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Helping your heirs get what they deserve

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As the executor begins reading the last will and testament, the heirs sit on the edge of their seats. In a moment, they’ll know for sure whether Uncle James (or Dad or Grandma) left them a bundle…or left them out of the will entirely!

You’ve probably seen some version of that scene on television or in the movies. Hopefully, the reading of your will (and any trusts) won’t be so dramatic. Chances are you’re not planning to use your estate plan to teach a few relatives a lesson. But even if, like most of us, you simply want to leave what you can to your loved ones and a few charities, you’ll need to make your intentions clear in a will—and possibly other legally binding documents, such as trusts.

What are wills and trusts?

Put simply, a will is a written1, signed and witnessed statement of what you will pass on to whom after you die. They are typically notarized and govern what are known as "probate assets." A will can help ensure your plans will be carried out— whether you’re leaving substantial wealth or just a few treasured possessions. Wills also let parents name guardians for children who are minors. And a will is the place to name an “executor,” the person who will work with the court during “probate,” a legal process to determine if the will is valid and to settle any disputes between heirs. Think you can wait a while to draft a will? Just keep in mind that if you die without one, decisions about guardianship and who gets what will be made according to state laws—with no regard for what you might have preferred.

A will isn’t the only way to leave an inheritance. Some assets, typically referred to as "non-probate assets" such as insurance policies and IRAs, are transferred according to instructions you provide on beneficiary designation forms. If you're married, your 401(k) plan account assets will generally go to your spouse unless he or she signs a waiver allowing a change of beneficiary. If you own a home jointly with your spouse, he or she will inherit your share automatically if the co-ownership agreement is set up with the rights of survivorship and otherwise meets any applicable local requirements. Still another way to transfer assets is through trusts, which let you eliminate probate for any assets properly transferred before death and allow you to gain greater control over what happens to your assets after you're gone. Trusts can help with “blended family” and domestic partner issues, the transfer of assets to charities, the transfer of real estate and even the well-being of your pets. While some trusts are designed for those with large estates, others can be useful for nearly anyone. Trusts are used by parents to assure money will be managed for their children until they become adults. Credit-shelter trusts help married couples take full advantage of estate-tax credits.

Who will get what… and how do you decide?

What about your digital assets?

A number of online services now enable you to pass on to heirs ownership of your Facebook, Twitter, Pinterest or other social media and online accounts. You may even be able to name account executors. But laws concerning digital assets are still evolving. You may want to ask your professional advisors what they recommend.

Those decisions may seem pretty straightforward. But before making your plans official, there are things to consider. First, you’ll need to be aware of potential tax consequences. For example, you may expect to leave everything to your spouse and let him or her pass on remaining assets to the children. While your spouse can inherit all of your assets without owing estate taxes, the kids could later be left with a big tax bill—and a smaller inheritance—if the estate is large enough. Placing some of what you planned to leave to your spouse—up to your lifetime exemption amount—in a credit shelter trust will allow the kids to inherit that amount federal-estate-tax-free.2 If you’re leaving money to charities, you may need to explore other strategies to reduce the impact of taxes on what they receive from your estate.

You also may want to anticipate how heirs could feel about your decisions, and then modify your plans accordingly. If you have more than one child, the best way to preserve harmony may be to distribute financial assets equally and identify in your will which personal items go to which child. If you have reasons to leave unequal amounts—say, one child is a financial success and the other a struggling actor—you may want to explain your plans ahead of time or leave written notes to assure your children they were loved equally.

What happens when things change?

Once you’ve drafted wills and trusts, it’s tempting to just set them aside. But as “life happens,” bringing all kinds of unexpected changes, it’s important to keep plans up to date. This can be as simple as adding a new son or daughter (or grandchild) to your will. Or, it could be more complicated, particularly if you divorce and remarry. Let’s say you planned to leave everything to spouse #2, with your children from your first marriage as secondary beneficiaries. The kids would need to wait until the spouse’s death to receive all of their inheritance. As an alternative, you could establish an irrevocable life insurance trust (ILIT) for your children’s benefit. They’ll receive the insurance proceeds immediately following your death—and the assets won’t be subject to federal income taxes or estate taxes.3

What about sharing your plans?

Think you can wait a while to draft a will? Just keep in mind that if you die without one, decisions about guardianship and who gets what will be made according to state laws—with no regard for what you might have preferred.

You don’t need to keep your heirs in suspense until the reading of your last will and testament. Arranging a family gathering (perhaps after you’ve drafted your estate planning documents—or at some point in the future) to share your plans could help you manage expectations, alleviate fears and ensure that everyone understands what you’ve decided and why. You’ll also need to draft a letter of instruction, so key individuals will know what steps to take after your death. A few states now recognize videotaped wills, but keep in mind that statutory or other requirements, which vary by state, would still need to be met.

Whether you have the opportunity to make your heirs wealthy or just make sure they’ll remember you fondly, planning ahead with wills and trusts can empower you to leave a meaningful legacy.

Learn more and take action

  • You can find current-year estate tax limits and other information at irs.gov.
  • Estate planning can be complicated. You may benefit from speaking with an estate-planning attorney as well as professional tax and financial advisors.
  • A Merrill Lynch Retirement Education Specialist is available at 1.888.363.2389 to answer common questions about setting up beneficiaries or to help you complete a no-cost, no-obligation personalized analysis of your overall financial picture.
 
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1 In most states, a will must be type-written or written by hand to be legally binding. A few states now recognize videotaped wills. Speak with your professional advisors to learn what is required in your state.

2 Whether or not your estate triggers federal estate taxes, your heirs may owe state estate taxes. Not all states assess estate taxes, and rates vary from one state to another. Your heirs also may be responsible for other taxes and fees, such as income taxes and final expenses. A professional tax advisor can help you review your situation.

3 To avoid estate taxes, very specific requirements and procedures must be met and followed.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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