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Ready to Die?
- Bud Schiff
- Oct 9
- 7 min read
Although most individuals want to provide for their families after they pass, some estimates show that over half the U.S. population still lacks even basic Wills, and this is downright troubling.
When an individual dies “intestate,” or without a Will, assets that do not pass by a beneficiary designation or based on survivorship or similar rights, are distributed according to state intestacy laws. These statutes vary by state, and individuals are often surprised to learn that they do not dispose of an individual’s assets as expected. Moreover, intestacy laws do not consider the impact of federal and state estate taxes or incorporate any asset management or creditor protection planning.
Having a properly executed legacy plan (a Will, or Will and revocable living trust) is the best way to ensure that estate assets pass to the intended beneficiaries in the desired manner. Planning is particularly critical for blended families, as state laws may leave more or less than desired to a surviving spouse or children from a prior marriage. Only with a legacy plan can individuals manage their estate tax liability, ensure distribution of specific assets to certain beneficiaries, and provide for creditor protection, long-term planning, and professional asset management for their beneficiaries.
Many individuals may underestimate how greatly intestate distribution can vary from their wishes, giving them false comfort that they can put off planning until a “more convenient time.” Implementing a legacy plan is crucial as intestate distribution can have adverse effects and may cause a bereaved family more pain and conflict.
INTESTACY LAWS: AN OVERVIEW
When a person dies without a Will, state intestacy laws apply to distribute “probate” assets, generally assets that do not pass by beneficiary designation or based on the titling of the asset, such as jointly-titled assets with rights of survivorship (i.e., “non-probate” assets). Every state has laws addressing intestate succession, and most generally provide that probate assets pass to the surviving spouse if there are no descendants or if all descendants of the decedent are also descendants of the surviving spouse. If there is no surviving spouse, typically probate assets will pass to the decedent’s descendants, or if none, then to more extended family members as one proceeds further along the chain of ascent/descent (e.g., to surviving parents, if none, then to surviving siblings, etc.). Yet there can be important and potentially unexpected differences in state intestate distributions, especially if there are descendants from multiple relationships and/or marriages. Even more complicated may be cases where an individual or couple, or trust, moved from state to state after Wills were written, so being aware of the validity of these documents is always worth investigating just in case recent court cases have created new standards.
EXAMPLE:
The Family. Joe, age 46, and Kara, age 33, have been married for four years. It’s Joe’s second marriage and Kara’s first. They have three young children, Nicholas, age 3, and the twins, Sofia and James, age 1. Joe has a daughter from his first marriage, Ella, age 21. He also has a brother, David, but they have been estranged for many years since Joe bought David out of the family business. Neither Joe nor Kara has done any estate planning -- with three young children and a business to run, there never seemed to be a good time. Sadly, Joe passed away unexpectedly. At the time of his passing, he owned the following:
*This policy was purchased for business purposes when David was still involved with the family company. Joe wanted to change the beneficiary designation but never got around to it.
Joe’s Wishes
Joe planned to leave all his assets, except the life insurance, in trusts for Kara’s benefit, with the remainder passing in further trusts to Nicholas, Sofia, and James after Kara’s death. Joe understood that he could structure the plan to help manage the total estate taxes due at his passing and to use distributions in trusts (as opposed to outright) to provide both creditor protection and professional asset management for his family.
Joe planned to leave only the life insurance death benefits to Ella, because he knew that Ella’s maternal grandparents had provided her with a substantial trust fund.
Actual Outcome:
Unfortunately, Joe’s wishes have no impact on the actual distribution of his assets, since he failed to put a Will or other estate plan in place. So, who will receive Joe’s assets after his passing? What a mess!
Non-Probate Assets. Regardless of Joe’s state residence at death, his $4 million in non-probate assets will pass per their beneficiary designations or by operation of law, as follows:
Practical Comment: Although the primary residence and retirement account pass to Kara, as Joe desired, David receives the insurance death benefits because Joe failed to update his beneficiary designation, something Joe surely did not want. Accordingly, along with implementing a Will, individuals must review and coordinate the beneficiary designations and titling of their non-probate assets.
Probate Assets. Distribution of Joe’s remaining assets (his “probate estate”), worth $21 million, will vary depending on the intestacy laws of his state residence at death. To see the potential disparities among states, compare some of the possibilities:
Practical Notes. Ella could receive up to $3.5 million, not the $1 million Joe intended. Further, Kara could be deprived of up to $14 million for her support and lifestyle. She will have no access to Ella’s assets, and, although she will control the assets passing to her children, as their guardian, she must use the assets solely for their benefit and support, not hers, even if she needs them.
Manner of Distribution. Whichever state law applies, all intestate estate assets pass outright, with no regard for tax or creditor protection planning and with no allocation of a specific asset to a desired individual. In Joe’s case, this could cause significant issues, especially for his business. Ella and three minor children could receive business interests, surely complicating business succession or sale planning after Joe’s death.
Further, Kara will have full control over her intestate share and may dispose of it in any way desired, including for the benefit of another spouse if she remarries. There also is no multi-generation planning or use of Joe’s generation-skipping transfer tax exemption to defer further estate taxes for descendants, arguably a huge financial loss.
For many families, defaulting to intestacy laws for distributions of an estate will be inefficient from a succession and tax perspective and will fail to provide sufficiently for long-term planning for children and other beneficiaries.
Payment of Taxes & Expenses. In addition to debts and administrative and funeral expenses, intestate distribution could result in the immediate payment of federal estate taxes upon the passing of the first spouse. In Joe’s case, assuming Virginia law applies, $15 million of assets will pass to non-spousal beneficiaries ($1 million of non-probate assets to David + $14 million of probate assets to children), making it ineligible for the federal estate tax marital deduction. After applying a currently-available federal estate tax exemption of $5,490,000, Joe’s estate would still owe over $3.8 million in federal estate taxes (at a 40% rate) immediately at his passing, instead of possibly being deferred until after Kara’s passing. State estate taxes also could apply, depending on the state.
The payment of these expenses, debts, and taxes will be determined by applicable state law, including the state’s tax apportionment statute. These statutes may or may not apportion the tax liability proportionately among probate beneficiaries or allocate any of the tax liability to non-probate assets, leaving the probate beneficiaries to bear the entire burden. For example, even though the $1 million in life insurance proceeds passing to David is taxable, he may not bear any portion of Joe’s estate tax, leaving Joe’s probate estate, likely the assets passing to his children, to bear the entire burden (since assets passing to Kara qualify for the marital deduction).
WHY THIS MATTERS
Having a properly executed legacy plan (a Will, or Will and revocable living trust) is the best way to ensure that estate assets pass to the intended beneficiaries in the desired manner. Planning is particularly critical for blended families, as state laws may leave more or less than desired to a surviving spouse or children from a prior marriage. Only with a legacy plan can individuals manage their estate tax liability, ensure distribution of specific assets to certain beneficiaries, and provide for creditor protection, long-term planning, and professional asset management for their beneficiaries.
At Insurex, we have found that many clients who are executives even in the life insurance and financial services industries do not always have a will, and that includes agents as well as agency leaders. Regardless of your occupation, including being a retiree, having a review of your entire plan by an expert is a sound investment given the incredible burden that could be placed on your beneficiaries in the absence of such a review. Find a trusted expert and engage them before the need.
This article is not a source of financial or legal advice. Always rely upon licensed professionals in your state. For educational purposes only.