What's the Worst That Could Happen If I Don't Plan Ahead?
It’s easy to put off making a will, trust fund or even getting a life insurance policy when you’re young and healthy. Unless you’ve been told that your days are numbered, death and its consequences can seem distant.
But, if you have experienced tragedy, especially if someone you know has passed away without a last will and testament, a trust, or life insurance, you may understand the chaos created when plans and precautions aren’t in place.
So instead of talking about the reasons for taking care of your estate planning sooner rather than later, let’s look at it from another perspective. What is the worst that could happen if you die with no plan in place, and no life insurance to help your family cope with the financial loss of your departure? As it turns out, quite a lot could go wrong.
Even before you’ve passed on, if you end up incapacitated and don’t have any sort of advance directive, health care power of attorney or living will, family members could make choices that are contrary to your wishes.
For example, they could insist that you be kept alive on a respirator or a feeding tube even though you are in a vegetative state. Maybe you’ll arrive at a point in your life when you don’t want to be resuscitated if you go into a coma or become unconscious. Depending on whether your wishes were discussed with your family and whether or not they share your views, your wishes may not be fulfilled unless they were expressed in writing as part of a living will or advance directive.
Further, in some states, the options available to your family may be limited unless you have selected some choices in writing. For example, withdrawal of life support might require a court order or determination unless you have indicated your choice using a proper legal form.
Unexpected medical decisions aren’t just difficult to make ideologically, but they can also result in much higher medical bills for the surviving family or state as your family tries to determine what is best for you. In addition, if there is any uncertainty about your wishes, your family may have to pursue legal action before they can make certain decisions, which can increase costs.
One of the most alarming potential effects of not having a will, trust, or life insurance policy is the possible impact on minor children.
If you have minor children when you pass away, and there’s no will, trust, or life insurance in place to provide for them, there can be a number of unfortunate or tragic events that could occur.
For instance, if you made no arrangements or provisions for guardianship of minor children, and you are the sole parent or both parents pass away, then the court will appoint someone as the guardian of your minor children. The court will usually do its best to appoint a close relative or friend as guardian, but that person could still be someone you don’t want raising your kids. The guardian chosen by the court could potentially have different religious beliefs, values or parenting philosophies than your own.
In a worst-case scenario, the children could even end up separated from each other or, if there is no obvious relative to act as guardian, in foster care rather than with a close friend.
In addition, keep in mind that the person appointed as guardian will not have the benefit of your income to assist them in paying for your child’s expenses. Life insurance proceeds payable to your minor beneficiaries can be used to defray their living and educational expenses. Thus, life insurance can ease the potential financial burden of acting as a guardian for your children.
If you have children from another marriage and die with no will or trust, your spouse could inherit your estate and leave your children—their stepchildren—with nothing. Leaving some money to these children via your will or trust even if your spouse survives you would ensure that they cannot be totally disinherited.
If part of the estate passes directly to your adult children through intestate succession laws (how your estate is distributed if you die without a will), they could burn through their inheritance quickly because of addictions or poor money management.
If you are afraid that your children might not manage their inheritance wisely, you can provide for it to be managed for them by creating a trust during your life.
Distant cousins vs. your best friend
If you die without a will (aka intestate), your estate will go through the probate process, and a probate court will divide your property according to the default rules under state law.
The way it is divided differs somewhat from state to state, but, in general, your estate would be divided among your relatives in a preferential order depending on how closely you were related . Under this default approach, the first order beneficiaries would usually be your spouse and/or children, followed by your parents and/or siblings. If none of those obvious beneficiaries are available, the court would then look to more distant relatives like nieces, nephews, aunts, uncles and cousins.
While the first order defaults make sense for many people, the division the state chooses may be very different from what you would have wanted. Your estate could end up being administered by the court to people you do not want to give an inheritance to, or disbursed in a manner that is contrary to your wishes. This is especially true if you are unmarried or have no children and you would prefer to leave your property to friends or charity, instead of distant relatives you may not have seen in years.
If you die unexpectedly, you could leave behind a family business with no clear instructions for how your share is to be passed on. While your estate is being sorted out, the uncertainty as to who will be in charge could have economic consequences, such as employee turnover or loss of clients.
Alternatively, the default beneficiary who becomes the new owner might be someone inept or inexperienced. And, if the beneficiary is a minor, a guardian or conservator could be appointed to act on their behalf—possibly someone you do not know or would not have chosen. These outcomes could negatively impact the family business. Having a plan in place will help to ensure that your family can proudly continue the family business you’ve worked so hard to build.
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Debts and taxes
Most personal debt will be counted as liabilities against your estate after you pass away. If the primary breadwinner passes away with no life insurance, there may not be sufficient liquid assets available to pay for medical costs, funeral costs, taxes on the estate, administrative costs, debts, and other liabilities.
The threshold for federal estate tax is high enough that it is not a concern for most people, but some states also assess inheritance or estate taxes with lower thresholds. If taxes are assessed on your estate, and there are few liquid assets, it could put your family in a difficult situation.
If your spouse is left in a dire enough situation, he or she may have to sell all or part of a family business or estate assets in order to pay the bills. They could lose the family home to foreclosure and may even have to declare bankruptcy.
Depending on who you name as beneficiary of your life insurance, and whether you own the policy through a trust, the insurance proceeds may provide your estate or beneficiaries with additional funds. The funds could then be used to pay estate debts and liabilities so that assets don’t have to be sold. Or, the funds could be used to ensure that even after paying off estate debts, your family will still have some money left over.
Disinherited non-spouse partner
If you die without a will in place, intending for your partner to inherit your property, it is unlikely that they will have any claim to it unless you were legally married, registered domestic partners or partners in a civil union. Common law marriages are not recognized in most states, so if you do not have a legal spouse or legally recognized civil partner, your estate could end up passing to your next closest relative under the state default rules for intestate succession, such as a sibling, parent, or child.
Plan ahead for peace of mind
It’s true—getting organized to create your will, set up a trust, sign up for life insurance, and everything else needed to complete your estate planning is no small feat. Although it can seem daunting, the process can be far easier than you think.
Do it today and set your mind at ease, knowing that passing on your finances and properties will not cause unnecessary heartache and distress for your loved ones after you are gone.