Some Unintended Consequences of Not Having a Will
There is a common misconception that when one spouse dies without a will, the entire estate passes automatically to the other. Here is an example of a case I recently handled that illustrates how to avoid the unintended consequences of failing to think and plan ahead. I have changed some of the details in order to illustrate a point.of the details in order to illustrate a point.
Bob and Barbara are in their late 40′s and have been married for 12 years. They have no children. Barbara’s parents are alive and well, but Bob’s widowed mother has been living in a nursing home for about three years. Both Bob and Barbara have good jobs and have managed their finances well. Each has a 401(k) plan. They have savings and investments, some in joint names and some individually. About five years ago, they purchased their dream house and are carrying a large mortgage, which they could afford because there are two incomes. Life was good, until Bob began to have headaches. To make a long story short, Bob has brain cancer. Surgery at a leading hospital was not successful, and he is now on hospice.
Barbara came to me because she and Bob had done no estate planning. She realized that Bob needs to sign a power of attorney so that she can handle the finances without burdening him as his health declines. She said she wanted to execute a will because she will soon own all of the assets she and Bob have accumulated and wants to make sure that her affairs are in order if the unthinkable should happen to her. She believed a will for Bob would not be critical because she assumed that all of his assets would pass to her automatically upon his death. Fortunately, she acted in time, because she was wrong in her assumption about Bob’s lack of a will, and the results would have been financially devastating.
Let’s look at the finances. The house, which they bought for $600,000, is now worth about $450,000. It is subject to a $400,000 mortgage. The payments are almost $3,000 per month. With her income and Bob’s disability benefits, they are still able to make the payments. After Bob dies, however, it will be a struggle to keep up financially. Bob has savings and investments in his own name of about $400,000. Barbara’s savings and investments are only about $100,000 because she put up most of the down payment on the house. The 401(k) plans are worth about $300,000 each. The joint savings and investments are worth about $200,000.
Under New Jersey law, if a person dies intestate (without a will), the persons who inherit his estate depend on his marital status and the existence of children and parents. If he leaves a surviving spouse, no children and a surviving parent, the intestate assets (those held in the decedent’s name – - not assets owned jointly or with a beneficiary designation) will pass as follows:
(a) The first 25%, but not less than $50,000 or more than $200,000, goes to the surviving spouse;
(b) The balance of the estate is divided 75% to the surviving spouse and 25% to the surviving parent(s).
Here is what would happen if Bob dies without a will. We don’t count the house and the joint savings and investment accounts because those assets will pass automatically to Barbara. We also don’t count the 401(k) plan because Barbara is the beneficiary. Actually, we averted another potential disaster. During my meeting with Barbara, I learned that, before he and Barbara were married, Bob had designated his mother as beneficiary of his 401(k) plan. Her savings are running out because of the enormous cost of nursing home care. It is anticipated that she will have to apply for Medicaid benefits early next year. Bob never got around to changing the 401(k) beneficiary to Barbara, that is, not until a few days after I met with Barbara.
Upon Bob’s death, then, his intestate estate would be $400,000, the value of his personal savings and investment accounts. Had they done nothing, Barbara would have received $100,000 – - the first 25% of the intestate assets. The remaining 75% of those assets – - $300,000 would be divided $225,000 (75%) to Barbara, and $75,000 (25%) to Bob’s mother. The inheritance of $75,000 would delay Medicaid eligibility for Bob’s mother for about nine months, until she spent the entire amount on nursing home care.
By preparing a simple will for Bob, in which he leaves everything to Barbara, and by changing the 401(k) beneficiary designation, we were able to preserve all of the marital assets for Barbara. She now has some options about how to deal with her finances and her own estate after Bob is gone. Although the preparation of an estate plan does not ease the pain Barbara faces as her husband’s life ebbs away, at least she can now devote her efforts to making him as comfortable as possible during his last months.
- Michael Rudolph, Esq., www.ElderLawAnswers.com