Martin Shenkman, CPA, JD
Martin M. Shenkman, CPA, JD, estate and tax-planning attorney based in New York City. He is coauthor of The Business Owner’s Guide to the Corporate Transparency Act. ShenkmanLaw.com
A man walked into tax attorney Martin Shenkman’s office some years ago with a problem—he had inherited a large sum of money. Nice problem to have, right? But the IRS had placed a tax lien on the man’s assets, so anything he inherited would go to the government. His question: Was there any way to keep the money his parents had spent a lifetime earning in the family?
The answer: With proper planning, there would have been. If his parents had created wills, they could have left their money to this man in trust or to his children, bypassing the tax lien. Unfortunately, they died “intestate”—without wills—so according to state law, their money went to their child outright instead of in trust. If the son had acted quickly, he could have protected the inheritance by disclaiming (rejecting the inheritance), but he waited too long. Result: The IRS pocketed every penny.
This is a stark reminder of why it’s important to have a will. But if a loved one passes without having a will, there still may be ways to protect the inheritance.
When an adult dies without a will, state “intestate succession” laws determine who inherits. These laws vary—in some states, a surviving spouse receives everything…in others, a surviving spouse gets half and the other half is divided among the deceased’s children, for example. If there is no surviving spouse or descendants, parents and siblings typically may be next in line.
Intestate succession laws can lead to unwanted outcomes. Examples: A recently married second spouse might inherit everything while his/her children get nothing…or a grown child estranged from the deceased might inherit just as much as a child who cared for the aging parent for years.
Even if a state’s intestate succession laws perfectly match the way you want your assets distributed, it’s worth having a will drafted. Dying without one may make the probate process slower and more expensive…and it means assets from the estate cannot be left to trusts that could have protected them against heirs’ divorces, lawsuits, tax liens and other inheritance threats. Exception: Insurance policy benefits, retirement accounts and certain other assets are transferred according to the terms of those assets’ beneficiary-designation forms whether or not there’s a will. But the solution may be a special trust to receive retirement assets or a trust to own the insurance.
Having a will is especially important for anyone who has minor children. When parents fail to specify in a will who they want to raise their kids, the courts make this decision. That protracted legal process often involves court-appointed lawyers who are paid out of the estate to represent the kids’ interests…family dirty laundry being aired in public as the court tries to determine who can be trusted to raise the children…and custody decisions that might not match what the parents or children would have wanted.
Despite all these risks, two out of three American adults don’t have wills, according to a recent survey. Here’s what to do if you suspect a loved one might not have a will and what to do if a family member dies without one…
This relative and the rest of the family will benefit if you can convince him/her to have a will drafted. But sometimes discussing wills with relatives goes wrong—it can create the impression that the person raising the topic is grasping for an inheritance.
What to do: If you fear that a conversation about wills won’t go well, ask this relative if he/she has completed a “health-care proxy.” This estate-planning document designates someone to speak on the relative’s behalf if he cannot speak for himself.
If your relative says he does have a health-care proxy, he is more likely to have a will.
If he says he doesn’t have a health-care proxy, point out how stressful it would be for the family to figure out who should speak for him in the middle of a medical emergency. That plea may convince your relative to make an appointment with an estate-planning attorney—and that attorney inevitably will do everything possible to convince him to draft a will if he doesn’t have one.
When someone dies without a will, it may seem like the surviving family members are without options or control—the courts appear to have all the power. But there are some steps loved ones can take…
Research intestate succession laws for the deceased’s home state. Easiest way to do this: Enter “[State Name] intestate succession statute” into a search engine. Pay particular attention to results from websites ending “.gov.” If you don’t find anything useful, try “intestate statute” and the state. These statutes can be nuanced, so consider paying an estate attorney to help you understand the rules—ideally one based in the deceased’s state. Warning: Don’t wait for a probate court to inform you who’s inheriting.
Decide if it makes sense to use “disclaimers” to adjust who gets what. An individual who is entitled to an inheritance usually has the option of “disclaiming” that inheritance, allowing it to pass to someone else. This can be a useful strategy when the person slated to receive the inheritance faces financial risks such as divorce, lawsuits, tax liens or future estate taxes. Three details worth noting about disclaimers…
The person who disclaims an inheritance does not have the right to decide who gets it—the assets pass to the person next in line to inherit. An estate-planning attorney can help you determine who that would be under the state’s intestate succession laws.
Inheritances must generally be disclaimed within nine months of the date of death. The disclaiming process requires drafting and filing of legal documents, so don’t wait until the deadline. Example: Had the man who lost his inheritance to a tax lien disclaimed it within nine months, the money would have passed to his sons, who were next in line for the inheritance. Unfortunately, he didn’t see an attorney about disclaimers until after the nine-month deadline had passed.
Medicaid recipients might not be able to disclaim inheritances. Disclaimers can be a sensible option when the recipient of an inheritance is relying on Medicaid to pay nursing home bills. That’s because Medicaid’s strict income and asset limits would mean that the inherited money would be drained away by the nursing home. Unfortunately, Medicaid rules in many states prohibit disclaimers in these situations. Ask an estate-planning attorney in the Medicaid recipient’s state whether disclaiming is possible.
Look for any ambiguity about the deceased’s state of residence. As noted above, state law determines who inherits when someone dies without a will—but which state’s laws? If the deceased owned homes in multiple states or spent considerable time living with a relative in a different state toward the end of his life, there could be room for debate. Read the intestate succession rules for the potential alternate state of residence, and/or discuss these with an attorney. If this state’s rules better suit the family’s financial goals, ask an estate-planning attorney if there’s a chance that probate proceedings could be brought to that state instead.