I DON’T LIKE THE IDEA OF HAVING A WILL

The other day, I was presenting a seminar to a local group of seniors. I was talking on the subject of estate administration, or what many people call “probate.”

One of the attendees asked me, “Can’t you just avoid probate by having all of your money payable on death to your children. I don’t like the idea of having a Will.”

Now, actually, this woman wasn’t asking a question. Like many of the people who are “asking me a question” during the question-and-answer segments of my seminars, this woman was making a statement, or statements. Essentially, her statements were as follows: I think lawyers charge too much money. I think the legal system is too intrusive and overly complicated. I’m going to avoid the need to involve in a lawyer in my life, as well as government interference, by holding all of my assets with beneficiary designations. By doing this, I will avoid the need to have a Will and probate.

You might be thinking, No, John, she just doesn’t like thinking about her own mortality. That’s why she doesn’t have a Will.

If that were the case, then why is she jumping through so many hoops to ensure that her assets are equally allocated into various bank accounts with “payable on death” designations. I don’t know about you, but putting something called a “payable on death” designation on my accounts doesn’t make me feel warm and fuzzy. And to put such designations on each of my accounts requires me to think more frequently about my death then having one Will drafted.

This woman’s ideas are not bad. We’d all like to avoid unnecessary expenses and interference with our lives. This woman, like many of the people who ask “questions” during my seminars, was simply being honest, honest about the way she felt.

But just because someone firmly believes something doesn’t make that belief true. First of all, a Will is a relatively inexpensive document. A “simple Will” – a Will that leaves your entire estate, outright, to your spouse or adult children – costs about $175.

When you think about it, a Will has the potential of controlling how every asset you own will pass to friends and loved ones after your death. Paying $175 for a document that important is extremely inexpensive.

Furthermore, having a lawyer draft a Will for you gives you something else that trying to handle your estate plan yourself should not, peace of mind. For instance, I am confident that the woman who asked the question at my seminar feels comfortable with her estate plan. She whole-heartedly believes that her plan to dispose of her assets will work seamlessly.

But let’s analyze her plan versus a traditional lawyer-created Will.

The woman’s plan is to put “payable on death” designations on her bank accounts. I assume that the bulk of the woman’s estate is held in these bank accounts, with the exception of her house. Not to be remiss, this woman also “asked” me if it wouldn’t be prudent to “give her house to her children.”

So, let’s assume that this woman has four children and four CDs worth $50,000 each. Let’s further assume that she has a house, that she paid $30,000 for her house in 1970, and that her house is now worth $300,000. Finally, let’s assume that this woman gave her house to her children, or as some people like to say, she didn’t “give” it to her children, she “sold” it to her children for a dollar. (We, in the know, know that selling a $300,000 house for a dollar is a $299,000 gift – assuming, that is, that you actually received the $1.)

If everything goes as planned, after this woman dies, each of her children will receive a $50,000 CD and will own a one-quarter interest in her former house, if everything goes as planned.

Reality is, things rarely go as planned. For instance, no one – or very few – people seriously plan on needing long-term care. What if this woman ends up in a nursing home for the last six months of her life? Nursing homes cost about $7,000 a month. A six month stay would cost this woman $42,000.

A $42,000 unexpected debt would practically eliminate two of this woman’s four CDs, meaning that two of her children would not receive any cash assets, while the other two would receive their full share.

Furthermore, because this woman gifted her house to her children, her children assumed her “basis” in her house, which is $30,000. When the children sell the house after her death, they will have to pay 15% long-term capital gains tax on $270,000 of gain, or $40,500 in tax.

If the woman had a simple Will that left her entire estate to her four children, held none of her assets with beneficiary designations, and refrained from gifting her house – her children would pay no tax and would share equally in her estate.

Let’s assume that the Will would cost her $175. By having a Will, this woman prevented family disputes by allowing each of her children to share equally in her estate and saved her estate over $40,000 in tax. In short, it would be the best $175 the woman ever spent.