John Denver went out for a routine plane ride when the unexpected happened. He crashed into the bay and died. What was he thinking? Probably not about the fact that he had left three children and no will, with no directive about the disposition of his $20 million estate.
Jackie O. on the other hand, left an explicit will detailing the handling of her $200 million estate including specific bequests to her children, gifts for her friends, and 36 pages of directives on the distribution of her property including her Fifth Avenue apartment in New York City and an autographed copy (signed by Robert Frost) of JFK’s inaugural address.
While you may not have $200 million (yet!), it is important that you take control of your legacy and write a will. Seven out of 10 Americans die “intestate,” meaning without a will. In fact, each state has its own rules regarding the distribution of property as well as laws that dictate what constitutes the elements of a valid will. Just like any other area of financial planning, knowing the basics can go a long way. Unfortunately, most of us don’t like to think about writing a will, but the best way to provide for your heirs is to do proper planning in life, while you can!
What’s a will?
A will is a document that transfers your property at your death to designated persons. It is revocable, which means that it is subject to change until your death. It becomes effective only upon your death. The goal of your will is to distribute your property to whom you wish, like your diamond engagement ring to your favorite daughter-in-law or your coin collection to your grandson. A will also provides for your assets to be managed or for the care of your children by naming guardians for them.
You — the “testator” if you are a man, or “testatrix” if you are a woman — are the main player in writing your will. You must be of sound mind and of majority age in your state. You must declare it to be your “last will and testament.” It must be in writing and signed by you, and two witnesses. It should be revised when you have a change in your family situation like a birth or a divorce, or when there is a change in the tax law.
It is essential to name a personal representative, who is known as an “executor” or “executrix.”
“The executor is charged with a fiduciary duty to carry out the terms and conditions of the testator’s will as well as settle all debts. The role is shaped by the size and complexity of the estate,” says Judd Kleeger, an attorney in New York City. Being an executor or executrix is a job which requires competency and some financial knowledge. Upon the death of the testator, the executor will have to take an inventory of and collect assets, pay debts and taxes, and manage assets.
“An executor of a large and complex estate will have much to do. However, they will be rewarded handsomely by receiving a fee, generally a percentage of the estate’s value,” Kleeger says.
Related tax issues
You also should be aware of possible taxes when preparing your will. If you leave a large estate to someone other than you spouse, our government will collect taxes on the assets.
Federal estate taxes were first collected in 1916. Now they are being phased out under 2001 tax legislation, with the estate tax set to expire completely in 2010. But the elimination of estate taxes is for that one year — 2010 — only unless Congress takes further action.
In addition, many states impose their own estate taxes, usually as a “sponge tax” that piggybacks on the federal estate tax, as well as separate inheritance taxes. Check
Bankrate’s state tax directory for your state’s law.
The possibility of estate taxes underscores why you should consult an attorney about your estate and how to deal with it in your will and through other financial moves. “With all of the tax law changes, effective tax planning by a tax practitioner can save taxes both during life and for your heirs,” says Alan Levine, a tax attorney in New York City.