlined Avoid or reduce estate and inheritance taxes as a reason to form a trust. I cannot emphasize enough the disastrous effect that a lack of tax planning can have on your estate. Taxes can whittle a substantial legacy down to almost nothing if you don’t take into account the legal mechanisms of how assets are passed down from generation to generation.

Estate taxes actually go back a very long time in the history of America. I was a little surprised that the actual first estate-related tax was levied by the U.S. in the 1790s when the country was trying to raise funds for fighting an undeclared naval war with the new French Republic. The next one came along with the Civil War in the 1860s.

And when World War I started, the government enacted a federal estate tax in 1916 to prop up revenues.

The powers that be loved that revenue so much that they’ve been taxing us ever since!

However, most of us won’t have to worry about federal estate taxes. For 2024, in general, only estates with assets more than $13.61 million will be taxed by Uncle Sam. And the rates range from 18% to 40%.

But it’s a different story when it comes to state estate taxes.

Thirteen states levy an estate tax, and the following chart depicts the exemptions for each of those states.

An Inheritance Tax Is Different from an Estate Tax

Six states (Iowa (being phased out in 2025), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) have an inheritance tax, which is paid by heirs or inheritors generally upon receiving the inherited assets. Kentucky and New Jersey have the highest top rate of 16%.

Whether or not you will be subject to an inheritance tax may depend on your relationship to the deceased. According to nerdwallet.com, “A surviving spouse is usually exempt from state inheritance tax. Some states tax a deceased person’s children but at a low rate. More distant relatives or heirs who aren’t related to the deceased usually face the highest inheritance tax rates.”

An inheritance tax is not the same as an estate tax, which is a tax levied on the entire taxable estate. The state of Maryland has both an estate and an inheritance tax.

The following graphic shows you which states have estate and/or inheritance taxes.

I realize that no one likes to think about aging, needing healthcare, or death. But by making informed choices right now, you are relieving your heirs of stress, eliminating confusion, disagreements between heirs, and saving untold money by avoiding legal strife.

Two of the worst moments of my life were having to select coffins, plan funerals for my parents, and try to figure out how to pay for them. It’s such an emotional time, and folks can easily fall prey to unscrupulous providers who can make you overspend in your moment of grief. My family was fortunate that we didn’t suffer from that, but it would have been so much less stressful—emotionally and financially—had my parents preplanned.

Make Sure Your Plans Are Updated

As life progresses, your plans may change. You may divorce, remarry, have more children, stepchildren and grandchildren—all of which could change your estate planning goals.

So, it’s imperative that you keep your estate planning documents and directives updated, and communicate them to your trusted financial advisor and your heirs/caretakers.

And lastly, while there are plenty of do-it-yourself websites that can help you prepare your legal documents, I would recommend that you also run them by your attorney to make sure they are all in good order.