Term Life vs. Whole Life Insurance: Which Is Best for You?

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Taking out a life insurance policy is a great
way to protect your family’s financial future. A policy can also be a useful
financial planning tool. But life insurance is a notoriously tricky subject to
tackle.

One of the hardest challenges is deciding
whether term life or whole life insurance is a better fit for you.

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Not sure what separates term life from whole
life in the first place? You’re not alone. Insurance industry jargon can be
thick, but we’re here to clear up the picture and make sure you have all the
information you need to make the best decision for you and your family.

Life Insurance = Financial
Protection for Your Family

Families have all sorts of expenses: mortgage payments, utility bills, school tuition, credit card payments and car loan payments, to name a few. If something were to happen and your household unexpectedly lost your income or your spouse’s income, your surviving family might have a difficult time meeting those costs. Funeral expenses and other final arrangements could further stress your family’s financial stability.

That’s where life insurance comes in. Essentially, a policy acts as a financial safety net for your family by providing a death benefit. Most forms of natural death are covered by life insurance, but many exceptions exist, so be sure to do your research. Death attributable to suicide, motor accidents while intoxicated and high-risk activity are often explicitly not covered by term or whole life policies.

If you die while covered by your life
insurance policy, your family receives a payout, either a lump sum or in
installments. This is money that’s often tax-free and can be used to meet
things like funeral costs, financial obligations and other personal expenses.
You get coverage in exchange for paying a monthly premium, which is often
decided by your age, health status and the amount of coverage you purchase.

Don’t
know how much to buy? A good rule of thumb is to multiply your yearly income by
10-15, and that’s the number you should target. Companies may have different
minimum and maximum amounts of coverage, but you can generally find a
customized policy that meets your coverage needs.

In addition to the base death benefit, you can enhance your coverage through optional riders. These are additions or modifications that can be made to your policy—whether term or whole life—often for a fee. Riders can do things like:

  • Add coverage for disability or deaths not commonly
    covered in base policies, like those due to public transportation accidents.
  • Waive future premiums if you cannot earn an income.
  • Accelerate your death benefit to pay for medical bills
    your family incurs while you’re still alive.

Other
riders may offer access to membership perks. For a fee, you might be able to
get discounts on goods and services, such as financial planning or health and
wellness clubs.

One
final note before we get into the differences between term and life: We’re just
covering individual insurance here. Group insurance is another avenue for
getting life insurance, wherein one policy covers a group of people. But that’s
a complex story for a different day.

Term Life Policies Are Flexible

The “term” in “term life” refers to
the period of time during which your life insurance policy is active. Often,
term life policies are available for 10, 20, 25 or 30 years. If you die during
the term covered, your family will be paid a death benefit and not be charged any future
premiums, as your policy is no longer active. So, if you were to die in year 10
of a 30-year policy, your family would not be on the hook for paying for the
other 20 years.

Typically, your insurance cannot be canceled
as long as you pay your premium. Of course, if you don’t make payments, your coverage will lapse, which typically
will end your policy. If you want to exit a policy you can cancel during an
introductory period. Generally speaking, nonpayment of premiums will not affect your credit score, as
your insurance provider is not a creditor. Given that, making payments on your
life policy won’t raise your credit score either.

The major downside of term life is that your
coverage ceases once the term expires. Ultimately, once your term expires, you need to reassess
your options for renewing, buying new coverage or upgrading. If you were to die
a month after your term expires, and you haven’t taken out a new policy, your
family won’t be covered. That’s why some people opt for another term policy to
cover changing needs. Others may choose to convert their term life into a
permanent life policy or go without coverage because the same financial
obligations—e.g., mortgage payments and college costs—no longer exist. This
might be the case in your retirement.

The Pros and Cons of Term Life

Even though term life insurance lasts for a
predetermined length of time, there are still advantages to taking out such a
policy:

  • Comparably lower cost: Term life is usually the more affordable type of life insurance, making it the easiest way to get budget-friendly protection for your family. A woman who’s 34 years old can buy $1 million in coverage through a 10-year term life policy for less than $50 a month, according to U.S. News and World Report. A man who’s 42 can purchase $1 million in coverage through a 30-year term for just over $126 a month.
  • Good choice for mid-term financial planning: Lots of families take out a term life policy to coincide with major financial responsibilities or until their children are financially independent. For example, if you have 20 years left on your mortgage, a term policy of the same length could provide extra financial protection for your family.
  • Upgrade if you want to: If you take out a term life policy, you’ll likely also get the option to convert to a permanent form of life insurance once the term ends if your needs change. Just remember to weigh your options, as your rates will increase the older you get. Buying another term life policy at 50 years old may not represent the same value as a whole life policy at 30.

There are some drawbacks to term life:

  • Coverage is temporary: The biggest downside to
    term life insurance is that policies are active for only so long. That means
    your family won’t be covered if something unexpected happens after your insurance
    expires.
  • Rising premiums: Premiums for term life
    policies are often fixed, meaning they stay constant over the duration of the
    policy. However, some
    policies may be structured in a way that seems less costly upfront but feature
    steadily increasing premiums as your term progresses.

Young Families Often Opt for Term Life

The rate you pay for term life insurance is
largely determined by your age and health. Factors outside your control may influence the rates you
see, like demand for life insurance. During a pandemic, you might be paying
more if you take a policy out amid an outbreak.

Most consumers seeking term life fall into
younger and healthier demographics, making term life rates among the most
affordable. This is because
such populations present less risk than a 70-year-old with multiple chronic
conditions. In the end, your rate depends on individual factors. So if
you’re looking for affordable protection for your family, term life might be
the best choice for you.

Term life is also a great option if you want a
policy that:

  • Grants you some flexibility for
    future planning, as you’re
    not locked into a lifetime policy.
  • Can replace your or your spouse’s
    income on a temporary basis.
  • Will cover your children until
    they are financially stable on their own.
  • Is active for the same length as
    certain financial responsibilities—e.g., a car loan or remaining years on a
    mortgage.

Whole Life Insurance Offers
Lifetime Coverage

Like with term life policies, whole life
policies award a death benefit when you pass. This benefit is decided by the
amount of coverage you purchase, but you can also add riders that accelerate
your benefit or expand coverage for covered types of death.

The biggest difference between term life and
whole life insurance is that the latter is a type of permanent life insurance.
Your policy has no expiration date. That means you and your family benefit from
a lifetime of protection without having to worry about an unexpected event
occurring after your term has ended.

The Pros and Cons of Whole Life

As if a lifetime of coverage wasn’t enough of
advantage, whole life insurance can also be a highly useful financial planning
tool:

  • Cash value: When you make a premium payment on
    your whole life policy, a portion of that goes toward an account that builds
    cash up over time. Your
    family gets this amount in addition to the death benefit when their claim is
    approved, or you can access it while living. You pay taxes only when the money
    is withdrawn, allowing for tax-deferred growth of cash value. You can
    often access it at any time, invest it, or take a loan out against it. However, be aware that anything
    you take out and don’t repay will eventually be subtracted from what your
    family receives in the end.
  • Dividend payments: Many life insurance
    companies offer whole life policyholders the opportunity to accrue dividends
    through a whole life policy. This works much like how stocks make dividend
    payments to shareholders from corporate profits. The amount you see through a dividend payment is
    determined by company earnings and your provider’s target payout ratio—which is
    the percentage of earnings paid to policyholders. Some life insurance
    companies will make an annual dividend payment to whole life policyholders that
    adds to their cash value.

Some potential downsides to consider include:

  • Higher cost: Whole life is more expensive than
    term life, largely because of the lifetime of coverage. This means monthly
    premiums that might not fit every household budget.
  • Interest rates on cash value loans: If you need emergency extra
    money, a cash value loan may be more appealing than a standard bank loan, as
    you don’t have to go through the typical application process. You can also get
    lower interest rates on cash value loans than you would with private loans or
    credit cards. Plus, you don’t have to pay the balance back, as you’re basically
    borrowing from your own stash. But if you don’t pay the loan back, it will be
    money lost to your family.

Whole Life Is Great for Estate Planning

Who stands to benefit most from a whole life
policy?

  • Young adults and families who can
    net big savings by buying a whole life policy earlier.
  • Older families looking to lock in
    coverage for life.
  • Those who want to use their policy
    as a tool for savings or estate planning.

To that last point, whole life policies are particularly advantageous in overall financial and estate planning compared to term life. Cash value is the biggest and clearest benefit, as it can allow you to build savings to access at any time and with little red tape.

Also,
you can gift a whole life policy to a grandchild, niece or nephew to help
provide for them. This works by you opening the policy and paying premiums for
a set number of years—like until the child turns 18. Upon that time, ownership
of the policy is transferred to them and they can access the cash value that’s
been built up over time.

If you’re looking for another low-touch way to leave a legacy, consider opening a high-yield savings account that doesn’t come with monthly premium payments, or a normal investment account.

What to Do Before You Buy a
Policy

Make sure you take the right steps to finding
the best policy for you. That means:

  • Researching different life insurance companies and their policies, cost and riders. (You can start by reading our review of Bestow.)
  • Balancing your current and long-term needs to best protect your family.
  • Buying the right amount of coverage.

If you’re interested in taking next steps, talk to your financial advisor about your specific financial situation and personal needs.

Infographic explaining the difference between term and whole life insurance policies.


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A Guide to Schedule K-1 (Form 1041)

A Guide to Schedule K-1 (Form 1041) – SmartAsset

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Inheriting property or other assets typically involves filing the appropriate tax forms with the IRS. Schedule K-1 (Form 1041) is used to report a beneficiary’s share of an estate or trust, including income as well as credits, deductions and profits. A K-1 tax form inheritance statement must be sent out to beneficiaries at the end of the year. If you’re the beneficiary of an estate or trust, it’s important to understand what to do with this form if you receive one and what it can mean for your tax filing.

Schedule K-1 (Form 1041), Explained

Schedule K-1 (Form 1041) is an official IRS form that’s used to report a beneficiary’s share of income, deductions and credits from an estate or trust. It’s full name is “Beneficiary’s Share of Income, Deductions, Credits, etc.” The estate or trust is responsible for filing Schedule K-1 for each listed beneficiary with the IRS. And if you’re a beneficiary, you also have to receive a copy of this form.

This form is required when an estate or trust is passing tax obligations on to one or more beneficiaries. For example, if a trust holds income-producing assets such as real estate, then it may be necessary for the trustee to file Schedule K-1 for each listed beneficiary.

Whether it’s necessary to do so or not depends on the amount of income the estate generates and the residency status of the estate’s beneficiaries. If the annual gross income from the estate is less than $600, then the estate isn’t required to file Schedule K-1 tax forms for beneficiaries. On the other hand, this form has to be filed if the beneficiary is a nonresident alien, regardless of how much or how little income is reported.

Contents of Schedule K-1 Tax Form Inheritance Statements

The form itself is fairly simple, consisting of a single page with three parts. Part one records information about the estate or trust, including its name, employer identification number and the name and address of the fiduciary in charge of handling the disposition of the estate. Part Two includes the beneficiary’s name and address, along with a box to designate them as a domestic or foreign resident.

Part Three covers the beneficiary’s share of current year income, deductions and credits. That includes all of the following:

  • Interest income
  • Ordinary dividends
  • Qualified dividends
  • Net short-term capital gains
  • Net long-term capital gains
  • Unrecaptured Section 1250 gains
  • Other portfolio and nonbusiness income
  • Ordinary business income
  • Net rental real estate income
  • Other rental income
  • Directly apportioned deductions
  • Estate tax deductions
  • Final year deductions
  • Alternative minimum tax deductions
  • Credits and credit recapture

If you receive a completed Schedule K-1 (Form 1041) you can then use it to complete your Form 1040 Individual Tax Return to report any income, deductions or credits associated with inheriting assets from the estate or trust.

You wouldn’t, however, have to include a copy of this form when you file your tax return unless backup withholding was reported in Box 13, Code B. The fiduciary will send a copy to the IRS on your behalf. But you would want to keep a copy of your Schedule K-1 on hand in case there are any questions raised later about the accuracy of income, deductions or credits being reported.

Estate Income and Beneficiary Taxation

If you received a Schedule K-1 tax form, inheritance tax rules determine how much tax you’ll owe on the income from the estate. Since the estate is a pass-through entity, you’re responsible for paying income tax on the income that’s generated. The upside is that when you report amounts from Schedule K-1 on your individual tax return, you can benefit from lower tax rates for qualified dividends. And if there’s income from the estate that hasn’t been distributed or reported on Schedule K-1, then the trust or estate would be responsible for paying income tax on it instead of you.

In terms of deductions or credits that can help reduce your tax liability for income inherited from an estate, those can include things like:

  • Depreciation
  • Depletion allocations
  • Amortization
  • Estate tax deduction
  • Short-term capital losses
  • Long-term capital losses
  • Net operating losses
  • Credit for estimated taxes

Again, the fiduciary who’s completing the Schedule K-1 for each trust beneficiary should complete all of this information. But it’s important to check the information that’s included against what you have in your own records to make sure that it’s correct. If there’s an error in reporting income, deductions or credits and you use that inaccurate information to complete your tax return, you could end up paying too much or too little in taxes as a result.

If you think the information in your Schedule K-1 (Form 1041) is incorrect, you can contact the fiduciary to request an amended form. If you’ve already filed your taxes using the original form, you’d then have to file an amended return with the updated information.

Schedule K-1 Tax Form for Inheritance vs. Schedule K-1 (Form 1065)

Schedule K-1 can refer to more than one type of tax form and it’s important to understand how they differ. While Schedule K-1 (Form 1041) is used to report information related to an estate or trust’s beneficiaries, you may also receive a Schedule K-1 (Form 1065) if you run a business that’s set up as a pass-through entity.

Specifically, this type of Schedule K-1 form is used to record income, losses, credits and deductions related to the activities of an S-corporation, partnership or limited liability company (LLC). A Schedule K-1 (Form 1065) shows your share of business income and losses.

It’s possible that you could receive both types of Schedule K-1 forms in the same tax year if you run a pass-through business and you’re the beneficiary of an estate. If you’re confused about how to report the income, deductions, credits and other information from either one on your tax return, it may be helpful to get guidance from a tax professional.

The Bottom Line

Receiving a Schedule K-1 tax form is something you should be prepared for if you’re the beneficiary of an estate or trust. Again, whether you will receive one of these forms depends on whether you’re a resident or nonresident alien and the amount of income the trust or estate generates. Talking to an estate planning attorney can offer more insight into how estate income is taxed as you plan a strategy for managing an inheritance.

Tips for Estate Planning

  • Consider talking to a financial advisor about the financial implications of inheriting assets. 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 professional advisors in your local area in minutes. If you’re ready, get started now.
  • One way to make the job of filing taxes easier is with a free, easy-to-use tax return calculator. Also, creating a trust is something you might consider as part of your own estate plan if you have significant assets you want to pass on.

Photo credit: ©iStock.com/fizkes, ©iStock.com/urbazon, ©iStock.com/dragana991

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

Per Stirpes vs. Per Capita in Estate Planning

Per Stirpes vs. Per Capita in Estate Planning – SmartAsset

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When creating an estate plan, one of the most basic documents you may wish to include is a will. If you have a more complicated estate, you might also need to have a trust in place. Both a will and a trust can specify how you want assets distributed among your beneficiaries. When making those decisions, it’s important to distinguish between per stirpes and per capita distributions. These are two terms you’re likely to come across when shaping your estate plan. Here’s a closer look at what per stirpes vs. per capita means.

Per Stirpes, Explained

If you’ve never heard the term per stirpes before, it’s a Latin phrase that translates to “by branch” or “by class.” When this term is applied to estate planning, it refers to the equal distribution of assets among the different branches of a family and their surviving descendants.

A per stirpes designation allows the descendants of a beneficiary to keep inherited assets within that branch of their family, even if the original beneficiary passes away. Those assets would be equally divided between the survivors.

Here’s an example of how per stirpes distributions work for estate planning. Say that you draft a will in which you designate your adult son and daughter as beneficiaries. You opt to leave your estate to them, per stirpes.

If you pass away before both of your children, then they could each claim a half share of your estate under the terms of your will. Now, assume that each of your children has two children of their own and your son passes away before you do. In that scenario, your daughter would still inherit a half share of the estate. But your son’s children would split his half of your estate, inheriting a quarter share each.

Per stirpes distributions essentially create a trickle-down effect, in which assets can be passed on to future generations if a primary beneficiary passes away. A general rule of thumb is that the flow of assets down occurs through direct descendants, rather than spouses. So, if your son were married, his children would be eligible to inherit his share of your estate, not his wife.

Per Capita, Explained

Per capita is also a Latin term which means “by head.” When you use a per capita distribution method for estate planning, any assets you have would pass equally to the beneficiaries are still living at the time you pass away. If you’re writing a will or trust as part of your estate plan, that could include the specific beneficiaries you name as well as their descendants.

So again, say that you have a son and a daughter who each have two children. These are the only beneficiaries you plan to include in your will. Under a per capita distribution, instead of your son and daughter receiving a half share of your estate, they and your four grandchildren would each receive a one-sixth share of your assets. Those share portions would adjust accordingly if one of your children or grandchildren were to pass away before you.

Per Stirpes vs. Per Capita: Which Is Better?

Whether it makes sense to use a per stirpes or per capita distribution in your estate plan can depend largely on how you want your assets to be distributed after you’re gone. It helps to consider the pros and cons of each option.

Per Stirpes Pros:

  • Allows you to keep asset distributions within the same branch of the family
  • Eliminates the need to amend or update wills and trusts when a child is born to one of your beneficiaries or a beneficiary passes away
  • Can help to minimize the potential for infighting among beneficiaries since asset distribution takes a linear approach

Per Stirpes Cons:

  • It’s possible an unwanted person could take control of your assets (i.e., the spouse of one of your children if he or she is managing assets on behalf of a minor child)

Per Capita Pros:

  • You can specify exactly who you want to name as beneficiaries and receive part of your estate
  • Assets are distributed equally among beneficiaries, based on the value of your estate at the time you pass away
  • You can use this designation to pass on assets outside of a will, such as a 401(k) or IRA

Per Capita Cons:

  • Per capita distributions could trigger generation-skipping tax for grandchildren or other descendants who inherit part of your estate

Deciding whether it makes more sense to go with per stirpes vs. per capita distributions can ultimately depend on your personal preferences. Per stirpes distribution is typically used in family settings when you want to ensure that individual branches of the family will benefit from your estate. On the other hand, per capita distribution gives you control over which individuals or group of individuals are included as beneficiaries.

Review Beneficiary Designations Periodically

If you have a will and/or a trust, you may have named your beneficiaries. But it’s possible that you may want to change those designations at some point. If you named your son and his wife in your will, for example, but they’ve since gotten divorced you may want to update the will with a codicil to exclude his ex-wife. It’s also helpful to check the beneficiary designations on retirement accounts, investment accounts and life insurance policies after a major life change.

For example, if you get divorced then you may not want your spouse to be the beneficiary of your retirement accounts. Or if they pass away before you, you may want to update your beneficiary designations to your children or grandchildren.

The Bottom Line

Per stirpes and per capita distribution rules can help you decide what happens to your assets after you pass away. But they both work very differently. Understanding the implications of each one for your beneficiaries, including how they may be affected from a tax perspective, can help you decide which course to take.

Tips for Estate Planning

  • Consider talking to a financial advisor about how to get started with estate planning and what per stirpes vs. per capita distributions might mean for your heirs. 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, within minutes, with a professional advisor in your local area. If you’re ready, get started now.
  • While it’s always a good idea to consult with a financial advisor about estate planning, you can take a do-it-yourself approach to writing a will by doing it online. Here’s what you need to know about digital DIY will writing.

Photo credit: ©iStock.com/Georgijevic, ©iStock.com/monkeybusinessimages, ©iStock.com/FatCamera

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

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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An Overview of Filial Responsibility Laws

An Overview of Filial Responsibility Laws – SmartAsset

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Taking care of aging parents is something you may need to plan for, especially if you think one or both of them might need long-term care. One thing you may not know is that some states have filial responsibility laws that require adult children to help financially with the cost of nursing home care. Whether these laws affect you or not depends largely on where you live and what financial resources your parents have to cover long-term care. But it’s important to understand how these laws work to avoid any financial surprises as your parents age.

Filial Responsibility Laws, Definition

Filial responsibility laws are legal rules that hold adult children financially responsible for their parents’ medical care when parents are unable to pay. More than half of U.S. states have some type of filial support or responsibility law, including:

  • Alaska
  • Arkansas
  • California
  • Connecticut
  • Delaware
  • Georgia
  • Indiana
  • Iowa
  • Kentucky
  • Louisiana
  • Massachusetts
  • Mississippi
  • Montana
  • Nevada
  • New Jersey
  • North Carolina
  • North Dakota
  • Ohio
  • Oregon
  • Pennsylvania
  • Rhode Island
  • South Dakota
  • Tennessee
  • Utah
  • Vermont
  • Virginia
  • West Virginia

Puerto Rico also has laws regarding filial responsibility. Broadly speaking, these laws require adult children to help pay for things like medical care and basic needs when a parent is impoverished. But the way the laws are applied can vary from state to state. For example, some states may include mental health treatment as a situation requiring children to pay while others don’t. States can also place time limitations on how long adult children are required to pay.

When Do Filial Responsibility Laws Apply?

If you live in a state that has filial responsibility guidelines on the books, it’s important to understand when those laws can be applied.

Generally, you may have an obligation to pay for your parents’ medical care if all of the following apply:

  • One or both parents are receiving some type of state government-sponsored financial support to help pay for food, housing, utilities or other expenses
  • One or both parents has nursing home bills they can’t pay
  • One or both parents qualifies for indigent status, which means their Social Security benefits don’t cover their expenses
  • One or both parents are ineligible for Medicaid help to pay for long-term care
  • It’s established that you have the ability to pay outstanding nursing home bills

If you live in a state with filial responsibility laws, it’s possible that the nursing home providing care to one or both of your parents could come after you personally to collect on any outstanding bills owed. This means the nursing home would have to sue you in small claims court.

If the lawsuit is successful, the nursing home would then be able to take additional collection actions against you. That might include garnishing your wages or levying your bank account, depending on what your state allows.

Whether you’re actually subject to any of those actions or a lawsuit depends on whether the nursing home or care provider believes that you have the ability to pay. If you’re sued by a nursing home, you may be able to avoid further collection actions if you can show that because of your income, liabilities or other circumstances, you’re not able to pay any medical bills owed by your parents.

Filial Responsibility Laws and Medicaid

While Medicare does not pay for long-term care expenses, Medicaid can. Medicaid eligibility guidelines vary from state to state but generally, aging seniors need to be income- and asset-eligible to qualify. If your aging parents are able to get Medicaid to help pay for long-term care, then filial responsibility laws don’t apply. Instead, Medicaid can paid for long-term care costs.

There is, however, a potential wrinkle to be aware of. Medicaid estate recovery laws allow nursing homes and long-term care providers to seek reimbursement for long-term care costs from the deceased person’s estate. Specifically, if your parents transferred assets to a trust then your state’s Medicaid program may be able to recover funds from the trust.

You wouldn’t have to worry about being sued personally in that case. But if your parents used a trust as part of their estate plan, any Medicaid recovery efforts could shrink the pool of assets you stand to inherit.

Talk to Your Parents About Estate Planning and Long-Term Care

If you live in a state with filial responsibility laws (or even if you don’t), it’s important to have an ongoing conversation with your parents about estate planning, end-of-life care and where that fits into your financial plans.

You can start with the basics and discuss what kind of care your parents expect to need and who they want to provide it. For example, they may want or expect you to care for them in your home or be allowed to stay in their own home with the help of a nursing aide. If that’s the case, it’s important to discuss whether that’s feasible financially.

If you believe that a nursing home stay is likely then you may want to talk to them about purchasing long-term care insurance or a hybrid life insurance policy that includes long-term care coverage. A hybrid policy can help pay for long-term care if needed and leave a death benefit for you (and your siblings if you have them) if your parents don’t require nursing home care.

Speaking of siblings, you may also want to discuss shared responsibility for caregiving, financial or otherwise, if you have brothers and sisters. This can help prevent resentment from arising later if one of you is taking on more of the financial or emotional burdens associated with caring for aging parents.

If your parents took out a reverse mortgage to provide income in retirement, it’s also important to discuss the implications of moving to a nursing home. Reverse mortgages generally must be repaid in full if long-term care means moving out of the home. In that instance, you may have to sell the home to repay a reverse mortgage.

The Bottom Line

Filial responsibility laws could hold you responsible for your parents’ medical bills if they’re unable to pay what’s owed. If you live in a state that has these laws, it’s important to know when you may be subject to them. Helping your parents to plan ahead financially for long-term needs can help reduce the possibility of you being on the hook for nursing care costs unexpectedly.

Tips for Estate Planning

  • Consider talking to a financial advisor about what filial responsibility laws could mean for you if you live in a state that enforces them. 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 help you connect, in just minutes, with professional advisors in your local area. If you’re ready, get started now.
  • When discussing financial planning with your parents, there are other things you may want to cover in addition to long-term care. For example, you might ask whether they’ve drafted a will yet or if they think they may need a trust for Medicaid planning. Helping them to draft an advance healthcare directive and a power of attorney can ensure that you or another family member has the authority to make medical and financial decisions on your parents’ behalf if they’re unable to do so.

Photo credit: ©iStock.com/Halfpoint, ©iStock.com/byryo, ©iStock.com/Halfpoint

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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Fiduciary Bonds: Definition, Types, Costs

Fiduciary Bonds: Definition, Types, Costs – SmartAsset

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A fiduciary bond, otherwise known as a probate bond, is a protective court bond that ensures a fiduciary will honor the expectations placed on them according to the law. The fiduciary bond upholds the interests and protection of the estate or trust owner. To understand who needs a fiduciary bond, how it works and the costs involved, here’s what you need to know.

What Is a Fiduciary Bond?

Fiduciary bonds are legal instruments that act as insurance to protect heirs, beneficiaries or other creditors when a fiduciary commits acts of fraud, embezzlement or other forms of dishonesty. To prevent damage, as a result, the court may require anyone with a fiduciary responsibility to another party to get a fiduciary bond.

Generally speaking, a fiduciary is an individual responsible for safeguarding the interest of another party. Fiduciaries may include trustees, guardians, financial professionals or another party with control over someone’s assets or property. Typically, a fiduciary will take control of someone’s assets when they are no longer able to manage them independently.

For example, a will may name a fiduciary to maintain the decedent’s assets. However, in the absence of a will, the spouse or children may take control, followed by relatives.

A fiduciary bond can range in price and ultimately depends on the value of the estate, as well as a few other factors. It may only be required to pay a portion to fund the bond, rather than the entire amount. For instance, if the fiduciary bond is $100,000, you may only need to pay about $400 to $600, depending on whether you receive approval.

Example of a Fiduciary Bond

Let’s say that John Smith is an elderly man who can no longer manage his property and assets. He didn’t appoint anyone to manage his finances, so the court appoints his daughter, Sally, to manage them in his place. To protect these assets, she may need to secure a fiduciary bond to guarantee she will meet her role’s duties and responsibilities.

The bond will help ensure that Sally won’t sell her father’s estate or embezzle money from him. If someone thinks Sally is not fulfilling the role of a fiduciary, they can make a claim against her. The company that issued the bond will then step in and fulfill the claim.

The company would likely reimburse John Smith for any money lost and then pursue Sally for the reimbursement of funds. If Sally no longer wants to be the estate’s fiduciary, she must find a suitable replacement and get approval from the court to resign. Until she does so, she is accountable for the duties and responsibilities of the fiduciary.

Who Needs a Fiduciary Bond?

A fiduciary bond isn’t always required. If it is mandatory, the fiduciary will receive a notification from the court.

In some cases, beneficiaries or creditors may request a fiduciary bond if they have concerns about the integrity of the fiduciary.

Usually, when banks, trusts or other corporate fiduciaries are in the mix, the courts don’t require a fiduciary bond. This is because there is less of a risk that a corporate fiduciary will compromise the payout.

Fiduciary Bond Types, Costs

Some of the common types of fiduciary bonds include:

  • Personal Representative Bond – This bond reassures the parties invested and connected to an estate that the fiduciary will manage the estate affairs in a responsible and ethical manner. The latter will also comply with local, state and federal laws and duties.
  • Executor Bond – This bond reassures the beneficiaries of an estate that even if the fiduciary doesn’t fulfill their duties, the bond will protect them and they will also receive compensation.
  • Guardianship Bond – This bond protects an individual who is receiving day-to-day care from a guardian. If the guardian fails to perform his or her obligations, someone can make a claim against the person.
  • Trustee Bond – It’s the trustee’s duty and responsibility to handle the trust’s property and assets. This bond ensures that the trustee fulfills his duties appropriately.
  • Administrator Bond – This bond ensures that the administrator of an estate distributes the estate assets according to local, state and federal laws.
  • Conservatorship Bond – A conservator handles the monetary matters of someone who needs to be cared for by a guardian. This type of bond ensures that the conservator upholds the duties and responsibilities of the role.

A fiduciary bond can range in price and ultimately depends on the value of the estate, as well as a few other factors. It may only be required to pay a portion to fund the bond, rather than the entire amount. For instance, if the fiduciary bond is $100,000, you may only need to pay about $400 to $600, depending on whether you receive approval.

Duties and Obligations of a Fiduciary

There are many different types of fiduciaries; therefore, their duties and obligations vary. For example, an executor’s duties include taking control of a decedent’s property, collecting debts and arranging appraisals of assets. On the other hand, a trustee may have duties such as directing audits, challenging improper claims and determining claimants. In comparison, guardians and conservators may have the extra responsibility to care for an incapacitated individual or minor.

When fulfilling the role of a fiduciary, the individual must have a high level of loyalty since it’s one of the highest standards of care by either equity or law.

It’s important to note that anyone who gives financial advice or handles funds is also a fiduciary. However, if they work for a company, the company is required to obtain a fidelity bond, which differs from a fiduciary bond.

The Takeaway

A fiduciary bond protects individuals who have their estate or trust managed and handled by a fiduciary. While the court may not always require a fiduciary bond, there are some instances where it may make sense to protect an individual’s assets. A fiduciary bond is a crucial protection to aid those who may not have other forms of recourse. Bonded fiduciaries are often members of a person’s immediate family.

Estate Planning Tips

  • Consider talking to a financial advisor experienced in estate planning. Finding one doesn’t have to be hard. SmartAsset’s advisor matching tool can set you up with three personalized financial advisor options in just minutes. If you’re ready, 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.

Photo credit: ©iStock.com/AndreyPopov, ©iStock.com/monkeybusinessimages, ©iStock.com/fizkes

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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COVID-19 Gives a Boost to Estate Planning: How You Can Get a Will Done—and Fast

Here’s the macabre truth: With hundreds of thousands of confirmed cases of COVID-19 across the country—and the death toll steadily rising—estate planners are reporting an increase in calls and transactions by people wanting to put their affairs in order in case of their death.

But estate planning isn’t just for those with a life-threatening diagnosis. In fact, if you’ve never considered who will inherit your assets, or whom you’d appoint to be your power of attorney, now’s probably a good time. We spoke with several experts to find out everything you need to know about quickly securing your assets during the pandemic—or beyond. Keep reading for all the details.

Estate planning with a lawyer vs. online

If you’re panicked about getting your estate planning done quickly, maybe you’ve wondered: Can’t I just do it online?

While many lawyers advocate for working with a professional, there are situations in which it might make sense to take the do-it-yourself online approach.

“If you’ve already taken stock of your assets and decided on how it should be managed, creating an estate plan is rather straightforward,” explains Felix Sebastian of Legal Templates. “An attorney can draft one up for you in a matter of hours, or you can do so yourself by using forms provided by your state government.”

For those with relatively simple estate planning goals (i.e., a limited number of assets and beneficiaries, and no special circumstances), online services can be a great option, with the added perk of having an incredibly fast turnaround time.

“We have streamlined the process to make it easy and efficient,” says Patrick Hicks, head of legal at Trust & Will. “Most people finish in 15 to 30 minutes, but the process is driven by the individual, so anyone can take more or less time as they desire.

“Our process is much like TurboTax,” he adds. “One easy question at a time, and each question will then lead you through the process to collect and synthesize all of your information and decisions. Most people can complete it all with no preparation and no other documents needed.”

__________

Watch: Our Chief Economist’s View on the Pandemic, Mortgage Rates, and What’s Ahead

__________

The downsides of DIY estate planning

If this sounds good to you, you wouldn’t be alone. Hicks says their service has seen a 50% increase in activity even compared with other busy times of the year, and Mary Kate D’Souza, founder of online estate planning service Gentreo, reported a 143% increase in membership over the past week alone.

And while there are certainly potential perks of using an online service (e.g., getting documents faster or saving money on lawyer fees), just be sure you understand what you’re actually getting: a set of unnotarized forms that will likely not include any sort of legal advice.

“Creating an estate planning document such as a will only gets you halfway there,” Sebastian says. “Pretty much every single state and territory of the U.S. requires that these documents be signed by witnesses and/or notarized.”

And on that note: While putting your online forms together can be done relatively quickly, it may end up taking you much longer to get those forms notarized, even if you have the option to do so remotely.

Lawyers urge clients not to delay their wills and trusts

If you’re considering working with a lawyer for your estate planning, the experts are advising you get to it—and fast.

“Since the COVID-19 outbreak, we have experienced a 30% increase in calls from people wanting us to draft powers of attorney, health care powers of attorney, and wills,” says family law and estate planning attorney Chelsea Chapman of McIlveen Family Law Firm.

Plus, beyond those new clients, estate planners are trying to juggle their existing roster of clients, too—who are, understandably, concerned.

“With the COVID-19 outbreak, we’re receiving an exponentially greater number of existing-client calls than usual,” says Judith Harris, an attorney and co-chair of the Estate Trust and Tax Group at Norris McLaughlin.

Although many law offices typically take several weeks to complete estate planning packages, exceptions can be made for emergency situations.

“In the event of an emergency, we can get documents done in 48 hours,” says Eido Walny, founder of the Walny Legal Group. “That’s one heck of a rush job, however, and would require skipping over a lot of other people in the process. As a result, clients who ask for that kind of turnaround should expect to offer all the cooperation that is asked of them and also to pay a hefty premium for the service. But it can be done.”

The final word

Ultimately, however you choose to get your estate planning done, there’s one key takeaway.

“Don’t wait,” Walny says. “Get the planning process started now. Estate planning is not death planning—these documents will help you during life, during illness, and also in death. Hopefully this crisis will pass, and when it does, these documents will continue to be valuable, unlike the 1,200 rolls of toilet paper hidden in the basement.”

For more smart financial news and advice, head over to MarketWatch.

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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.

Photo credit: ©iStock.com/FatCamera, ©iStock.com/Sean_Warren, ©iStock.com/LPETTET

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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Can I Inherit Debt?

Can I Inherit Debt? | SmartAsset.com

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When someone passes away leaving debts behind, you might be wondering if you have any personal liability to pay them. If you have aging parents, for instance, you may be worried about having to assume responsibility for their mortgage payments, credit cards or other debts. If you’ve asked yourself, “Can I inherit debt?” the answer is typically no, even though those debts don’t automatically disappear. But there are situations in which you may have to deal with a loved one’s creditors after they’re gone.

How Debts Are Handled When Someone Passes Away

Debts, just like assets, are considered part of a person’s estate. When that person passes away, their estate is responsible for paying any and all remaining debts. The money to pay those debts comes from the asset side of the estate.

In terms of who is responsible for making sure the estate’s debts are paid, this is typically done by an executor. An executor performs a number of duties to wrap up a person’s estate after death, including:

  • Getting a copy of the deceased person’s will if they had one and filing it with the probate court
  • Notifying creditors and other entities of the person’s death (for example, the Social Security Administration would need to be notified so any Social Security benefits could be stopped)
  • Completing an inventory of the deceased person’s assets and their value
  • Liquidating those assets as needed to pay off any debts owed by the estate
  • Distributing the remaining assets to the people or organizations named in the deceased person’s will if they had one or according to inheritance laws if they did not

In terms of debt repayment, executors are required to give notice to creditors who may have a claim against the estate. Creditors are then giving a certain window of time, according to state laws, in which to make a financial claim against the estate’s assets for repayment of debts.

If a creditor doesn’t follow state guidelines for making a claim, then those debts won’t be paid from the estate’s assets. But if creditors are less than reputable, they may try to come after the deceased person’s spouse, children or other family members to collect what’s owed.

Not all assets in an estate may be used to repay debts owed by a deceased person. Any assets that already have a named beneficiary, such as a life insurance policy, a 401(k), individual retirement account, payable on death accounts or annuity, would be transferred to that beneficiary automatically.

Can I Inherit Debt From My Parents?

This is an important question to ask if your parents are carrying high amounts of debt and you’re worried about having to pay those bills when they pass away. Again, the short answer is usually no. You generally don’t inherit debts belonging to someone else the way you might inherit property or other assets from them. So even if a debt collector attempts to request payment from you, there’d be no legal obligation to pay.

The catch is that any debts left outstanding would be deducted from the estate’s assets. If your parents were substantially in debt when they passed away, repaying them from the estate may leave little or no assets for you to inherit.

But you should know that you can inherit debt that you were already legally responsible for while your parents were alive. For instance, if you cosigned a loan with them or opened a joint credit card account or line of credit, those debts are legally yours just as much as they are your parents. So, once they pass away, you’d be solely responsible for repaying them.

And it’s also important to understand what responsibility you may have for covering long-term care costs incurred by your parents while they were alive. Many states have filial responsibility laws that require children to cover nursing home bills, though they aren’t always enforced. Talking to your parents about long-term care planning can help you avoid situations where you may end up with an unexpected debt to pay.

Can I Inherit Debt From My Children?

The same rules that apply to inheriting debt from parents typically apply to inheriting debts from children. Any debts remaining would be paid using assets from their state.

Otherwise, unless you cosigned for the debt, then you wouldn’t be obligated to pay. On the other hand, if you cosigned private student loans, a car loan or a mortgage for your adult child who then passed away, as cosigner you’d technically have a legal responsibility to pay them. Federal student loans are an exception.

If your parents took out a PLUS loan to pay for your higher education costs and something happens to you, the Department of Education can discharge that debt due to death. And vice versa, if your parents pass away then any PLUS loans they took out on your behalf could also be discharged.

Can I Inherit Debts From My Spouse?

When marriage and money mix, the lines on inherited debt can get a little blurred. The same basic rule that applies to other situations applies here: if you cosigned or took out a joint loan or line of credit together, then you’re both equally responsible for the debt. If one of you passes away, the surviving spouse would still have to pay.

But what about debts that are in one spouse’s name only? That’s where it’s important to understand how living in a community property state can affect your liability for marital debts. If you live in a community property state, debts incurred after the marriage by one spouse can be treated as a shared financial obligation. So if your spouse opened up a credit card or took out a business loan, then passed away you could still be responsible for paying it. On the other hand, debts incurred by either party before the marriage wouldn’t be considered community debt.

Consider Getting Help If You Need It

If a parent, spouse, sibling or other family member passes away, it can be helpful to talk to an attorney if you’re being pressured by debt collectors to pay. An attorney who understands debt collection laws and estate planning can help you determine what your responsibilities are for repaying debts and how to handle creditors.

The Bottom Line

Whether or not you’ll inherit debt from your parents, child, spouse or anyone else largely hinges on whether you cosigned for that debt or live in a community property state in the case of married couples. If you’re concerned about inheriting debts, consider talking to your parents, children or spouse about how those financial obligations would be handled if they were to pass away. Likewise, you can also discuss what financial safety nets you have in place to clear any debts you may leave behind, such as life insurance.

Tips for Estate Planning

  • Consider talking to a financial advisor about how to manage and pay off debts you owe or any debts you might inherit from someone else. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool can help you connect with an advisor in your local area. It takes just a few minutes to get your personalized advisor recommendations online. If you’re ready, get started now.
  • The Fair Debt Collection Practices Act caps the statute of limitations for unpaid debt collections at a maximum of six years, although most states specify a much shorter time frame. However, some debt collectors buy so-called zombie debts for pennies on the dollar and then – unscrupulously – try to collect on them. Here’s how to deal with such operators.

Photo credit: ©iStock.com/NiseriN, ©iStock.com/AndreyPopov, ©iStock.com/FatCamera

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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How to Change the Executor of a Will

How to Change the Executor of a Will – SmartAsset

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Drafting a last will and testament can help to ensure that your assets are distributed according to your wishes after you pass away. You can also use your will to name a legal guardian for minor children or choose an executor for your estate. It’s possible to make changes to your will after it’s written, including removing or adding an executor if necessary. If you’re wondering how to change the executor of a will after the fact, the process is easier than you might think. As you go about the process, it may behoove you to find a trusted financial advisor in your area for hands-on guidance.

Executor of a Will, Explained

The executor of a will is the person responsible for carrying out the terms of a will. When you name someone as executor, you’re giving him or her authority to handle certain tasks related to the distribution of your estate.

Generally, an executor can be any person you name. For example, that might include siblings, your spouse, adult children or your estate planning attorney. Minor children can’t serve as executors and some states prohibit convicted felons from doing so as well.

There’s no rule preventing a beneficiary of a will from also serving as executor. While beneficiaries can’t witness a will in which they have a direct interest, they can be charged with executing the terms of the will once you pass away.

What Does the Executor of a Will Do?

Being executor to a will means there are certain duties you’re obligated to carry out. Those include:

  • Obtaining death certificates after the will-maker passes away
  • Initiating the probate process
  • Creating an inventory of the will-maker’s assets
  • Notifying the will-maker’s creditors of the death
  • Paying off any outstanding debts owed by the will-maker
  • Closing bank accounts if necessary
  • Reading the will to the deceased person’s heirs
  • Distributing assets to the persons named in the will

Executors can’t change the terms of the will; they can only see that its terms are carried out. An executor can collect a fee for their services, which is typically a percentage of the value of the estate they’re finalizing.

Reasons to Change the Executor of a Will

While you may draft a will assuming that your choice of executor won’t change, there are different reasons why making a switch may be necessary. For example, you may need to choose a new executor if:

  • Your original executor passes away or becomes seriously ill and can’t fulfill his or her duties
  • You named your spouse as executor but you’ve since gotten a divorce
  • The person you originally named decides he or she no longer wants the responsibility
  • You’ve had a personal falling out with your executor
  • You believe that a different person is better equipped to execute your will

You don’t need to provide a specific reason to change the executor of a will. Once you’re ready to do so there are two options to choose from: add a codicil to an existing will or draft a brand-new will.

Using a Codicil to Change the Executor of a Will

A codicil is a written amendment that you can use to change the terms of your will without having to write a new one. Codicils can be used to change the executor of a will or revise any other terms as needed. If you want to change your will’s executor using a codicil, the first step is choosing a new executor. Remember, this can be almost anyone who’s an adult of sound mind, excluding felons.

Next, you’d write the codicil. In it, you’d specify the changes you’re making to your will (i.e. naming a new executor), the name of the person who should serve as executor going forward and the date the change should take effect. You’d also need to validate the codicil the same way you did your original will.

This means signing and dating the codicil in the presence of at least two witnesses. Witnesses must be legal adults of sound mind and they can’t have an interest in the will. So, a beneficiary to the will couldn’t witness your codicil but a neighbor or coworker could if they don’t stand to benefit from the will directly or indirectly.

Once the codicil is completed and signed by yourself and the witnesses, you can attach it to your existing will. It’s helpful to keep a copy of your will and the codicil in a safe place, such as a safe deposit box. You may also want to give a copy to your estate planning attorney if you have one.

Writing a New Will to Change the Executor of a Will

If you need to change more than just the executor of your will, you might consider drafting a new will document. The process for drafting a new will is similar to the one you followed for making your original one.

You’d need to specify who your beneficiaries will be, how you want your assets to be distributed and who should serve as executor. The new will would also need to be signed and properly witnessed.

But you’d have to take the added step of destroying all copies of the original will. This is necessary to avoid confusion and potential challenges to the terms of the will after you pass away. If you’re not sure how to draft a new will to replace an existing one, you may want to talk to an estate planning attorney to make sure you’re doing so legally.

What Happens If You Don’t Name an Executor?

If, for any reason, you choose not to name an executor in your will the probate court can assign one. After you pass away, eligible persons can apply to become the executor of your estate. The person the court chooses would then be able to carry out the terms of your will. If you don’t have a will at all, then your assets would be distributed according to your state’s inheritance laws.

That’s why it’s important to take the time to at least write a simple will. This way, there’s no question of your estate being divided among your heirs the way that you want it to be.

The Bottom Line

Making a will can be a good starting point for shaping your estate plan. Naming an executor means you don’t have to rely on the probate court to do it. But if you need to change the executor of your will later, it’s possible to do so with minimal headaches.

Tips for Estate Planning

  • Consider talking to a financial advisor about creating an estate plan and what you might need. 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 an advisor in your local area. It takes just a few minutes to get your personalized recommendations online. If you’re ready, get started now.
  • A will is just one document you may need as part of your estate plan. You may also consider setting up a trust, for example, if you have extensive assets or own a business. Life insurance is something you may also need to have, along with an advance health care directive and/or power of attorney.

Photo credit: ©iStock.com/eric1513, ©iStock.com/kate_sept2004, ©iStock.com/courtneyk

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