What is a Will?
A will is a legal document that indicates how a person wants his or her estate (money and property) to be distributed after death. Wills must expressly state to whom the will belongs and be signed, dated and include the signatures of at least two witnesses. A will also may describe any wishes for funeral and burial arrangements and may designate guardians for minor children.
How Does a Will Work?
A man who has created a will is called the testator; a woman is called a testarix. However, testator is often used in reference to both genders.
When the testator dies, the executor, who is named in the will, administers the distribution of the estate to the beneficiaries (a beneficiary is any person or organization that receives the assets after the testator's death). The executor's job also includes paying any bills and taxes owed by the estate as well as locating and protecting the assets until they are distributed. An executor often receives payment for his or her services, and the payment varies from state to state.
Many people hire an attorney to draw up a will, but many states (though not all states) also recognize holographic wills, which are simply created in the testator's own handwriting on a regular piece of paper (holographic wills are more frequently contested, however).
A testator can change a will at any time, for any reason, and should keep the original copy of the will in a safe place. A copy also should be given to the executor. There is some controversy over whether banks may seal a safe-deposit box after a renter's death, so consult a professional regarding storage of this important document.
If one does not have a will before death, the state's intestate succession rules determine how a person's assets are distributed. These rules vary by state. Normally, a person's spouse and children receive the estate first, then members of extended family. If there are no surviving family members, the estate may pass to the state.
Why Does a Will Matter?
A will is central to a person's estate planning. In most cases, people create wills to protect the assets they have worked hard for and to ensure they are passed to appropriate individuals or organizations.
However, court procedures, called probate, are often required to legally pass assets from a testator to beneficiaries because the testator is no longer around to sign deeds and other documents necessary to actually transfer the assets. In probate, a judge must validate the will and then issue a court order to distribute the assets. The probate process can last from six months to two years or more and can cost from 4% to more than 9% of the gross value of the estate, depending on the laws of the testator's home state. Everything in a will becomes public record after it is probated.
Many people choose to create trusts in an attempt to prevent their estate from going through the probate process. In general, the testator transfers his or her assets to a trust while alive, and the trust -- which is usually controlled by the testator -- in turn designates the beneficiaries. This often avoids the need for probate and can also reduce estate taxes in certain circumstances. There are many kinds of trusts and trust structures, and a professional estate planner should be consulted when considering this option.
For more details on trusts, read our article Shield Your Hard-Earned Money from Uncle Sam With a Trust.
It is important to keep a will up-to-date because life events, such as marriages, divorces, deaths, separations, moving, significant changes in assets or the birth of a child often change a testator's needs or wishes. It is also important to note that titles to assets (joint tenancy, joint tenancy with right of survivorship, etc.) frequently affect how assets are transferred, as do the existence of businesses, internationally held assets, life partners, ex-spouses and blended families.
Estate planning is a complex subject, and it is of particular importance to consult an estate-planning specialist when considering how to distribute assets after death.
For more details on why wills and trusts matter, read our article The Common Mistake That Puts Your Entire Portfolio At Risk.