by Chuck Drury
Did you know that 65 percent of adult Americans do not have a will? Many feel that only the rich need one. For others it is one of those things that “they will get around to someday.”
Further, did you know that 70 percent of beneficiaries mismanage or burn through inherited wealth within a short time? A Dec. 9, 2011 Forbes magazine article by Carolyn Rosenblatt reported this fact. Inadequately planned distributions can become a source of friction and dispute among family members and even in-laws or creditors of beneficiaries.
Let’s look at some of the reasons you should have an estate plan and/or will:
Who will raise your minor children if you die or become incapacitated? You have a chance to provide a caring and loving home for them. The courts will make this decision for you if you do not.
Who will manage your affairs if you become incapacitated? You need to provide a power of attorney to someone you can trust to handle your financial and other matters. Here again, the court will decide if you have not.
Blended families need a clear plan to assure that family members from different marriages are treated fairly. You need to determine what goes to the current spouse and children of prior marriages.
If you die without a will, the court will distribute your assets in accordance with state law. This could mean that they might go to someone other than whom you would wish. It can be bad for some heirs who would waste them or spend them on a destructive lifestyle. I know five young relatives who did not know how to manage inherited money. They blew it on booze, drugs and boyfriends until it was all gone in a few months.
A good plan is needed so that your spouse and family will be able to survive financially if you die. This may also involve providing an adequate amount of life insurance.
A good financial plan such as a trust can provide several protections. First, a trust avoids the legal costs and inconvenience of probating a will. It allows you to determine when and how beneficiaries receive distributions. It can be set up to keep assets in the family. Otherwise, your adult child’s spouse may wind up with them in the event of divorce or your child passes away prematurely. Trusts can also be set up so that benefits are paid out over time and under specific circumstances. They can include “spendthrift” clauses so those funds are not paid out to one who would waste them. Typical limitations include addicted gamblers, alcoholics, drug addicts, etc.
Another area that deserves attention is the distribution of your IRA or retirement accounts. You need to properly designate beneficiaries for these accounts. There can be very significant tax consequences unless beneficiaries are designated and the beneficiaries properly handle the inherited accounts. A qualified beneficiary can use the funds over time, in accordance with the law.
Estate plans and wills should be periodically reviewed and updated – at least once every five years. Some events that should trigger an update are marriage, divorce or death of a spouse, increase or decrease in assets and changes in federal or state inheritance laws. Other events may be the assigned guardian or trustee is no longer able to serve or you may wish to make changes.
A good estate plan can eliminate temptation to an irresponsible beneficiary by restricting access to large sums of money. An estate plan can be used to provide incentives to a child to improve. It is often a good idea to set up a plan that can last for decades or generations. It may be wise to have assets distributed when the heirs reach certain age targets such as 21, 35, 45 and 55 years of age. Distributions can be set up to occur when some needs may occur such as paying for college, family emergencies, etc.
One good practice, if you can afford it, is to give some of the “inheritance” to heirs while you are still alive. This gives them a chance to learn how to manage it and you get to learn how well they do it.
The best practice is to get competent legal advice in setting up wills and estate plans. Online services are available if your situation is simple and straight foreword.
By all means, examine your situation and cover your bases ahead of time.
Chuck Drury is an Anoka resident, retired engineer and former technical director of Federal Cartridge Company. He currently owns a consulting firm in explosives and ammunition research and development, safety, testing and manufacturing.