Planning Ahead: How Having an Estate Plan can avoid a Headache

Contributed by: Matt Trujillo, CFP® Matt Trujillo

Can you believe 2017 is half over already?! That New Year’s resolution that you had to get your estate planning documents drafted is already getting a little stale. For those procrastinators amongst you, I thought I would write about what happens if you pass without a will or trust in place.

First let’s define what the legal term is for people that pass away without a valid will or trust in place. The term used is “Intestacy.”

What is intestacy?

You are said to have died intestate if you pass without a valid will. Intestacy laws govern the property distribution of someone who dies intestate. Each of the 50 states has adopted intestate succession laws that spell out how this distribution is to occur, and although each state's laws vary, there are some common general principles. The laws are designed to transfer legal ownership of property the recently deceased owned or controlled to the people the state considers their heirs. These laws also control how these individuals are to receive this property and when the property is distributed.

Example:

Frank is a Michigan resident and is married with two minor children. He keeps meaning to write his will but hasn't gotten around to it yet. One day, Frank gets hit by a truck while crossing the street and dies instantly. Because he has no will, the intestate succession laws of Michigan govern how his property is distributed. Under Michigan law, 50 percent of Frank's property passes to his wife, and 50 percent passes to Frank's two minor children (25 percent each). Had Frank had a will, he could have left everything to his wife.

Technical Note:

Real property is distributed under the intestacy laws of the state in which it is located. Personal property is distributed under the intestacy laws of the state in which you are domiciled at the time of your death.

Why should you avoid intestacy?

  • Cost
    • Intestacy can be more costly than drafting and probating a will. In most states, an administrator must furnish a bond, where you can often waive this requirement in your will. Also, an administrator's powers are limited, and he or she must get permission from the court to do many things. The cost of these proceedings is paid by your estate.
  • You can't decide who gets your property
    • State intestacy laws will determine who receives your property. These laws divide up your property among your heirs, and if you have no heirs, the state itself will claim your property.
    • Unlike beneficiaries under your will who can be anyone to whom you wish to leave property, heirs are defined as your legal spouse and specific relatives in your family. If the state can find no heirs, it could claim the property for itself (the property escheats to (goes to) the state). The laws of your state determine the order in which heirs will receive your property, the percentage that each will receive, and in what form they will receive it, whether in cash, property, lump sum, annuity, or other form.
  • Special needs are not met
    • State intestacy laws are inflexible. They do not consider special needs of your heirs. For example, minor children will receive their share with no strings attached, whether they are competent to manage it or not.
  • Heirs may be short-changed
    • The predetermined distribution pattern set out by state law can end up giving a larger portion of your estate to an heir than you intended for he or she to have. It may also leave one of your heirs with too little.
  • You can't decide who administers your estate
    • If you die intestate, the probate court will name an administrator to manage your estate. You will have no say in who settles your estate.
  • You have no say in who becomes a guardian for your minor children
    • A court will appoint personal and property guardians for your minor children, since you didn't specify otherwise. You will also expose the assets you leave your child to the management skills of someone you may not approve of.
  • Relations take priority over friends and others
    • State intestacy laws will distribute your property to family members in a preset pattern. These laws do not take your relationship with your family into account when dividing up your estate. As a result, that brother that you haven't spoken to in 20 years may end up with a portion of your assets that you'd rather he not have.
  • Tax planning options are eliminated
    • Without a will or some other means of disposing of your property, you can't plan to minimize or provide payment of income or estate taxes.
  • Family fights can occur
    • Who gets Grandma's jewelry? Or what about that stamp collection that you began 30 years ago? Distribution by intestacy law provides no answers to specific questions like these. If these questions cannot be resolved peaceably, lawsuits may result or the property in question may end up being sold and the proceeds distributed to the squabbling family.

How is property distributed under intestacy?

The pattern of distribution varies immensely from state to state. You must check with your state to find out what its intestate's will looks like. Generally, the rules are as follows:

  • If you leave a spouse, but no children, the spouse takes the entire estate
  • If you leave a spouse and children, each takes a share
  • If you leave children and no spouse, the children take the entire estate in equal shares
  • If you leave no spouse or children, the entire estate goes to your parents
  • If you leave no spouse, children, or parents, the entire estate goes to your siblings (or your siblings' descendants)
  • If you leave none of the above, the entire estate goes to your grandparents and their descendants (your aunts, uncles, and cousins)
  • If you leave no heirs, the next takers are your deceased spouse's heirs
  • If there are no heirs on either side, the next to take are your next of kin, those who are most nearly related to you by blood
  • If there are no next of kin, your estate escheats to the state

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.


This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. While we are familiar with the legal and tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on legal or tax matters. These matters should be discussed with the appropriate professional.