When you die without a valid will, it is called dying “intestate.” Many people put off creating an estate plan because they do not realize the high costs of intestacy. These additional costs are associated with the probate court applying various statutory defaults and the decedent's lack of planning. Creating a comprehensive estate plan avoids intestate succession and almost always saves costs in the long run.
Recently, our office met with a couple, Bill and Linda, who were hesitant to create a will. They were planning to leave their entire estate to their four children and felt that the cost and time associated with creating an estate plan were not worth it. They quickly changed their minds once we told them all the hidden costs of dying without a will. Not only would their children have to pay increased administrative costs and taxes, but also their disabled son would lose all his government benefits.
Like Bill and Linda, many people are unaware of the costs of dying without a will. They put off creating an estate plan because they do not want to pay an attorney or other professionals. These individuals don't realize that the significant direct and indirect costs of dying intestate often are substantially greater than any costs spent on planning.
If you do not create an estate plan, you leave your family at the mercy of your state's intestate statute. These intestacy laws work to create a “will” for you. They determine how your estate is distributed if you failed to make a valid will before your death.
Every state has its own intestacy laws, but there are some similarities across the board. First, the probate court will appoint an administrator for your estate from a list of preferred people outlined in the statute. The court will select the administrator based on their relationship to you, their willingness to serve and sometimes their character. If no relative is willing or able to serve, an attorney or government employee may be appointed.
The administrator has the same duties as a personal representative, except that a statute, not the will, determines how the assets are distributed. The property of an intestate estate is only distributed to heirs at law (spouses, children, grandchildren, parents, siblings and so forth). The intestate statute directs the distribution of your estate to the closest class of relative. Each member of the class receives an equal share of the estate. Upon court approval, the distributions are made in full, even if the heirs at law are minors, financially inexperienced or disabled.
The fees and costs associated with an intestate estate are often substantially greater than if the decedent has a will. The additional costs are associated with the various statutory defaults being applied, plus the decedent's complete lack of planning and preparation.
When you die, your estate must go through the formal court process of probate, whether or not you had a will. Probate costs time and money, and your heirs will be the ones who have to pay. These direct costs are often significantly increased when you die intestate, which only reduces the size of your heirs' inheritance. Below are six direct costs of intestacy.
- Court fees. Court fees typically range from a few hundred dollars to thousands of dollars. The court fees depend heavily on the number of forms that the administrator must file. Intestate estates are more complex and require additional forms, resulting in additional filing fees.
- Attorney's fees. Attorney fees are calculated based on the attorney's services and time. A probate attorney must often provide additional services and spend more time on the estate when a person dies without a will. For example, as a part of making a will, you name a personal representative who is willing and able to administer your estate. When you die, without a will, the court appoints an administrator. If this individual is unwilling and uninvolved in administering the estate, significantly more responsibility falls onto the attorney. Additionally, when you die intestate, the attorney must identify and locate the nearest relatives, a potentially time-consuming task. With a will, the decedent names the beneficiaries, and there is no need to search for relatives. Finally, an intestate estate generally involves additional requirements, filings and hearings that the court waives in a typical unsupervised estate with a will.
- Administrator fees. Administrator fees are typically set by a court-provided fee schedule. Administrators can also ask for “extraordinary fees” if they provide services beyond basic probate duties. There are various reasons why administrator fees are usually greater for an intestate estate than an estate with a will. First, intestate estates require the administrator to prepare for additional hearings and create additional reports. Secondly, the estate's appointed administrator is unlikely to be familiar with the decedent's financial affairs. Because of this, they must spend considerable time collecting and organizing financial accounts and information. Finally, because the decedent's wishes are unknown, the administrator will likely face additional challenges and demands getting information from heirs.
- Surety bond. The probate court often requires that the estate administrators pay a surety bond to ensure that the appointed individual will fulfill their duties and obligations under the law. Typically, the probate court sets the surety bond at 1% to 2% of the estate value. When you create a will, you can waive the bond requirement.
- Identifying and locating heirs. In some cases, the administrator and attorney will have to spend resources identifying and locating heirs to the estate. These efforts could include newspaper postings and hiring an investigator or search firm. In other cases, the death of a person can draw long-lost relatives out of the woodwork. The administrator must spend money validating the claims of any would-be heirs.
- Litigation and claims. If your estate gets caught up in litigation, it can end up costing hundreds of thousands of dollars and take years to resolve. The best way to avoid litigation and claims against your estate is to create a comprehensive estate plan. If you die without a will, the chance that your estate ends up in litigation is significantly increased. Under certain circumstances, the possibility of litigation is increased, including when there are unmarried couples, blended marriages, distant relatives or unknown “children.” Because intestate statutes are based on the concept of a traditional family, disputes and delays can arise when the law does not fit the decedent's family situation.
The direct costs of intestacy relating to the administration of the estate are straightforward and easy to recognize. What usually gets overlooked are the indirect costs of intestacy that occur after the intestate laws are applied. These costs are caused primarily by the decedent's lack of planning. Below are five of the most significant indirect costs of intestacy.
Loss of control. Your state's intestacy statutes decide to whom and when your assets are distributed. The laws are based on the traditional family and prioritize your surviving spouse and children. Many times, the intestate laws differ drastically from what you would
want to happen.
For example, your property is only distributed among your living children. If a child predeceased you, their children (your grandchildren) would not get a share of your estate. To many people, this result seems unfair. Additionally, if you have a blended family, stepchildren will not receive a share of your estate, no matter how you treated and considered them. Unmarried partners, friends and charities will all be left with nothing. However, if you make a will, you have complete control over who will receive your property after your death.
Additional taxes. A huge benefit of creating a comprehensive estate plan is the ability to lower your tax liability. Everyone wants their inheritance to go to their heirs instead of Uncle Sam. Although the tax code includes no direct increase in taxes for intestate
estates, when you die intestate, your estate will likely end up paying more income and estate taxes due to a lack of planning.
There are various estate planning techniques that can reduce tax liability. For example, inherited retirement assets are not taxable until they are distributed. Through estate planning, you can delay and lower the distribution, which means that your beneficiaries will pay less tax, and the money can grow, tax-deferred, for an extended period of time. When you die intestate, retirement accounts are paid out faster, and your heirs will end up paying additional income tax. Income tax can also be reduced through charitable deductions. If you die intestate, you cannot take advantage of the charitable tax deduction.
In addition to increased income taxes, your heirs may owe additional estate taxes because you failed to take advantage of planning opportunities and make full use of available exemptions.
Loss of government benefits. Dying intestate can be devastating for heirs that have special needs and are reliant on government benefits. Many government benefits, such as Medicaid, SSI and housing assistance, are needs-based. To be eligible to receive these
benefits, the individual must be meet strict income and asset limits. Receiving an inheritance can push an individual over these limits, and heirs will lose their government benefits.
Instead of improving the quality of the heir's life, the inheritance will be quickly consumed by paying for services previously provided by government benefit programs. Furthermore, their care will be disrupted as government-provided caregivers are replaced with private-pay caregivers. However, with proper estate planning, you can avoid this result. There are estate planning tools, like the special needs trust, that protect an heir's government benefits while providing them an inheritance.
- Heirs who are minors. When you die intestate, the court selects and appoints a conservator to manage any property left to minors. The court-appointed conservator is responsible for deciding how the minor's assets are invested and managed. They are also responsible for paying for the minor's health, education and maintenance, including medical bills, clothing, food, school tuition and summer camps. They must provide the court with an annual accounting of the funds. Once the child reaches the age of majority, the funds are released. If you create a will, you can choose an individual you trust to be the conservator. Through other estate planning tools, you can control the manner and method that your minor will receive their inheritance.
- Financially irresponsible heirs. Financially irresponsible heirs will receive full access to all inheritance funds if you die without a will. The court will distribute the funds and place no limits on how they can spend the funds. When you have a financially irresponsible heir, there is a high likelihood that they will quickly and frivolously spend the money. However, when you create an estate plan, you can control how the property is distributed and place restrictions on how the beneficiary can spend the money. For example, you could limit the use of funds to educational expenses.
The only way to avoid intestacy is to create an estate plan that includes a valid will and other essential documents. By investing in an estate plan, you will be saving your heirs significant costs after your death. The estate planning process does not need to be stressful or overwhelming. The professionals at Legacy Assurance Plan can guide you through the process and ensure that you create the best plan for yourself and your family.