A will is important to have, as it allows you to communicate your wishes clearly and precisely. It is advisable to work closely with an attorney to create and update your will.
When there is no will
Without a will, the state in which you reside decides how to distribute your assets to your beneficiaries according to its laws. This is known as dying intestate, and the resulting settlement process may not produce the results that you would prefer for your survivors. You can prevent this from happening by having documents drafted that reflect your wishes.
Contents of the will
A will generally includes:
- Designation of an executor, who carries out the provisions of the will.
- Beneficiaries—those who are inheriting the assets.
- Instructions for how and when the beneficiaries will receive the assets.
- Guardians for any minor children.
Why naming beneficiaries is important
For assets that move outside the will and probate process, if the named beneficiary conflicts with anything stated in the will, then the named beneficiary prevails. This means the named beneficiary will receive the asset, rather than anyone else named in the will, and usually the asset will not have to go through probate.
Thus, it's essential to name beneficiaries on assets that allow it—such as IRAs, 401(k)s, and brokerage accounts—and to keep those designations up to date. Note that, generally, if you are married and you name anyone other than your spouse as a 401(k) beneficiary, consent of your spouse is required.
For assets that do not allow for the naming of beneficiaries (such as some bank accounts and real estate), the will is the place to designate who will get them, as well as any related special instructions.
Some types of assets allow for the naming of beneficiaries (such as IRAs and investment accounts), which enables a direct transfer of the asset without involving the will and has greater authority than the will. These types of assets usually avoid probate and the associated fees and may avoid certain taxes, helping you maximize what you leave to your beneficiaries.
Assets that pass through the will must undergo the probate process.
Probate is a legal process for settling an estate, whether one has a will or not. The probate process varies by state—many states offer a quicker, less expensive option if the assets subject to probate are below a certain value (for example, $25,000 or $50,000).
Probate is also public record, so it decreases the level of privacy of the estate.
Generally speaking, an asset that allows the owner to name a beneficiary will not have to go through probate.
Common Types of Inherited Assets
|Usually subject to probate||Not usually subject to probate|
|Retirement accounts or investment accounts that are missing beneficiaries or transfer on death (TOD) instructions||Retirement accounts: 401(k)s, 403(b)s, IRAs with named beneficiaries|
|Cash, cash accounts that don’t allow TOD designation||Trusts|
|Real estate||Insurance policy proceeds|
|Personal property, including valuable items||Investment, brokerage, or cash accounts with TOD instructions in place|
|Assets held as tenants in common||Assets with joint ownership with right of survivorship|
This means, for the assets not usually subject to probate, listed on the right, named beneficiaries will likely be able to assume ownership sooner and may save money on court costs and attorney fees.
For example, if you have an IRA and you would like to pass it on to a child, ensure the IRA's beneficiary designation is made accordingly. The IRA will pass directly to the child without having to go through the often lengthy and costly probate process.
As always, you should discuss your specific situation with your attorney or tax advisor.