In this lesson, you will explore the use of wills as a tool to transfer property after death. You will also understand the need to be agile and make changes as the need arises. Specifically, this lesson will cover:
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A will’s purpose is straightforward: to transfer property of a person who has died according to his or her wishes. Wills can be short (one page), or lengthy legal documents that are difficult to decipher. At some point in your lifetime financial journey, you will want to draft and execute a will. Perhaps equally important, an older family member may need to draft a will to let loved ones know his or her wishes. Knowing a person’s wishes before she or he passes away may help avoid hurt feelings among surviving loved ones trying to divide up assets. In this topic, we discuss the basics of wills.
1. Transferring Property After Death
There are four ways property can change ownership when someone dies.
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Title: Legal evidence of property ownership.
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Contract: A legally enforceable agreement.
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State law: Governmental statutes describing how assets are transferred when no will is present.
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Will: Legal document describing how assets should be distributed after death.
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A trust may also be used to transfer property after death.
2. Wills
A will is a legal document that dictates someone’s desires regarding the distribution of property after death (see Hint below). A testator is a person who makes a will. To die with a will is termed to die testate. Someone who dies without a will is deemed to have died intestate. Generally, anyone older than age 18 may draft a will. The law makes a distinction between making a gift and leaving a bequest through a will.
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The person who dies is often referred to as the decedent.
- A gift is the irrevocable and voluntary transfer of property to another person while the gift giver is alive. This means that once the gift is made, the person making the gift cannot take the property back or control how the property is used by the new owner.
- A bequest involves leaving property to another party after death through a will. This transfer is also irrevocable.
This illustration shows how the process of making a gift differs from a bequest.
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- Will
- A legal document that dictates someone’s desires regarding the distribution of property after death.
- Testator
- A person who makes a will.
- Bequest
- The irrevocable and voluntary transfer of property to another party after death through a will.
2a. Elements of a Will
The table below shows the elements of a will. Although the specific factors that need to be present for a will to be valid may differ from state to state, these elements are common on a national level.
Table: Elements of a Will
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Legal age
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- Typically, age 18
- Some exceptions for married minors and young parents
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Sound mind
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- Must be legally competent to make decisions
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Intention
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- Must specifically list property to be transferred
- Must specifically indicate to whom property will be transferred
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Written
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- Most states require a word-processed document
- Some states allow oral and handwritten wills
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Signed
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- The document must be signed
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Witnessed
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- Typically, the will must be witnessed by two adults
- Witnesses need to be competent and not beneficiaries of the will
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Properly executed
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- Will must be signed in front of witnesses
- The drafter of the will cannot be forced to sign the will
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2b. Will Disclaimers
Although a will is a legal document, it is important to note that the wishes outlined in a will are not always legally binding. Say that Ashley left her couch, dining room chairs, and refrigerator to her best friend Tony. Does the law require that Tony take the bequest? Absolutely not. Let’s see what happens if Tony rejects the bequest.
- Tony can choose to disclaim the property (not accept the bequest). He might feel badly about disclaiming the property, but he is under no legal obligation to take what he does not want.
- If Tony does disclaim, the property goes back into Ashley’s estate and passes according to either her will or the laws of her state.
- For example, Ashley can write a residual clause in her will when she is still alive. This clause states how all remaining property should be distributed in case there is something left in her estate or property is disclaimed. For example, Ashley could leave everything not claimed or distributed to a charity (note the charity may also disclaim the property).
- The term estate refers to someone’s property, which can include personal, real, and intangible assets (e.g., Facebook and SnapChat accounts).
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- Residual Clause
- A will provision that states how all remaining property should be distributed in case there is something left in an estate or property is disclaimed.
2c. Personal Representative
An important element in any will is the appointment of an executor (sometimes called a personal representative). This is the person (e.g., relative or attorney) or institution (e.g., trust company) tasked with the responsibility of carrying out a will’s directions and disposing of the deceased’s property.
- If the deceased (the person who died) does not name an executor or dies intestate, then the state will appoint one instead.
You want to avoid having the state name an executor because of the costs involved. Usually an attorney will be named, with all activities billed at an hourly rate charged to the estate.
- Although all executors are entitled to be compensated for their work, a state-named representative will often be more expensive than having a relative or close friend perform the same tasks.
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- Executor
- The personal representative (e.g., relative or attorney) or institution (e.g., trust company) tasked with the responsibility of carrying out a will’s directions and disposing of the deceased’s property.
2d. Probate
Recall that probate refers to the settlement of a person’s estate – the assets and liabilities held by a deceased person – through a court-supervised process.
- Probate is a public process that ensures that the distribution of assets and payment of liabilities occurs according to a person’s will or through the laws of the state.
- The executor named in the will works with the probate court to validate the will.
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Estate taxes are taxes assessed on the value of the decedent’s estate at death. Only estates larger than $11.2 million will incur a federal estate tax (and possibly a state inheritance tax).
- It is during the probate process that a will can be contested.
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- Estate Taxes
- Taxes assessed on the value of a decedent’s estate at death.
3. Creating a Will
When people think of wills, they often envision visiting an attorney’s office and, with great anguish, providing a list of all properties owned and intended bequests to the attorney. Although this certainly can occur, drafting a valid will does not need to be a painful process. Let’s look at some of the ways you can create a will.
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If your situation is at all complex, an attorney should draft your will.
3a. Drafting a Will
You can draft your own will, or you can hire an attorney to help you. You can expect the following when you take steps to draft a will.
- A basic attorney-drafted will should cost between $150 and $500. Using an attorney is a common practice, especially for unique or challenging circumstances.
- The cost will probably be lower using an online legal form or a statutory will (a fill-in-the-blanks form).
- As long as certain elements are present, every state accepts a written will that has been signed and witnessed by at least two adults that are not heirs.
Roughly half of all states also recognize a holographic will (handwritten) even if it has not been witnessed. A few states even allow recorded oral wills in the probate process, as long as the statements have been witnessed by a number of nonrelated adults.
3b. Provisions of a Will
For a will to be valid, it must contain a minimum number of clauses and provisions. These provisions generally include the following.
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Each state has its own requirements regarding the validity of a will.
- The will must include an introductory clause, which lists the testator’s city and state of residency, and a note about this being the last will and testament of the deceased.
- The will should also include a description of how assets are to be distributed.
- The will should state how all debts, taxes, and other expenses will be paid. Remember, debts and expenses must be paid first before someone can receive a bequest.
- A will should also name an executor or personal representative, and provide guidelines regarding the person’s powers.
- Of special importance for those with children involves naming a guardian for minor children. This provision is often overlooked with tragic consequences. Without a named guardian, the state in which the deceased lived will determine who is granted guardianship. This person may not be, in fact, the best choice given the family’s situation.
Keep in mind things change over time. You may get a divorce, have more children, or simply have a falling out with someone. It is important you use your agility skill to revisit and revise your will as needed when changes like this occur.
3c. Who Needs a Will?
If you are a full-time student, do you need a will? Probably not, if you want all your assets to go to your parents, or if you are married and you want everything to go to your spouse (in some states, your surviving spouse may only receive half your estate and the other half may go to your parents or children). But for nearly every other person, having a will is a good idea. Here are some guidelines for determining when you need a will.
- If you would like to see your assets go to another person or organization or if you have valuable assets, a will is needed.
- If you are married, your spouse, in most states, is entitled to the property, but to be safe, a will should be used.
- If you would like to reduce financial confusion among your survivors, a will is needed.
The following illustration provides examples of situations that can arise that should prompt someone to draft a new will. Completely new wills are often written upon marriage, the birth of children, or after any other major life event. As soon as a new will is drafted and executed, any old wills become obsolete and non-enforceable.
In this lesson, you learned about transferring property after a death. One way that property transfers is through a will. The required elements of a will include things like witnessing the signatures and making sure the will’s creator is legally competent. A recipient of property from a will is not legally obligated to take it. They can choose to disclaim, or not accept the property.
The executor of the will is also called a personal representative. They’re charged with carrying out the will’s direction which can include overseeing the will through probate, which are court proceedings.
So, who needs a will? Having a will is a good idea for most people. When creating a will, you can draft your own will or hire an attorney for help. For a will to be valid, it must contain the correct provisions which vary by state. An example of a provision is stating how the will’s assets should be distributed. No matter who drafts your will or where you live, your agility skill can help you revise this important document as needed.
Source: This content has been adapted from Chapter 10.4 of Introduction to Personal Finance: Beginning Your Financial Journey. Copyright © 2019 John Wiley & Sons, Inc. All rights reserved. Used by arrangement with John Wiley & Sons, Inc.
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