A sometimes overlooked aspect of Financial Planning is ensuring that a client has the proper beneficiary designations on their accounts so those assets pass to the correct beneficiaries. However, not all asset trusts will dictate how those assets will pass. Without a will or trust in place, these assets could pass through what is called “intestate succession,” the method used to distribute property owned by a person who dies without a valid will.[1]
Most of our clients have gone through the process of creating an estate plan using either a will or a pourover will and trust to dictate how their assets will pass upon their death. Some clients’ estate plan contains only a will, a document by which a person directs his or her estate to be distributed upon death.[2] Other clients’ estate plans are set up with a pourover will and trust. A pourover will gives money, assets, property, etc., to an existing trust upon that individual’s death.[3] A pourover trust is an inter vivos trust (created during the individual’s life) that receives property from a will upon the individual’s death and passes the property to the beneficiaries according to its terms.[4] (Author’s note: determining the proper estate planning method an individual should use is a case-by-case scenario and will depend on several factors, including: value of estate, beneficiaries, whether assets should remain in trust or be distributed all at once, etc. My next blog will focus on these factors).
We always recommend that our clients meet with an estate planning attorney for assistance in creating their estate plan. However, we recognize not everyone gets around to it for a variety of reasons. Thus, should you die without getting your estate plan put in place, it is important to know how your assets will be distributed to your heirs upon your death via intestate succession. Although intestate succession can differ dramatically from how an individual would have wanted or intended their assets to pass, the purpose is to distribute wealth in a manner that closely represents how the average person would have designed his or her estate plan had that person had a will.
All 50 states have intestacy statutes, and 17 states and the Virgin Islands[5] have enacted the Uniform Probate Code of 1990 (“UPC”). Although not every state has enacted the UPC, it serves as the starting point for many states’ law and represents the best reference for a general discussion. Under the UPC, close relatives consist of classes whose members take property instead of distant relatives. The classes of relatives who receive property under the UPC include:
- Decedent’s surviving spouse
- Descendents (children, grandchildren, etc)
- Parents
- Descendents of Decedent’s parents (siblings, nieces, nephews)
- Grandparents
- Descendents of Grandparents (aunts, uncles, cousins)
If none of the above-named classes of relatives include any qualified persons, the property “escheats” to the state (reversion of property to the state upon the death of an owner who has neither a will nor any legal heirs).
Under the UPC, the surviving spouse is either entitled to the entire estate or a substantial part. For example, the surviving spouse is entitled to the entire net estate if the decedent is survived by children, all of which are children of the decedent and the surviving spouse (i.e., decedent had two children, both are children of surviving spouse and decedent). However, the surviving spouse would only be entitled to the first $150,000 plus ½ of anything exceeding that amount if the decedent is also survived by children from a previous relationship (i.e., decedent has 4 children, 2 with surviving spouse and 2 from a previous relationship).
If there is no surviving spouse, the descendents of the decedent take the entire estate by right of representation, also known as per stirpes (proportionally divided among beneficiaries according to their deceased ancestor’s share). If a decedent is not survived by a spouse or descendents, the entire net estate passes to the decedent’s parents equally, or if only one survives, to the survivor. Finally, if a decedent is not survived by a spouse, descendents, or parents, the entire net estate passes to the decedent’s parents’ descendents (siblings of the decedent). If there are no siblings or descendents of siblings, the net estate goes to the decedent’s grandparents or their descendents.
As you can see, intestacy statutes may not distribute assets in the same manner in which you may want or intend to pass your wealth upon your death. And with a worst case scenario of your wealth escheating to the state if there are no qualified beneficiaries, it is very important to get your house in order and meet with an estate planning attorney to create your estate plan.
[1] Black’s Law Dictionary 687 (3rd ed. 2006).
[2] Black’s Law Dictionary 778 (3rd ed. 2006).
[3] Black’s Law Dictionary 779 (3rd ed. 2006).
[4] Black’s Law Dictionary 736 (3rd ed. 2006).
[5] Alaska, Arizona, Colorado, Hawaii, Idaho, Maine, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Jersey, New Mexico, North Dakota, South Carolina, South Dakota, and Utah