Five Often-Overlooked Reasons Why You Need a Will
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Most people fail to appreciate the full importance of a will, especially if they feel their estate is too small to justify the time and expense of preparing one. And even people who recognize the need for a will often don't have one, perhaps due to procrastination or a disinclination to broach the subject of mortality with loved ones.
Here are five basic reasons why you should have a will:
Reason 1. To Choose Beneficiaries
The intestate succession laws of the state in which you live determine how your property will be distributed if you die without a valid will. For example, in most states the property of a married person with children who dies intestate (i.e., without a will) generally will be distributed one-third to the spouse and two-thirds to the children, while the property of an unmarried, childless person who dies intestate generally will be distributed to his or her parents (or siblings, if the parents are deceased). These distributions may be contrary to what you want. In effect, by not having a will, you are allowing the state to choose your beneficiaries. Further, a will allows you to specify not only who will receive the property, but how much each beneficiary will receive.
Note: If you wish to leave property to a charity, a will may be needed to accomplish this goal.
Reason 2. To Minimize Taxes
Many people feel they do not need a will because their taxable estate does not exceed the amount allowed to pass free of federal estate tax. These assumptions, however, should be reviewed given the current state of change in the federal estate tax laws. The federal estate tax laws in 2009, 2010 and 2011 are vastly different, for the moment and, therefore, it is important to have your will reviewed and updated as necessary this year.
Most wills were written with the existence of a federal estate tax. However, due to a loophole in the law, both the federal estate tax and the generation skipping transfer tax were repealed at the end of 2009, leaving 2010 without either of these taxes. There is still the gift tax, with the exemption of $1,000,000 during your lifetime, but the tax rate is reduced to 35% in 2010. (In 2009, this rate was 45% and 2011, it will increase to 55%. For both years, the gift tax exemption remains at $1,000,000.)
The federal estate and generation skipping transfer taxes, however, are both scheduled to return in 2011 at much less favorable rates than seen in the past 10 years. In 2011, the estate tax exemption amount will be $1,000,000 with a tax rate of 55% on the remaining estate. This compares to the 2009 exemption amount of $3,500,000 with a tax rate of 45%. Many professionals believe that Congress may retroactively reestablish the 2009 estate tax structure for 2010. This, however, remains to be seen.
Having your will reviewed during these changing times is important as the tax consequences have changed and unanticipated taxes could arise. (For instances, inherited assets subject to capital gain taxes.)
Further, your taxable estate may be larger than you think. For example, life insurance, qualified retirement plan benefits and IRAs typically pass outside of a will or of estate administration. But retirement plan benefits and IRAs (and sometimes life insurance) are still part of your federal estate and can cause your estate to go over the threshold amount. Also, in some states, the estate or inheritance tax differs from the federal laws. A properly prepared will is necessary to implement estate tax reduction strategies.
Tip: Changes in the estate tax laws and in the size of your estate may warrant a re-examination of your estate plan.
Reason 3. To Appoint a Guardian
If for no other reason, you should prepare a will to name a guardian for minor children in the event of your death without a surviving spouse. While naming a guardian does not bind either the named guardian or the court, it does indicate your wishes, which courts generally try to accommodate.
Reason 4. To Name an Executor
Without a will, you cannot appoint someone you trust to carry out the administration of your estate. If you do not specifically name an executor in a will, a court will appoint someone to handle your estate, perhaps someone you might not have chosen. Obviously, there is an advantage, and peace of mind, in selecting an executor you trust.
Reason 5. To Help Establish Domicile
You may wish to firmly establish domicile (permanent legal residence) in a particular state, for tax or other reasons. If you move frequently or own homes in more than one state, each state in which you reside could try to impose death or inheritance taxes at the time of death, possibly subjecting your estate to multiple probate proceedings. To lessen the risk of this, you should execute a will that clearly indicates your intended state of domicile.
