Choosing Not to Have a Will – Pros, Cons, and Alternatives
Not everyone has a will. Perhaps most often, people do not want to write one because they don’t want to think about dying, or they plan to write one and simply put it off. Other common reasons include not wishing to pay for an attorney and/or thinking that a small estate doesn’t require planning. However, most people who die without a will (known as dying intestate) are not fully aware of how easy, inexpensive, and useful a simple estate plan can be. They also do not typically know how their property will be distributed through intestacy should they go without a will. On the other hand, some purposefully choose intestacy and/or employ “will substitutes,” different mechanisms for disposing of property at death, to avoid the cost and delay of the probate process.
To make an informed decision about your estate plan, it is important to know the importance of having a will and the alternatives if a will is not utilized. The sections below answer some common questions about the consequences of not having a will.
Intestacy and the Advantages of an Estate Plan
What happens to my property if I die without a will?
If you die without a will, state law determines how to divide your property through its intestacy statutes. In Kentucky, half of your property passes to your spouse through the dower right. After your spouse takes, your children take. If you have no spouse and no children, your parents take. If you have no spouse, no children, and your parents have predeceased you, your brothers and sisters take, and so on. Only if you die without any relatives (or those entitled fail to claim it timely) will your property escheat to the state of Kentucky. KRS 393.020. In lieu of an executor, the court appoints someone to act as the estate’s personal representative and distribute property.
If you are satisfied with Kentucky’s intestate succession scheme, doing nothing and letting state law run its course is clearly the simplest and most inexpensive form of estate planning. But it’s not really planning – most people don’t know exactly how their home state distributes property. Also, only family members can inherit through intestacy. If you die without relatives, the state will end up with your property before your closest friend. Partial intestacy is also possible if your will is not properly drafted with residuary or catch-all provisions to cover all your property.
Why would I need a will if I do not have a lot of property?
Of course planning for property distribution is the primary reason for having a will, but it’s not the only one. Even if you’re happy with the state’s intestacy scheme, a will can do more than distribute property. A will also allows you to designate a guardian for minor children and provide funeral and burial instructions. Advanced directives and powers of attorney, often drawn up with a will, allow you to determine how you want to be treated before you die, such as by allowing you to choose someone to make medical decisions for you when you become incapacitated. Also, most people with small estates still do have dear personal items. The idea that you wanted a loved one to have an item of meaning can be incredibly comforting after you pass. It can be burdensome on your family to distribute your household items, so designating an executor and clearly setting out a distribution scheme can save your friends and family time and confusion.
Further, if you have a small estate, probate might not be as lengthy and complicated as you think. Your surviving spouse (if none, your children) may apply to have the district court set aside the first $15,000 of personal property in your estate. This process, called dispensing with administration or “mini probate,” allows the judge to direct assets to be transferred without further proceedings and without an administrator/executor. KRS 395.455.
Avoiding Probate Through Will Substitutes
I do not want a will because I do not want my loved ones to have to go through the probate process. What can I do instead?
There are several ways to keep your property from passing through probate. Not all property is subject to probate anyway. For instance, property that passes at death to a named beneficiary (i.e. “payable on death” accounts and “transfer on death” accounts) such as a life insurance policy or IRA is non-probate property. It will pass directly to the beneficiary according to the terms of the policy without going through the court or the estate’s executor. Property that is held in joint tenancy with a right of survivorship (as real property often is) will pass to the joint tenant at your death and also avoid probate. It may be difficult to avoid probate and intestacy altogether without transferring your property during your life through a living trust. Nevertheless, non-probate property often makes up the bulk of an estate, leaving little subject to lengthy and costly administration.
Should I name my estate as the beneficiary of my policies and retirement plans?
In general, this is not recommended. First of all, naming your estate as a beneficiary is a sure-fire way not to avoid probate. More generally, naming your estate simply causes an unnecessary delay. Benefits such as life insurance proceeds would be paid directly to a named beneficiary instead of awaiting distribution by the executor if paid to the estate. Once they become part of the estate, creditors of the estate will be able to reach the proceeds. Additionally, these assets could impact estate tax liability.
Does joint ownership avoid probate? Wouldn’t owning all property jointly be a quick and easy way to save time and expense of estate administration?
Not necessarily. In Kentucky, specific language must be used in a title document (such as a deed) to indicate a joint tenancy with a right of survivorship. If such a tenancy is created, the surviving owner automatically takes the whole when his joint owner dies. There are a number of issues to consider before adding someone’s name to a title. First of all, even if you trust the person, holding property jointly means that this person has equal rights and access to the property. It also means that the person’s creditors may be able to get to the property. Further, you’d need the person’s consent if you ever wanted to dispose of the property.
There may also be significant tax consequences to holding property jointly. If you add someone’s name to your title without receiving adequate consideration, the IRS would consider this a gift. IRS – Frequently Asked Questions on Gift Taxes. Depending on the size of your estate and the amount of gifts you’ve given in your lifetime, your estate may end up owing gift tax.
Furthermore, changing the nature of ownership to joint tenancy could impact the step-up basis in the property. In basic terms, when you sell property, you’ll owe income tax on the amount of any gain. When property is inherited and disposed of later, you may end up with much lower gains because the basis of inherited property is determined as of the date of death of the original owner. IRS – Gifts & Inheritances. Alternatively, a joint tenant will not receive a stepped up basis for the deceased tenant’s share, resulting in potentially huge taxable gains if they wish to dispose of property that has appreciated. Because the tax law is constantly in flux, you should always discuss potential consequences with an attorney – especially before you add someone to a title. You may also wish to visit the IRS website for more information on gift and estate taxes (IRS – Estate and Gift Taxes). Also, if the transfer of part of your ownership interest is considered a gift (the interest is transferred for less than fair market value) it will likely also impact Medicaid eligibility. Medicaid.gov.
Despite these consequences, it is usually still advisable for married couples to hold property as tenants by the entirety, a type of ownership with a survivorship interest for spouses only. If you do decide you’d like to hold property in joint tenancy with the right of survivorship or in tenancy by the entirety, it is advisable to speak to an attorney first, and then have an attorney make sure the survivorship interest is properly established. If a joint tenancy or tenancy by the entirety is not properly created under state law, your property may be subject to adverse tax consequences without the benefit of avoiding probate through survivorship.
An alternative may be creating a life estate instead of a joint tenancy. If you become a life tenant of your home, you have the right to live there until your death, at which point it passes to the person or persons you designate in the deed, known as the remaindermen. Such a life estate still avoids probate and may avoid several joint tenancy pitfalls. Since the remaindermen have no right to the property until your death, they cannot legally damage or deplete it and their creditors cannot get to it until your death. However, creating a life estate will still impact Medicaid eligibility, you are unable to sell the property without consent of the remaindermen, and there are complex tax implications. Be sure to discuss potential changes in property ownership interests with an attorney and/or an accountant.