Wills: The Basics
As indicated in a previous article, planning for the future (even if the future means you're dead) is a necessary evil. Here are some of the basics of a will and what you need to know.
This is a legal document which outlines how your assets and belongings are to be distributed when you die.
Your executor (also known as "administrator") is the person you designate in your will to carry out your wishes.
Since they have to follow your will to the letter, it is best to meet with your chosen executor, gain their approval for such a responsibility (it's a big one), and then describe your wishes to them as outlined in the will. They should also ideally know where to find the will and other key documents if and when they need to.
Beneficiaries are the people who receive your assets when you die. You designate them as you see fit in your will, and you can have as many beneficiaries as you wish. Beneficiaries can also include companies, charities, and other organizations. (If you designate an organization or charity as your beneficiary, it is best to consult with them first to determine how specifically to do so).
If you die without a will, you are considered to be intestate. This is when the government steps in, and over a tiresome period will attempt to contact anybody who might be a family member with a right to receive any of your assets. They first need to find the most appropriate executor, since nobody will be allowed to touch anything you owned until one is appointed. All accounts without designated beneficiaries (and even some that are) will be frozen and assets locked up.
If there are competing interests for who should be the executor, then intestate succession can become ugly, costly, and chaotic.
And if somebody dies intestate, even joint accounts can be frozen (not always, but in some cases), so spouses who think their estate situations are simple and not in need of wills can sometimes be in for a nasty surprise.
Guardian for Children
In your will, you designate a guardian for your minor children. You can also specify certain elements of how they are to be raised, and arrange how they will be financially cared for.
If no guardian is selected, your kids don't get to pick, and sometimes the most logical guardian (for example a close friend who has been involved with the family since the beginning and would love to care for the kids) won't be respected - it goes by the book (worse case scenario: think "wicked Aunt who hates kids and never went to a family picnic if you paid her").
Income Tax Savings
Depending on where you live, there is usually a tax-friendly provision for the rollover of assets between spouses on death if it is properly specified in the will. Otherwise, there is a "deemed disposition" of assets often resulting in a tax bite before the spouse gains access to these funds. (General financial prudence dictates that you put off paying taxes until the last possible minute, in order to achieve greater overall gains using compound growth).
Trusts for Children
If you die and your kids are the age of majority, they will have full access to the assets you bequest to them. Not to challenge your parenting skills in raising a responsible child, but really - what 18 year old (or 21 year old for that matter) is going to responsibly accept a financial windfall? Heck - many seasoned adults can't handle financial windfalls; young adults won't fare any better. Your hard-earned estate that you hoped would provide financial security for your kids could end up being spent in record time with very little to show for it.
So in your will, consider setting up a trust. There are a few types of trusts (which go beyond the scope of this article), but basically you can set the terms as you wish. You can specify when and how your kids receive the money, and even how it is to be used or invested. Beware of setting too many restrictions: resentment can become a factor if the kids feel they have been unrightfully challenged, but most will eventually respect a decision to hold off divesting the funds until a later age.
Family Law Protection
Once again we trust our kids to make all the right choices in life, including their choice of spouse. However life happens, and sometimes marriages break down. If your hard-earned estate is left to your child and their partner (be they a husband or wife, or just a common-law partner), half of it could well disappear along with that marriage when it breaks down.
In your will, you can insert clauses and terms to prevent this from happening.
Common Disaster Clause
The best way to demonstrate the effectiveness of a Common Disaster Clause is by example:
John & Jane are married, with no children. They are both in a serious car accident, hospitalized in critical care. John passes away first, but Jane hangs on. However two weeks later, Jane too dies.
Without a common disaster clause, John's assets would go to Jane, the surviving spouse. When Jane dies, her entire estate (which includes everything John brought to the marriage) would go to her side of the family (or whoever her contingent beneficiaries are if she had a will). John's entire family would be denied any inheritance (including heirlooms or other prized family items - it's not all about money).
A common disaster clause diverts this problem by stating that if both spouses die within a certain amount of time (eg: a 30-day period) as a result of a common disaster, then their estates are split in half and distributed to their respective families accordingly.
This is inserted to protect the executor from being sued, for example in the case of an investment loss. This is particularly important if they are managing trust accounts.
This allows your executor to retain the services of an accountant or lawyer with regards to processing the estate or receiving estate-specific advice, and the estate can pay for it. Otherwise, the fees could come directly out of the executor's pocket. And although they may be a great brother or good friend, nobody appreciates a legal bill - much less an unexpected one!
As I said earlier, it’s not all about money and cash grabs when you plan your will and estate. You are looking out for the best interests of yourself, your loved ones, and their loved ones too. Nobody likes to plan for the future in this respect, but once it's done it can be put to bed, and everybody can rest easily knowing that the future is taken care of.