When A Will Won't Do

A Last Will and Testament is the most basic of estate planning documents, but also one that is often misunderstood. Many think that if they have a Will they don’t have anything to worry about—everything will go to the persons they specify. That’s not true, though, and it’s important you understand why a Will sometimes Won’t. Let’s test your knowledge of how a Will works. Here are the basic assumptions. Husband and Wife own a home, they have a checking account, a Certificate of Deposit, a life insurance policy on Husband and an IRA for Wife. They have two children, Son and Daughter. They each have a Will that says everything gets divided equally between their Son and Daughter.

The home is in both Husband’s and Wife’s name. Since they are getting up in years, and because Daughter lives close to them, they’ve added Daughter’s name to their checking account and Certificate of Deposit so those funds can be used to help care for them. Husband has had his life insurance policy for decades and when he set it up, he named Son as the beneficiary. Wife wants Husband to have the money from her IRA in case he needs it, so she has named him the beneficiary. Lastly, Son and Daughter don’t get along very well.

Here’s the quiz:

Question: If Husband dies first, who gets the life insurance money?

Answer: Remember, the Will says it should be divided equally between Son and Daughter. Is that what will happen? No. Since the Son is named as beneficiary on the life insurance policy, the Son will get 100% of the death benefit. In this situation the Will doesn’t matter—it won’t.

Question: Who gets the home after Husband and Wife both die?

Answer: In this situation, the Will determines that the ownership of the home will be equally divided between Son and Daughter.

Question: Does the home have to go through Probate?

Answer: Yes, anytime the Will decides how something is passed on, it must go through Probate. Probate is the legal process of proving the authenticity of the Will and that the assets are handled accordingly.

Question: When both Husband and Wife die, how soon with the money from the Certificate of Deposit and the checking account be divided between Son and Daughter?

Answer: Never. This is another situation in which the Will won’t. Since Daugther’s name is on both the Certificate of Deposit and the checking account as a co-owner, Daughter gets all of that money. It doesn’t have to pass through Probate, it’s hers right away.

Imagine how happy Son would be when he finds out that even though the Will says everything is split equally, that Daughter gets all the Certificate of Deposit and checking account. At least he got the life insurance money—but it was a small policy--much, much less than what the Certificate of Deposit and checking account were worth!

Question: Husband dies first, then the Wife passes away. Who gets the IRA?

Answer: It is split between Son and Daughter, but much of it is lost to taxes. This one is more tricky. The husband was named the beneficiary. There weren’t any contingent beneficiaries named. Since she died after him, the IRA doesn’t have a beneficiary!

When an IRA doesn’t have a beneficiary, it becomes a part of the overall estate and is handled by the Will. As a part of the process, though, all the money is taken out of the IRA and taxes have to be paid on it. Whatever is left then gets divided between Son and Daughter.

This situation could have cost Son and Daughter tens of thousands of dollars. If Wife had named them as beneficiaries after Husband died, then they would have inherited the IRA and could have continued to defer most of the taxes over their lifetimes.

How’d you do?

The main thing to understand is that assets are transferred 3 different ways—by ownership, by beneficiary or by Will. It doesn’t matter what the Will says if the asset will pass by ownership or beneficiary.

The bottom line: review your life insurance and IRA beneficiaries, verify the ownership of your investments and home, and make sure your Will is up to date. Because many times, your Will won’t.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at www.guardingyourwealth.com.

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