Breakdown of Estate Planning Costs

Breakdown of Estate Planning Costs – SmartAsset

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Estate planning costs vary, and the difference in fees can only add to the emotional challenges. It’s difficult enough to begin managing matters of death without confusion on top of that. The pandemic has only compounded such challenges. We are most stressed when we don’t understand, though. So, if you’re trying to navigate the basics of estate planning costs, below are a few core concepts that might help. Consider working with a financial advisor if you need help setting up an estate plan or managing inherited money.

Why is Estate Planning Important?

Before diving into costs, it’s important to lay out why an estate plan is so vital. Estate planning is a crucial measure in protecting not only your interests but your family as well. Without it, all of the assets you’ve worked hard to gain, including money, property and valuables, could get caught up in a legal tug of war. A comprehensive estate plan prevents in-family strife following your passing.

Therefore, it gives you the chance to take protective measures for your children. In the event you pass away, you’ll want them to have a guardian they can rely on and to minimize their financial burden as much as possible. Otherwise, their inheritance could be swallowed up by fees and taxes, leaving them with little in the end.

Overall, the significance of an estate plan is an allowance for your family to grieve your loss without having to fear the financial repercussions that might cause.

Hiring an Attorney vs. Estate Planning Online

The internet is useful for small fixes and tips, but you shouldn’t rely on the internet for everything. When it comes to something as important as estate planning, you’re better off hiring a professional. Do-it-yourself kits are advertised online, but their main draws are their simplicity and low costs. That might appeal to someone with no heirs or substantial property, but not if you have any specialized needs.

Sites may only help you create a will. A will cannot help any of your heirs avoid probate, which could incur estate taxes on the whole. The chances of issues like these only increase the more complex your situation is without a plan to match.

While internet legal sites can be alright starting points for some basic estate plans, they will not be able to address the collection of concerns you may have. However, research can be a great advantage in a legitimate consultation with an attorney. So, bring any questions you have to your first meeting with your estate planner.

Types of Estate Planning Fees

Not all estate attorneys use the same pricing system, so you may receive a variety of estimates depending on the individual. When trying to budget for the cost of an attorney estate plan, it’s important to know who is doing the work, what type of plan you need and the legal fees your estate planning attorney prefers.

Hourly Rate

If your attorney can’t pinpoint a fixed fee to charge you, he or she will likely use an hourly rate. This would encompass any time your lawyer was working on your case. If your attorney asks for an hourly fee, they may also request a retainer upfront before they begin. This could be the total amount or a portion of it. If it’s the latter, they’ll bill you the rest at a later point in the process.

An hourly rate may come into play if your attorney believes that your estate plan will require extra time or effort due to its specifications. They may also have an hourly rate they consistently use based on their knowledge and experience.

Flat Fee

A flat fee is a fixed price your attorney may offer to accommodate their estate planning work and experience. This pricing will typically cover preparing necessary documents, such as a will or a power of attorney. If your lawyer asks you for a flat fee, you should clarify what’s included in that plan. That is because it can change depending on the estate planner’s discretion. For example, some attorneys might not include a notary or helping with trusts.

Your attorney may also require you to pay a partial or total amount of a flat fee before they begin working. So, it’s best to ask about the payment expectations for a flat fee and what it covers ahead of time.

Contingency Fee

A contingency fee is used in situations where you will receive monetary compensation. For example, when you win a court case and accept awarded money, you pay your attorney a percentage. Because of this, estate planners don’t typically use contingency fees. They don’t make sense without an opposing side.

However, if you need to settle an estate, a probate attorney might use this type of fee.

Factors that Can Increase Your Bill

Fees are just one variable that could affect your estate planning bill. Any special considerations or tasks could increase the total fee. You should know what to expect, so talk directly with an attorney. Ask to schedule an upfront consultation in person, usually free of cost, and supply you with an estimate. Also, there’s no harm in comparing prices. So, feel free to speak with a few potential attorneys and pick the one best suits your needs.

Why Do Costs Vary By Estate Plan?

Estate plan costs vary because each estate plan has unique needs. The lower end of the spectrum can include a basic will written for as little as $150 to $200. But a more complex plan may cost you upwards of $300 per hour. If you want something that reflects your situation and the necessary measures it will take to protect your assets and heirs, it will cost more. The cost also depends on how many documents you need prepared beyond your will, like a power of attorney and the circumstances of your heirs.

There is no “one-size-fits-all” plan for an estate. For example, a couple with underage children will be focused on a plan that emphasizes guardianship, long-term care and financial security. However, add extra factors such as previous marriages and multiple trust funds. That situation calls for more accommodations while spreading out the distributions. This shouldn’t stop you from shopping for the most affordable price, but don’t let it be the deciding factor. If you’re not careful, your heirs could lose money regardless because the estate wasn’t properly managed.

How to Minimize Your Estate Planning Costs

Estate planning can be unpredictable and costly. Depending on your situation, you may be paying an unexpectedly high fee. If you plan accordingly, though, you will find there are ways to help minimize the costs. Here are a few suggestions for you to consider:

  • Pick the right attorney: Research firms, read reviews and compare them. Try to schedule an in-person consult with each one.
  • Know your needs: Go into your first meeting educated. Know what a basic estate plan includes and whether you’ll need more documents.
  • Discuss money upfront: Whether it is on the phone or in-person, a firm might offer the first consultation free. Use that opportunity to discuss rates and how long the process might take.
  • Put it in writing: Once you choose your attorney, make sure you draft a written agreement you both sign. It should include the work your lawyer will do as well as any costs.

The Takeaway

Having substantial assets means lots of planning: retirement planning, tax planning and estate planning. When doing estate planning be aware of your options. You can do it online to save money or you can hire an estate planning attorney. Taking the latter course will involve various fees, some of which may be flat fees, contingency fees or hourly fees. And while using a lawyer is more expensive, it reduces significantly the likelihood that your digital DIY estate plan will hold up in court.

Tips on Estate Planning

  • The probate process can hold up the process of distributing your assets for as long as a year. However, with good estate planning, you can help your heirs avoid this inconvenience. A professional financial advisor can help you plan out your estate and manage your wealth on top of that. To find one in your local area, use our advisor matching tool. If you’d like to get connected to one, get started today.
  • A revocable living trust isn’t the only trust that can help you secure your assets from probate. Look into how different trusts work to see which kind is right for you.

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Ashley Chorpenning Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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Washington, D.C. Estate Tax

Washington, D.C. Estate Tax — SmartAsset Blog

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Washington, D.C. does levy an estate tax on the estates of certain people after they have died. Specifically, the D.C. estate tax applies to any estate worth more than $4 million starting in 2021. In 2020, the threshold was $5.7642 million. For anyone who died prior to 2021, the rate of the estate tax is graduated and runs from 12.0% to 16.0%. Estate planning isn’t easy, and if you are planning for your estate or dealing with the estate of a loved one, you may need some help. Consider finding a financial advisor to help you using SmartAsset’s free financial advisor matching tool.

Washington, D.C. Estate Tax Exemption

In 2020, Washington, D.C. lowered its estate tax exemption to $4 million. Previously, it stood at $5,764,200. This means that if a person dies in 2021, any money in his or her estate in excess of $4 million will be subject to the estate tax. If the person died in 2020, it only applies to money in excess of $5,764,200. The estate tax exemption in D.C. is not portable between spouses. When the second of two spouses dies, that person can only apply his or her $4 million exemption, not that plus the $4 million exemption the deceased partner was entitled to.

Washington, D.C. Estate Tax Rate

The estate tax rate in D.C. is progressive, meaning that the rate goes up as the size of the estate increases. The estate tax brackets for 2021 have not yet been published. For this reason, we’ll be presenting here the brackets from the 2020 tax year, which still apply if the person who died passed away in 2020. The major difference, though, is that prior to 2021, the threshold for the estate tax was $5,764,200, while for people dying in 2021, it will be just $4 million. Still, we can use the 2020 numbers to show how calculating an estate tax burden works.

For 2020, the estate tax in Washington, D.C. ranged from 12.0% to 16.0%. The table below shows all of the rates. To figure out how much you will owe, first you’ll need to find your total taxable estate above the threshold in the first column of the chart below. In the second column, you can find the base taxes on money below your bracket. The third column shows the marginal rate you pay. Multiply that rate by any wealth above your tax bracket’s lower threshold. Add that number to the base taxes and you have the total you owe for the Washington, D.C. estate tax.

Here’s an example: Let’s say your total estate is worth $9.5 million. Subtracting the $5,764,200 exemption, you have a taxable estate of $3,735,800. Next, find where that number falls on the chart. The base taxes for the bracket is $436,512. The bottom of the threshold is $3,237,600, so we subtract that from $3,735,800 and get $498,200. That amount multiplied by the marginal rate of 15.2% is $75,726. When we add that number to the base taxes ($436,512), we get a total tax of $512,238 owed on a $9.5 million estate.

WASHINGTON, D.C. ESTATE TAX RATES
$0-$237,600 $0 12.0% $0
$237,600-$1,237,600 $28,512 12.8% $237,600
$1,237,600-$2,237,600 $156,512 13.6% $1,237,600
$2,237,600-$3,237,600 $292,512 14.4% $2,237,600
$3,237,600-$4,237,600 $436,512 15.2% $3,237,600
$24,237,600+ $588,512 16.0% $4,237,600

*The taxable estate is the total above the exemption of $1 million.
**The rate threshold is the point at which the marginal estate tax rate goes into effect.

What Is the Estate Tax?

The estate tax is levied against some estates after someone has died but before the money passes on as directed in the deceased’s will or other legal documents. It generally only applies to estates worth a certain amount as determined by the state government levying the tax. The federal government also has an estate tax.

The estate tax is not the same as the inheritance tax, which is paid by someone receiving money from a person who recently died after they’ve gotten the money.

Washington, D.C. Inheritance Tax and Gift Tax

There is no inheritance tax in Washington, DC. If you are getting money from someone who lived outside of D.C. when he or she died died, though, check local laws. In Kentucky, for instance, all in-state property is subject to the inheritance tax even if the person taking ownership lives elsewhere.

D.C. also does not have a gift tax. The federal gift tax kicks in at $15,000 in annual gifts.

Washington, D.C. Estate Tax for Married Couples

The Washington, D.C. estate tax is not portable between couples. When both spouses die, only one exemption is applied to the estate.

Federal Estate Tax

The federal estate tax has a much higher exemption level than the D.C. estate tax. The estate tax exemption for 2021 is $11.7 million. Unlike the D.C. estate tax exemption, the federal exemption is portable between spouses. This means that with the right legal steps, a married couple can protect up to $23.4 million upon the death of both spouses.

If an estate tax exceeds that amount, the top tax rate is 40%. A full chart of federal estate tax rates is below. By following the same method described in the D.C. Estate Tax section, you can use the table below to figure out your federal estate tax burden.

FEDERAL ESTATE TAX RATES
$1 – $10,000 $0 18% $1
$10,000 – $20,000 $1,800 20% $10,000
$20,000 – $40,000 $3,800 22% $20,000
$40,000 – $60,000 $8,200 24% $40,000
$60,000 – $80,000 $13,000 26% $60,000
$80,000 – $100,000 $18,200 28% $80,000
$100,000 – $150,000 $23,800 30% $100,000
$150,000 – $250,000 $38,800 32% $150,000
$250,000 – $500,000 $70,800 34% $250,000
$500,000 – $750,000 $155,800 37% $500,000
$750,000 – $1 million $248,300 39% $750,000
Over $1 million $345,800 40% $1 million

*The taxable estate is the total above the exemption of $11.7 million.
**The rate threshold is the point at which the marginal estate tax rate goes into effect.

Overall Washington, D.C. Tax Picture

Washington, D.C. is moderately tax-friendly for retirees. Social Security payments are not taxed, but withdrawals from retirement accounts are fully taxed. The income tax in Washington, D.C. ranges from 4.00% to 8.95%. If you are moving to Washington and want to figure out your take home pay, use the paycheck calculator from SmartAsset.

The average property tax in the District is 0.55%, and sales tax sits at 6%.

Resources for Estate Tax Help

  • If the estate tax seems overwhelming, you should consider finding a financial advisor to help you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
  • If you have a sizable estate, estate taxes on either the state or federal level could be hefty. However, you can easily plan ahead for taxes to maximize your loved ones’ inheritances. For example, you can gift portions of your estate in advance to heirs, or even set up a trust.

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Ben Geier, CEPF® Ben Geier is an experienced financial writer currently serving as a retirement and investing expert at SmartAsset. His work has appeared on Fortune, Mic.com and CNNMoney. Ben is a graduate of Northwestern University and a part-time student at the City University of New York Graduate Center. He is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance (CEPF®). When he isn’t helping people understand their finances, Ben likes watching hockey, listening to music and experimenting in the kitchen. Originally from Alexandria, VA, he now lives in Brooklyn with his wife.
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How to Make a Living Will

How to Make a Living Will – SmartAsset

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A living will is a legal document that allows you to specify the kind of care you’d like to receive in end-of-life situations. This is different from an advance healthcare directive, though either one can be an important part of an estate plan. If you’d like to draft a living will, you could get help from an estate planning attorney or you may try using an online software program to create one. Regardless of which one you choose, it’s important to understand how to make a living will to ensure that yours is valid and your wishes are upheld. A financial advisor can offer valuable insight and guidance as you make an estate plan.

What Is a Living Will?

Living wills can be used to spell out what type of healthcare you do or don’t want to receive in end-of-life situations or if you become permanently incapacitated or unconscious. This document tells your doctors and other healthcare providers as well as your family members what type of care you prefer in these situations.

For example, you can include instructions in your living will regarding things like resuscitation, life support and pain management. If you don’t want to be left on life support in a so-called vegetative state, you could communicate that in your living will. Or if you’re terminally ill and only want to receive palliative care you could include that as well.

A living will can be part of an advance healthcare directive that also includes a healthcare power of attorney. This type of document allows someone else, called a healthcare proxy, to make medical decisions on your behalf when you’re unable to. A living will typically only applies to situations where you’re close to death or you’re permanently incapacitated while an advance directive can cover temporary incapacitation. So if you’re unconscious after a car accident, for instance, your healthcare proxy could direct doctors regarding what type of care and treatment you should receive.

How to Make a Living Will

The first step in making a living will is deciding whether you want to do it yourself or hire an estate planning attorney. Making a living on your own using an online software program may cost less than paying an attorney’s fee. But if you want to be certain that your living will is drafted accurately and legally, you may feel more comfortable getting help from an estate planning professional.

If you choose to make a living will on your own, you can find the necessary forms online. Keep in mind that your state may have a specific form you’re required to use for your living will to be considered valid. There may also be minimum requirements, in some cases identical to what would be required for a simple will, you’ll need to meet to make a living will in your state, including:

  • Being at least 18 (or 19 in some states)
  • Being of sound mind
  • Having the will be properly witnessed
  • Getting the document notarized once it’s complete

Those are the technical aspects of how to make a living will. Your main focus may be on what to include. Again, your state may have a specific format you’ll need to follow. But generally, you’ll need to leave instructions regarding the following:

  • Life-prolonging care. You’ll need to decide what types of life-prolonging treatments, such as blood transfusions, resuscitation or use of a respirator, you do or don’t want to receive.
  • Intravenous feeding. You’ll also need to specify whether you want to be given food and water intravenously if you’re incapacitated and can’t feed yourself.
  • Palliative care. If you’re facing a terminal illness, palliative care can be used to manage pain if you decide to stop other treatments.

It’s important to be as thorough and specific as possible when outlining your wishes so there’s no confusion later on. This ensures that your wishes are carried out and it also relieves your loved ones from the burden of having to guess at what you do or don’t want.

What to Do After Making a Living Will

If you’ve drafted a valid living will according to the laws of your state, the next step is to make your wishes known to other relevant parties. This includes passing copies of your living will to your doctors, hospital and loved ones. If you’re drafting a living will as part of an advance healthcare directive, you’d also want to make sure your healthcare proxy has a copy.

It’s also important to review your living well regularly to make sure it’s still accurate. If you change your mind about the type of care you’d like to receive, then you’d want to update or rewrite your living will to make sure that’s reflected. If not, then your doctors and loved ones would be left to carry out the terms of your original living will, which may conflict with what you actually want.

Who Needs a Living Will?

A living will is designed for people who have specific wishes regarding care in situations where they have a terminal illness or become permanently incapacitated. If you’re comfortable letting your loved ones decide which type of care should be given to you, then a living will may not be necessary. On the other hand, if you absolutely don’t want a certain type of treatment then a living will is the best way to make that clear to your doctors and family members.

You might consider drafting a living will along with a healthcare power of attorney to ensure that all of the bases are covered, so to speak, when it comes to healthcare decision-making. Having a healthcare proxy can ensure that the terms of the living will are upheld and they can also make decisions about your care for you in situations where you’re only temporarily incapacitated. When choosing a healthcare proxy, it’s important to select someone you can rely on to adhere to your wishes.

The Bottom Line

A living will can be an important part of preparing your family for your death. This kind of document is a relatively straightforward legal document that you may consider including in your financial plan or estate plan if you have specific wishes regarding end-of-life care. Knowing how to make a living will and what it covers can help you decide if it’s something you need to have in place.

Tips for Estate Planning

  • A living will is not the same thing as a last will and testament. Living wills cover healthcare decision-making while a last will and testament deals with the distribution of your assets once you pass away. A will is important to have, since without one your assets are distributed according to the inheritance laws of your state. An estate planning attorney can help you draft a last will and testament as well as a living will. Or you can use online will-making software programs to create a simple will on your own.
  • Consider talking to a financial advisor about whether a living will is something you need. If you don’t have a financial advisor yet, finding one doesn’t have to be a complicated process. SmartAsset’s financial advisor matching tool can get you personalized recommendations, in minutes, for professional advisors in your local area. If you’re ready, get started now.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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What Is the Generation-Skipping Transfer Tax?

What Is the Generation-Skipping Transfer Tax? – SmartAsset

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Estate planning can help you pass on assets to your heirs while potentially minimizing taxes. When gifting assets, it’s important to consider when and how the generation-skipping tax transfer (GSTT) may apply. Also called the generation-skipping tax, this federal tax can apply when a grandparent leaves assets to a grandchild while skipping over their parents in the line of inheritance. It can also be triggered when leaving assets to someone who’s at least 37.5 years younger than you. If you’re considering “skipping” any of your heirs when passing on assets, it’s important to understand what that means from a tax perspective and how to fill out the requisite form. A financial advisor can also give you valuable guidance on how best to pass along your estate to your beneficiaries.

Generation-Skipping Tax, Definition

The Internal Revenue Code imposes both gift and estate taxes on transfers of assets above certain limits. For 2020, you can exclude gifts of up to $15,000 per person from the gift tax, with the limit doubling for married couples who file a joint return. Estate tax applies to estates larger than $11,580,000 for 2020, increasing to $11,700,000 in 2021. Again, these exemption limits double for married couples filing a joint return.

The gift tax rate can be as high as 40%, while the estate tax also maxes out at 40%. The IRS uses the generation-skipping transfer tax to collect its share of any wealth that moves across families when assets aren’t passed directly from parent to child. Assets subject to the generation-skipping tax are taxed at a flat 40% rate.

This tax can apply to both direct transfers of assets to your chosen beneficiaries as well as assets passed through a trust. A trust can be subject to the GSTT if all the beneficiaries of the trust are considered to be skip persons who have a direct interest in the trust.

How Generation-Skipping Transfer Tax Works

Generation-skipping tax rules cover the transfer of assets to people who at least one generation apart. A common scenario where the GSTT can apply is the transfer of assets from a grandparent to a grandchild when one or both of the grandchild’s parents are still alive. If you’re transferring assets to a grandchild because your child has predeceased you, then the transfer tax wouldn’t apply.

The generation-skipping tax is a separate tax from the estate tax and it applies alongside it. Similar to estate tax, this tax kicks in when an estate’s value exceeds the annual exemption limits. The 40% GSTT would be applied to any transfers of assets above the exempt amount, in addition to the regular 40% estate tax.

This is how the IRS covers its bases in collecting taxes on wealth as it moves from one person to another. If you were to pass your estate from your child, who then passes it to their child then no GSTT would apply. The IRS could simply collect estate taxes from each successive generation. But if you skip your child and leave assets to your grandchild instead, that removes a link from the taxation chain. The GSTT essentially allows the IRS to replace that link.

You do have the ability to take advantage of lifetime estate and gift tax exemption limits, which can help to offset how much is owed for the generation-skipping tax. But any unused portion of the exemption counted toward the generation-skipping tax is lost when you die.

How to Avoid Generation-Skipping Transfer Tax

If you’d like to minimize estate and gift taxes as much as possible, talking to a financial advisor can be a good place to start. An advisor who’s well-versed in gift and estate taxes can help you create a plan for transferring assets. For example, that plan might include gifting assets to your grandchildren or another generation-skipping person annually, rather than at the end of your life. Remember, you can gift up to $15,000 per person each year without incurring gift tax, or up to $30,000 per person if you’re married and file a joint return. You’d just need to keep the lifetime exemption limits in mind when scheduling gifts.

You could also make payments on behalf of a beneficiary to avoid tax. Say you want to help your granddaughter with college costs, for example. Any direct payments you make to the school to cover tuition would generally be tax-free. The same is true for direct payments made to healthcare providers if you’re paying medical expenses on behalf of someone else.

Setting up a trust may be another option worth exploring to minimize generation-skipping taxes. A generation-skipping trust allows you to transfer assets to the trust and pay estate taxes at the time of the transfer. The assets you put into the trust have to remain there during the skipped generation’s lifetime. Once they pass away, the assets in the trust could be passed on tax-free to the next generation.

This strategy requires some planning and some patience on the part of the generation that stands to inherit. But the upside is that members of the skipped generation and the generation that follows can benefit from any income the assets in the trust generates in the meantime. Trusts can also yield another benefit, in that they can offer asset protection against creditors who may file legal claims against you or your estate.

Another type of trust you might consider is a dynasty trust. This type of trust can allow you to pass assets on to future generations without triggering estate, gift or generation-skipping taxes. The caveat is that these are designed to be long-term trusts.

You can name your children, grandchildren, great-grandchildren and subsequent generations as beneficiaries and the transfer of assets to the trust is irrevocable. That means once you place the assets in the trust, you won’t be able to take them back out again so it’s important to understand the implications before creating this type of trust.

The Bottom Line

The generation-skipping tax could take a significant bite out of the assets you’re able to leave behind to grandchildren or another eligible person. If you’re considering using this type of trust to pass on assets or you’re interested in exploring other ways to transfer assets while minimizing taxes, it’s wise to consult an estate planning lawyer or tax attorney first.

Tips for Estate Planning

  • Consider talking to your financial advisor about how to best shape your estate plan to minimize taxation. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. It takes just a few minutes to get your personalized recommendations for advisors online. If you’re ready, get started now.
  • Creating a trust can yield some advantages in your estate plan. In addition to helping you minimize tax liability, the assets in a trust are not subject to probate. That’s different from assets you leave behind in a will.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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What Is Medicaid Estate Recovery?

What Is Medicaid Estate Recovery? – SmartAsset

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Medicaid is a government program that can help eligible seniors pay for nursing home care. If you’re helping an aging parent navigate Medicaid because they don’t have long-term care insurance or you think you’ll need it yourself someday, it’s important to understand how the program works. For instance, you should be aware that the Medicaid Estate Recovery Program (MERP) may be used to recoup costs paid toward long-term care. Medicaid estate recovery is intended to help make the program affordable for the government, but it can financially impact the beneficiaries of Medicaid recipients. Make sure you’re handling this kind of situation in the wisest possible way by consulting a financial advisor.

Medicaid Estate Recovery, Explained

Medicare is designed to help pay for healthcare costs for seniors once they turn 65. While it covers a number of healthcare expenses, it doesn’t apply to costs associated with long-term care in a nursing home.

That’s where Medicaid can help fill the gap. Medicaid can help with paying the costs of long-term care for aging seniors. It can be used in situations where someone lacks long-term care insurance coverage or they don’t have sufficient assets to pay for long-term care out of pocket. You may also use Medicaid to pay for nursing home care if you’ve taken steps to protect assets using a trust or other estate planning tools.

But the benefits you or an aging parent receives from Medicaid aren’t necessarily free. The Medicaid Estate Recovery Program allows Medicaid to recoup money spent on behalf of an aging senior to cover long-term care costs. The Omnibus Budget Reconciliation Act of 1993 requires states to attempt to seek reimbursement from a Medicaid beneficiary’s estate when they pass away.

How Medicaid Estate Recovery Works

The Medicaid Estate Recovery Program allows Medicaid to seek recompense for a variety of costs, including:

  • Expenses related to nursing home or other long-term care facility stays
  • Home- and community-based services
  • Medical services received through a hospital (when the recipient is a long-term care patient)
  • Prescription drug services for long-term care recipients

If you or an aging parent passes away after receiving long-term care or other benefits through Medicaid, the recovery program allows Medicaid to pursue any eligible assets held by your estate. What that includes can depend on where you live, but generally, it means any assets that would be subject to the probate process after you pass away.

So that may include:

  • Bank accounts owned by you
  • Your home or other real estate
  • Vehicles or other real property

Some states also allow Medicaid estate recovery to include assets that aren’t subject to probate. That can include jointly owned bank accounts between spouses, Payable on death bank accounts, real estate that’s owned in joint tenancy with right of survivorship, living trusts and any other assets that a Medicaid recipient has a legal interest in. It’s important to understand the laws in your state regarding what can and cannot be used to recover Medicaid benefits when you or an aging parent passes away.

It’s also worth noting that while Medicaid can’t take someone’s home or assets before they pass away, it is possible for a lien to be placed upon the property. For example, if your mother has to move into a nursing home then Medicaid could place a lien on the property. If your mother passes away and you inherit the home, you wouldn’t be able to sell it without first satisfying the lien.

What Medicaid Estate Recovery Means for Heirs

The most significant impact of Medicaid estate recovery for heirs of Medicaid recipients is the possibility of inheriting a reduced estate. Medicaid eligibility assumes that recipients are low-income or have few assets to pay for long-term care. But if your parents are able to leave some assets behind when they pass away, the recovery program could shrink the estate that passes on to you.

It’s also important to note that while Medicaid estate recovery rules disavow you personally from paying for your parents’ long-term care costs, filial responsibility laws do not. These laws, though rarely enforced, allow healthcare providers to sue the children of long-term care recipients to recover nursing care costs.

So even if Medicaid doesn’t take anything away from your parents’ estate after they pass away, a nursing home could still sue you personally to recover money paid toward the cost of their care. The care facility has to be able to prove that you have the means to pay but this could add a wrinkle to your financial picture if you’re responsible for wrapping up a deceased parent’s estate.

How to Avoid Medicaid Estate Recovery

Strategic planning can help you or your loved ones avoid financial impacts from Medicaid estate recovery.

For example, you may consider purchasing long-term care insurance for yourself for encouraging your parents to do so. A long-term care insurance policy can pay for the costs of nursing home care so you can avoid the need for Medicaid altogether.

If you’re interested in long-term care insurance for yourself or an aging parent, compare the cost for premiums against the benefits the policy pays out. If you’re unsure whether you or a parent may need long-term care at all, you might consider a hybrid policy that includes both long-term care coverage and a life insurance death benefit.

Another option for avoiding Medicaid estate recovery is removing as many assets as possible from the probate process. Married couples, for example, can accomplish that by making sure all assets are jointly owned with right of survivorship or using assets to purchase an annuity that transfers benefits to the surviving spouse when the other spouse passes away.

It’s important to understand which assets are and are not subject to probate in your state and whether your state allows for an expanded definition of recoverable assets for Medicaid. Talking to an estate planning attorney or an elder law expert can help you to shape a plan for protecting assets.

The Bottom Line

Medicaid estate recovery may not be something you have to worry about if your aging parents leave little or no assets behind. But it’s something you should still be aware of if you expect to inherit anything from your parents when they pass away. If you’re targeted for estate recovery, you may be able to avoid it if you can prove that it would cause you an undue financial hardship. Again, this is where talking to an estate planning professional can help you avoid any unexpected surprises.

Tips for Estate Planning

  • Consider talking to a financial advisor about Medicaid and how to plan for long-term care costs. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors online. It takes just a few minutes to get personalized recommendations for financial advisors in your local area. If you’re ready, get started now.
  • Consider a living trust. It will let you transfer assets to the control of a trustee, who will manage them according to your wishes on behalf of your beneficiaries. Trust assets aren’t necessarily exempt from Medicaid recovery, but this could still be a useful estate planning tool for minimizing taxes and ensuring a smooth transition of assets to your beneficiaries.

Photo credit: ©iStock.com/FatCamera, ©iStock.com/FatCamera, ©iStock.com/Dennis Gross

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Simple Trusts vs. Complex Trusts

Simple Trusts vs. Complex Trusts – SmartAsset

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A trust can be a useful estate planning tool, in addition to a will. You can use a trust to remove assets from probate, potentially minimize estate and gift taxes and ensure that assets are managed on behalf of beneficiaries according to your wishes. There are different types of trusts you can establish and some are more specialized than others. Knowing how these broad categories of trusts compare can help with choosing the right option. When it comes to estate planning, including whether to create a trust, a financial advisor can help you make the most informed decision possible.

What Is a Trust?

A trust is a type of legal entity that can be created in accordance with your state laws to manage your assets. The person who creates a trust is called a grantor and they have the right to transfer assets into the trust. They can also choose one or more trustees to oversee the trust and manage the assets within it.

The trustee’s job is to manage assets according to the grantor’s specifications on behalf of one or more trust beneficiaries. For example, you might set up a trust to hold assets that you want to be distributed among your three children when you pass away. Or you might choose your favorite charitable organization to be a beneficiary of your trust.

There are many different kinds of trusts and they can be categorized in different ways. For instance, a revocable trust can be changed during the grantor’s lifetime. If you have this type of trust and you want to add assets to it or change the beneficiaries, you can do so while you’re still living. An irrevocable trust, on the other hand, involves a permanent transfer of assets.

Trusts can also be categorized as grantor or non-grantor. In a grantor trust, the trust creator retains certain powers over the trust, including rights to the trust’s assets and income. Trust assets may be included in the trust creator’s estate when they pass away. With a non-grantor trust the trust creator has no interest or control over trust assets. Trust assets are generally excluded from the trust creator’s estate at their death.

Benefits of Trusts in Estate Planning

Trusts can be used inside an estate plan to perform a number of functions. For example, you might create a trust to:

  • Pass on specific assets to your chosen beneficiaries
  • Ensure that certain assets aren’t subject to the probate process
  • Manage estate and gift tax liability
  • Protect assets from creditors
  • Ensure that a special needs beneficiary is cared for when you’re gone
  • Receive the proceeds of a life insurance policy when you pass away

Some of these scenarios may call for a simple trust, while others may require a more specialized trust. One thing that’s important to keep in mind is how each one is treated for tax purposes when creating a simple vs. complex trust.

Simple Trust, Explained

A simple trust is a type of non-grantor trust. To be classified as a simple trust, it must meet certain criteria set by the IRS. Specifically, a simple trust:

  • Must distribute income earned on trust assets to beneficiaries annually
  • Make no principal distributions
  • Make no distributions to charity

With this type of trust, the trust income is considered taxable to the beneficiaries. That’s true even if they don’t withdraw income from the trust. The trust reports income to the IRS annually and it’s allowed to take a deduction for any amounts distributed to beneficiaries. The trust itself is required to pay capital gains tax on earnings.

Complex Trust, Explained

A complex trust also has certain criteria it must meet. In order for a trust to be complex, it must do one of the following each year:

  • Refrain from distributing all of its income to trust beneficiaries
  • Distribute some or all of the principal assets in the trust to beneficiaries
  • Make distributions to charitable organizations

Any trust that doesn’t meet the guidelines to qualify as a simple trust is considered to be a complex trust. Complex trusts can take deductions when computing taxable income for the year. This deduction is equal to the amount of any income the trust is required to distribute for the year.

There are also some other rules to keep in mind with complex trusts. First, no principal can be distributed unless all income has been distributed for the year first. Ordinary income takes first place in the distribution line ahead of dividends and dividends have to be distributed ahead of capital gains. Once those conditions are met, then the principal can be distributed. And all distributions have to be equitable for all trust beneficiaries who are receiving them.

Simple vs. Complex Trust: Which Is Better?

When it comes to simple and complex trusts, one isn’t necessarily better than the other. The type of trust that ultimately works best for you can hinge on what you need the trust to do for you.

A simple trust offers the advantage of being fairly straightforward when it comes to how assets and income can be distributed and how those distributions are taxed. A complex trust, on the other hand, could offer more flexibility in terms of estate planning if you have a sizable estate or numerous beneficiaries.

When comparing trust options, consider whether you want to retain control or an interest in the assets that are transferred to it. If you choose a simple or complex trust, you’re choosing a non-grantor trust which means you’ll no longer have an interest in the trust assets. Talking to an estate planning attorney or trust professional can help you decide which type of trust may work best for your financial situation.

The Bottom Line

The main difference between a simple vs. complex trust lies in how income and assets are distributed and how those distributions are taxed. Whether it makes sense to establish a simple vs. complex trust can depend on the size of your estate, the nature of the assets you want to include and your wishes for managing those assets. It’s important to understand the tax rules before creating either type of trust as well as how a trust fits into your larger estate plan.

Tips for Estate Planning

  • Consider talking to a financial advisor about whether it makes sense to use a trust to plan ahead for the distribution of assets or to manage estate and gift taxes. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect with a financial advisor in your local area. It takes just a few minutes to get your personalized recommendations online. If you’re ready, get started now.
  • While trusts can offer numerous benefits, creating one doesn’t necessarily mean you don’t also need a last will and testament. You can use a will to distribute assets that you don’t want to include in a trust. Or you could create a pour-over will to transfer assets into a trust.

Photo credit: ©iStock.com/skynesher, ©iStock.com/Lisa5201, ©iStock.com/scyther5

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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A Guide to Estate Planning for Second Marriages

A Guide to Estate Planning for Second Marriages – SmartAsset

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Getting married for a second time following a divorce or the death of your first spouse can feel like a fresh start. But it’s important to consider how joining your life with someone else’s may impact your financial plan, including how you manage your estate. What is fair in a second marriage and estate planning? It can be a difficult question to answer, especially when you or your new spouse are bringing children into the marriage or you plan to have children together at some point. Understanding some of the key financial issues surrounding a second marriage can help with reshaping your estate plan. So can consulting a financial advisor, especially one experienced in estate planning for second marriages.

Key Estate Planning Considerations for Second Marriages

Remarriage can bring up a number of important questions for estate planning. Both spouses should be aware of what the central issues are when updating individual estate plans or creating a new joint one.

Here are some of the most important questions to ask for estate planning in a second marriage:

  • What assets will be left to each of your children?
  • Do you plan to have additional children together and if so, what assets will be preserved for them?
  • Which assets will you each continue to hold individually?
  • Are there any assets that will be retitled in both of your names, such as a first home, vacation home or bank accounts?
  • Are either of you bringing any debts into the marriage or will you incur new debts after the marriage?
  • Do each of you have a will in place that needs to be updated?
  • Or will you establish a new joint will?
  • Besides a will, what other estate planning tools may be necessary, i.e. a trust, advance healthcare directive or power of attorney?
  • Will you continue working with your current financial advisors or choose a new advisor to help you manage your financial plan together?

Asking these kinds of questions can help you each get a sense of the other’s perspective on estate planning. Ideally, you should be having these types of discussions before the marriage takes place to minimize potential conflicts later. This can also help you decide if a prenuptial agreement may be necessary to protect your individual financial interests. But if you’ve already remarried, it may be a good idea to have this discussion sooner, rather than later.

At the same time, it can also help to complete an inventory of your assets and liabilities so you both know what you’re bringing into the marriage. This can help with managing the distribution side of your estate plan later as well as planning for how any debts may need to be handled should one of you pass away.

Estate Planning for Second Marriages With Children

Having kids can add a wrinkle to your estate planning efforts when you’re getting remarried. For example, you may wish to leave certain assets to your children while your new spouse may want your assets to be equally distributed among his or her children as well as yours. Or there may be questions over who would assume control over assets on behalf of minor children should one of you die.

When there are children in the picture, it’s important to consider any provisions you’ve already made for them in a will or trust and how that might affect any assets your spouse stands to inherit. You may need to update your will or set up a separate marital trust, for example, to ensure that your spouse receives the share of your assets you wish them to have while still preserving your children’s inheritance. Provisions may also need to be made for any children you plan to have if you’re still relatively young when a second marriage occurs.

It’s important to consider the age of your children when deciding what is fair in a second marriage and estate planning. If you have adult children, for example, it could make sense to gift some of their inheritance to them during your lifetime. But if you have minor children, you and your new spouse would need to decide who should be in charge of managing their inheritance on their behalf if one of you dies prematurely.

Check Beneficiary Designations

Assets that already have a named beneficiary may need to be updated if you’re remarrying. For example, if you named your previous spouse as beneficiary to your 401(k), individual retirement account or life insurance policy, you’d likely want to change the beneficiary to your new spouse or to a trust you’ve set up so that your former spouse can’t collect on those assets.

You should also consider other assets, such as bank accounts or real estate, should be titled. Adding your new spouse to your home as a joint tenant with right of survivorship may seem like the right move for keeping things simple in your estate plan. But doing so means that if something happens to you, your spouse will automatically assume full ownership of the home. They could then do with it as they wish, regardless of what you might have specified in a will or trust.

Look for Gaps in Your Estate Plan

When deciding what is fair in a second marriage and estate planning, consider where the gaps might exist that could leave your assets in jeopardy. Not having a will, for example, could be problematic if you pass away. Without a will, your state’s inheritance laws would be applied – not your wishes. That means your assets may not go to your children or other heirs as you’d like them to.

A trust can also be a useful tool in estate planning for passing on assets to your spouse or children as well as managing estate and inheritance taxes. If either of you are bringing considerable assets into a second marriage or you want to minimize the potential for conflicts over asset distribution later, setting up one or more trusts could be a good idea. Talking to an estate planning attorney can help you decide whether a trust is necessary and if so, which type of trust to set up.

Also, consider whether you have sufficient life insurance coverage to provide for the surviving spouse and any children associated with the marriage. Both spouses in a second marriage may need to have life insurance coverage, particularly if one person is the primary breadwinner while the other is the primary caregiver for children. Checking your existing life insurance policies and talking to your insurance agent can help you determine whether what you have is enough or if more coverage is necessary.

Finally, think about what you may need in terms of end-of-life planning. Long-term care insurance, for instance, can help pay for nursing home costs so that your spouse or either of your children aren’t left in the lurch financially. An advance healthcare directive and a power of attorney can ensure that your wishes are carried out in end-of-life situations where you’re unable to make financial or medical care decisions on your own behalf.

The Bottom Line

Deciding what’s fair in a second marriage and estate planning can be tricky and it’s important to get the conversation started early. Understanding what the biggest challenges of estate planning in a second marriage are can help you work together to shape a plan that you can both be satisfied with. And if you have adult children, it’s important to keep them in the loop so they understand how a second marriage may impact their inheritance.

Tips for Estate Planning

  • Consider talking to a financial advisor about the implications of a second marriage and what it might mean for your portfolio. You and your spouse may choose to maintain your current advisors or find a new advisor to work with together. In either case, finding the right professional to work with doesn’t have to be hard. SmartAsset’s financial advisor matching tool can offer personalized recommendations for professional advisors in your local area, in just minutes. If you’re ready, get started now.
  • Trusts can be a useful estate planning tool for couples, including those who are getting married for a second time. A marital trust, for example, goes into effect when the first spouse dies. This can be helpful for passing assets on to a surviving spouse while minimizing estate taxes. You may want to create this type of trust, along with a second living trust set up specifically for your children, to manage assets more efficiently while also protecting them from creditors.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Who Can and Cannot Witness a Will?

Who Can and Cannot Witness a Will? – SmartAsset

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A will is an important part of your financial plan. When you create a will and testament, you’re creating a legal document that determines how your assets will be distributed once you pass away. You can also use a will to name legal guardians for minor children. When making a will and testament, it’s important to follow the rules in your state to ensure the will is valid. One of those rules centers on the requirements for witnesses. For more guidance on the intricacies of wills and estate planning, consider enlisting the services of an expert financial advisor.

Why Wills Need to Be Witnessed

A will is a legal document but in order for it to be binding, there are certain requirements that need to be met. For instance, although state laws regarding wills vary, states generally require you to be of legal adult age to make a will. You must also have testamentary capacity, meaning you:

  • Must understand the extent and value of the property you’re including in the will
  • Are aware that you’re making a will to decide who will inherit your assets
  • Aren’t acting under duress in making the will

Having someone witness your will matters in case questions are raised over its validity later or there is a will contest. For example, if one of your heirs challenges the terms of your will a witness may be called upon in court to attest that they watched you sign the will and that you appeared to be of sound mind when you did so.

In other words, witnesses add another layer of validity to a will. If all the people who witnessed the signing of a will are in agreement about your intent and mental state when you made it, then it becomes harder for someone else to dispute its legality.

Who Can Witness a Will?

When drafting a will, it’s important to understand several requirements, including who can serve as a witness. Generally, anyone can witness a will as long as they meet two requirements:

  • They’re of legal adult age (i.e. 18 or 19 in certain states)
  • They don’t have a direct interest in the will

The kinds of people who could witness a will for you include:

  • Friends who are not set to receive anything from your estate
  • Neighbors
  • Coworkers
  • Relatives who are not included in your will, such as cousins, aunts, uncles, etc.
  • Your doctor

If you’ve hired an attorney to help you draft your will, they could also act as a witness as long as they’re not named as a beneficiary. An attorney who’s also acting as the executor of the will, meaning the person who oversees the process of distributing your assets and paying off any outstanding debts owed by your estate, can witness a will.

Who Cannot Witness a Will?

States generally prohibit you from choosing people who stand to benefit from your will as witnesses. So for example, if you’re drafting a will that leaves assets to your spouse, children, siblings or parents, none of them would be able to witness the will’s signing since they all have an interest in the will’s terms. Will-making rules can also exclude relatives or spouses of any of your beneficiaries. For instance, say you plan to leave money in your will to your sister and her husband with the sister being the executor. Your sister can’t be a witness to the will since she’s a direct beneficiary. And since her husband has an indirect interest in the terms of the will through her, he wouldn’t qualify as a witness either.

But married couples can witness a will together, as long as they don’t have an interest in it. So, you could ask the couple that lives next door to you or a couple you know at work to act as witnesses to your will.

You may also run into challenges if you’re asking someone who has a mental impairment or a visual impairment to witness your will. State will laws generally require that the persons witnessing a will be able to see the document clearly and have the mental capacity to understand what their responsibilities are as a witness.

Note that the witnesses don’t need to read the entire will document to sign it. But they do need to be able to verify that the document exists, that you’ve signed it in their presence and that they’ve signed it in front of you.

How to Choose Witnesses for a Will

If you’re in the process of drafting a will, it’s important to give some thought to who you’ll ask to witness it. It may help to make two lists: one of the potential candidates who can witness a will and another of the people who cannot act as witnesses because they have an interest in the will.

You should have at least two people who are willing to witness your will signing. This is the minimum number of witnesses required by state will-making laws. Generally, the people you choose should be:

  • Responsible and trustworthy
  • Age 18 or older
  • Younger than you (to avoid challenges presented if a witness passes away)
  • Free of any interest in the will, either directly or indirectly
  • Willing to testify to the will’s validity if it’s ever challenged

When it’s time to sign the will, you’ll need to bring both of your witnesses together at the same time. You’ll need to sign, initial and date the will in ink, then have your witnesses do the same. You may also choose to attach a self-proving affidavit or have the will notarized in front of the witnesses.

A self-proving affidavit is a statement that attests to the validity of the will. If you include this statement, then you and your witnesses must sign and date it as well. Once the will is signed and deemed valid, store it in a secure place, such as a safe deposit box. You may also want to make a copy for your attorney to keep in case the original will is damaged or destroyed.

The Bottom Line

Making a will can be a fairly simple task if you don’t have a complicated estate; it can even be done online in some situations. If you have significant assets to distribute to your beneficiaries or you need to make arrangements for the care of minor children, talking with an estate planning attorney can help you shape your will accordingly. Choosing witnesses to your will is the final piece of the puzzle in ensuring that it’s signed and legally valid.

Tips for Estate Planning

  • Consider talking to a financial advisor about will-making, trusts and how to create a financial legacy for your loved ones. If you don’t have a financial advisor, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool can help you connect with professional advisors in your local area in just a few minutes. If you’re ready, get started now.
  • A will is just one document you can include in your estate plan. You may also opt to establish a living trust to manage assets on behalf of your beneficiaries, set up a durable power of attorney and create an advance healthcare directive. A trust can help you avoid probate while potentially minimizing estate taxes.

Photo credit: ©iStock.com/djedzura, ©iStock.com/SanyaSM, ©iStock.com/Spanic

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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What Is a Nuncupative Will?

What Is a Nuncupative Will? – SmartAsset

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Making a last will and testament is an important part of your estate plan and there are different types of wills to choose from. A nuncupative will, meaning a will that’s oral rather than written, may be an option in certain circumstances. While state will laws typically require that a will be written, signed and witnessed to be considered legal, there are scenarios in which an oral will could be upheld as valid. Understanding how a nuncupative will works, as well as the pros and cons, can help with shaping your will-making plans if you have yet to create one.

A financial professional can offer advice on investing, retirement planning, financial planning and various other areas of finance. Find a financial advisor today. 

Nuncupative Will, Defined

A nuncupative will simply means a will that isn’t written. Instead, it’s delivered verbally by the person who intends to make the will.

Nuncupative wills are sometimes called deathbed wills since they’re often created in end-of-life situations where a person is too ill or injured to physically draft a will. The person making the will, known as a testator, expresses wishes about the distribution of property and other assets to witnesses.

How Does an Oral Will Work?

Ordinarily, when creating a will you’d draft a written document identifying yourself as the will maker and spelling out how you want your assets to be distributed after you pass away. You could also use a will to name legal guardians for minor children if necessary and name an executor for your estate.

An oral will sidesteps all that and simply involves the person making the will expressing his or her wishes verbally to witnesses. There would be no written document unless one of the witnesses or someone else who is present chooses to copy down what’s being said. The person making the will would have nothing to sign and neither would the witnesses.

There’s a reason oral wills are no longer used in most states: Without a written document that’s been signed by the person making the will and properly witnessed, it can be very difficult to prove the will maker’s intentions about how assets should be distributed or who should be beneficiaries.

Are Nuncupative Wills Valid?

This type of will is no longer considered valid in most states. Instead, you’ll need to draft a written will that follows your state’s will-making guidelines. For example, most states require that the person making a will be at least 18 and of sound mind. The will also has to be witnessed by the required number of people who don’t have a direct interest in the will’s contents. Depending on where you live, you may or may not need to have your will notarized.

There are a handful of states that still allow oral or verbal wills, however. But they’re only considered valid under certain circumstances.

In North Carolina, for example, oral wills are only recognized if:

  • The person making the will believes death is imminent
  • The witnesses are asked to testify to the will
  • Both witnesses are present with the testator when the will is dictated
  • The testator states that what he or she is saying is intended to be a will
  • An oral statement is made to at least two competent witnesses
  • The testator then passes away

Even if those conditions are met, the heirs to the will would still have to bring a legal action to have it admitted to probate court. The witnesses would have to testify to what was said and even then, North Carolina still doesn’t allow for the transfer of real estate through an oral will.

In New York, the guidelines are even narrower. New York State only allows nuncupative wills to be recognized as legal and valid when made by a member of the armed services during a time of war or armed conflict. The intentions of the person making the will has to be stated in front of two witnesses. State law automatically invalidates them one year after the person leaves military service if they don’t pass away at the time the will was made.

How to Prepare a Will

Having a written will in place can help your loved ones avoid problematic scenarios about how to divide your property after you pass away. If you don’t have a will in place yet, you risk dying intestate. There are a couple of ways you can create one.

The first is using an online will-making software. These programs can guide you through the will-making process and they’re designed to be easy enough for anyone to use, even if you’re not an attorney. If you have a fairly simple estate then using an online will-making software could help you create a will at a reasonable cost.

On the other hand, if you have a more complex estate then you may want to get help with making a will from an estate planning attorney. An attorney can help ensure that your will is valid and that you’re distributing assets the way you want to without running into any legal snags.

Generally, when making a will you should be prepared to:

When making a will, it’s important to remember that some assets can’t be included. For example, if you have any assets that already have a named beneficiary, such as a 401(k), individual retirement account or life insurance policy, those would go to the person you’ve named.

And it’s also important to note that a will is just one part of the estate planning puzzle. If you have a more complex estate then you may also need to consider setting up a living trust. A trust allows you to transfer assets to the control of a trustee, who manages them on behalf of the trust’s beneficiaries. Trusts can be useful for minimizing estate taxes and creating a legacy of giving or wealth if that’s part of your financial plan.

The Bottom Line

Nuncupative wills are rare and while some states do recognize them, they generally aren’t valid in most circumstances. If you don’t have a will in place, then creating one is something you may want to add to your financial to-do list. Even if you don’t have a large estate or you’re unmarried with no children, having a will can still provide some reassurance about what will happen to your assets once you pass away.

Tips for Estate Planning

  • Consider talking to a financial advisor about will making and estate planning. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help. By answering a few brief questions online you can get personalized recommendations for professional advisors in your local area. If you’re ready, get started now.
  • Along with a will and trust, there are other legal documents you might incorporate into your estate plan. An advance healthcare directive, for instance, can be used to spell out your wishes in case you become incapacitated. Power of attorney documents allow you to name someone who can make medical or financial decisions on your behalf when you’re unable to.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Source: smartasset.com