I often get asked, “When is a will OK?” Talk about a question that doesn’t narrow down the universe very much! A one-word answer to that question can range from “Never” to “Always!” What I usually assume as underlying concerns when people as me, “When I a will ok?” are the following questions all packed into those five simple words.
I assume the client is really asking, “At what point will only have a will force our kids into unnecessary court processes?” “How much does a will do for us while we are alive?” “What will happen tax-wise if we just pass away with a will?”
“Why was my parent’s estate so simple when all they had was a will?” and “Will our plan make things as simple as possible, even if all we have is a will?”
Unpacking these full questions is key to answering, “When is a will ok?” Let me begin by giving some situations where I think a will is OK and by identifying those situations I think you will be able to spot why a will may or may not be OK for a given situation.
First of all, if someone in Illinois owns no real estate and has less than $100,000 of other things, then a will-based plan is probably OK.
I’ll get into why here in a second, but I just noticed a shift in my vernacular that needs pointing out and explained. In the introduction to the podcast, I belabored “only a will” and “just a will” and I now shifted to “will-based plan” and there is a key difference.
In my office, a “will-based plan” always always always has intelligently drafted power of attorney documents with them. I strongly believe that everyone needs to have really robust power of attorney documents. In fact, I had a pretty lengthy discussion on powers of attorney a few episodes ago.
Go back and listen to that episode for more information on why the power of attorney documents are so important. Now back to the topic of this episode.
If someone in Illinois owns no real estate and has less than $100,000 of other things, then a will-based plan is probably OK and this has to do entirely with the rules of probate. Illinois law requires probate for anyone who owns any real estate or for anyone with over $100,000 in their estate. This $100,000 figure is cumulative and will not typically include assets that have beneficiaries named.
Take a life insurance policy for example. The life insurance policy probably has a beneficiary named and the death benefit of that policy will be paid to that beneficiary and the value of that death benefit will not count toward the $100,000 probate threshold.
Another situation where a will-based plan could be ok is if there is a really serious situation with one spouse being on their death bed and there is a surviving healthy spouse, you can probably get away with just doing a will.
When I say death bed, by the way, that’s what I mean. I do not mean a spouse who is sick or who has some chronic issues or incurable cancer or any of those other very bad and crushingly sad situations.
I have had clients in that situation where the “healthy spouse” dies before the “sick spouse” and any planning that assumed the order of death crashes and burns, often causing a lot of harm. The reason this situation could be appropriate for a will-based plan is twofold: first, probate is really only a concern when the second spouse passes away, and second, most tax or family dynamic issues usually tax the second stage to the pressing issues of imminent death.
As many weaknesses as death-only planning have, when facing death in the headlights, you must be honest about the realities of that situation. When I complete a will in this situation is usually the first step in a larger plan where I work with the surviving spouse and her family to put together a tax-efficient plan that, using trusts, provides flexibility for the long-term future.
Finally, there is a situation where a couple is young and healthy with only concern about taking care of their kids if something were to happen to both of them. In this situation, I may fit them with a will-based plan if they are confident in their overall health and longevity and simply want to name guardians who would watch the kids.
So when is a will OK? If somebody doesn’t care about the probate process, a will can be OK. When somebody has less than $100,000 and no real estate, a will can be OK. And if a young couple simply wants to address an emergency situation by making sure their kids end up with the right person, a will can be OK.
A will is simply opt-out of a state’s distribution pattern. What I mean by that is the state of Illinois has rules for you saying, “Hey when you pass away here’s where things are going to go – unless you say differently.”
The state’s rules are called intestate succession. You can Google it and you’ll find what goes to whom when you have a spouse or have surviving parents, or you have kids, yadda yadda yadda if you say to yourself, “You know what, I don’t really care for your rules. I want these rules to apply” you can say so through your will.
But what a will doesn’t do, and this is a very common misconception, a will does not avoid probate. We get calls all the time that say, “My mom just passed away but don’t worry she had a will so I know we don’t have to go through probate.”
I have to tell those people, “Listen I’ll take a look but I think you’re going through probate. Is there a house?” “Yes.” “OK, yeah I’m really really confident you’re going through probate but let’s take a look just to make sure.”