By now, most people have heard the shocking news that Prince died without a will. This is shocking because Prince was famous, his estate is worth hundreds of millions of dollars and, without any estate plan, his estate is going to end up paying many, many millions of dollars in estate taxes.
But this article isn’t about Prince. It’s about average people. You know, people who don’t have estates worth hundreds of millions of dollars. Every day, average people without wills pass away and they don’t make the news. So what happens to the estates of average people who don’t have wills?
First, start with our posts on The Very Basics of Estate Planning, Part 1 and Part 2, because it is important to understand the basic concepts of estate planning. An estate plan is usually made up of more than just a will, but the will is the document that the probate court relies on for guidance. If you don’t have a will, the probate court has no guidance for distributing your estate.
The Very Basics of Estate Planning, Part 2 contains a short section about passing away without a will. This post provides more detail about dying intestate.
A person dies “intestate” if they pass away without a will. Prince died intestate, and we have to continue to assume this unless and until a will is found. Dying intestate has three major ramifications: 1) you don’t get to decide who gets your stuff; 2) you don’t get to leave instructions for your estate; and 3) you don’t get to maximize tax benefits.
Who Gets Your Stuff. For the average person, not getting to decide who gets your stuff is usually the most significant consequence of dying intestate. It is a common misconception that if you die intestate, the government gets your whole estate. This is not true. In fact, if you die without a will, anything that would have passed pursuant to a will instead passes to your heirs pursuant to intestacy laws. In other words, the intestacy laws act as your will.
In Colorado, if you die without a will, there is a line of succession built into the laws so there is always another group of heirs the probate court can foist your estate off to. Your spouse is first in line, but if you have no spouse, then your kids inherit, then your parents, then your siblings, and so on. The rules are rather complicated. Most importantly, the rules don’t care if you wanted to donate your whole estate to charity, or if you hated your siblings, or if you wanted your son to get only a quarter of your estate and your daughter to get the rest. If you die intestate, you don’t get to choose your heirs because the laws choose for you.
Leaving Instructions. One of the biggest benefits of creating an estate plan is the ability to leave instructions for the disposition of your estate. An estate plan is not just about passing your worldly possessions on to the next person. A good estate plan acts like an instruction manual for your end of life care, your death and burial, and the administration of your estate after you are gone. Not only is this good for you, the deceased, but it can also take a lot of pressure off the people you leave behind.
For instance, who do you want to be in charge of administering your estate? You can choose someone and name them in your will. If you don’t have a will, the court has a process for choosing.
You can leave other instructions, too. Do you prefer hospice or at-home care? Are you donating organs? Who will take care of your dog when you die? What song should be played at the funeral? Should the house be sold, or do you want it to stay in the family? Do you think your niece should only be allowed to use her inheritance for college tuition? Not all of these things go in a will, but they can all be found in a good estate plan. If you die intestate and you haven’t left instructions, the court will appoint people to use their own best judgment in managing your various affairs.
Tax Benefits. For average people, losing possible tax benefits is probably the least important consequence of dying intestate. This is because, as of 2016, the federal estate tax exemption is $5,450,000. In other words, you can have an estate worth up to $5.45M and not have to pay federal estate taxes. It’s amounts over this that are taxed (at a rate as high as 40%!), so you can see how tax benefits are something Prince’s estate is totally missing out on.
Understand that even a fantastic will cannot generally create significant tax benefits. High-worth individuals need to create complex estate plans consisting of trusts and other documents to see any real tax benefit. In other words, even if they find a will for Prince, he may not avoid any taxes.
What Isn’t Included. Finally, do keep in mind that some things are not actually passed via a will, and thus they would not be passed intestate if you die without a will. These things include property in trust, life insurance proceeds and other accounts with named beneficiaries, real estate subject to beneficiary deeds, and property owned in joint tenancy. This is because these types of assets simply pass to the surviving co-owner or to the named beneficiary that’s already associated with the asset.
The law is always changing. We cannot guarantee that the information provided herein is current and accurate. Every situation is different. Do not refrain from seeking legal advice from a lawyer because of anything contained in this blog. Consult an attorney for individual legal advice regarding your own situation.