4 steps to help protect your heirs' inheritance

Text size: aA aA aA
Consider following these simple steps to help ensure that your wishes for your loved ones are carried out as you intend.

Key points

  • A will ensures that your assets are distributed the way you intend, rather than solely as dictated by state law
  • For some assets, such as an IRA or a life insurance policy, a beneficiary designation will spell out your intentions. Creating a trust can be another way to transfer assets outside of your will.
  • As circumstances change — with the birth of a grandchild, for instance — you may want to modify your will
  • Get the checklist for passing assets to your heirs
Perhaps because it's never pleasant to think about our own mortality, it's all too easy to postpone making a will. But making your wishes clear in a legal document is the best way to make sure your loved ones are protected and your assets are distributed in the way you intend. And though the process may seem daunting, it needn't be too difficult. These simple steps can help you get started.

Step 1: Consider the options

Put simply, a will is a writtenFootnote 1, signed and witnessed statement of what you will pass on to whom after you die. 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, such as insurance policies and IRAs, are transferred according to instructions you provide on beneficiary designation forms. If you are married, your 401(k) plan account assets will go to your spouse unless he or she signs a waiver allowing a change of beneficiary. If you own a home jointly with rights of survivorship with your spouse, he or she will inherit your share automatically. Still another way to transfer assets is through trusts, which may let you avoid probate and gain greater control over what happens to your assets after you are 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 by useful for nearly anyone. For example, credit-shelter trusts help married couples take full advantage of estate-tax credits. Trusts are also commonly used by parents to assure money will be managed for their children until they become adults.
What about your digital assets?
A number of online services now enable you to pass on control of your Google, Facebook, or other social media and online accounts to heirs. 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.

Step 2: Decide who'll get what – and how they'll get it

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 transfer 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 exclusion amount" — in a credit shelter trust will allow the kids to inherit that amount federal estate tax-free.Footnote 2 You may also consider including charitable gifts in your estate plan that may reduce your federal estate tax liability.
You may also 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.

Step 3: Change your plans as your life changes

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 your current spouse, 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.
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.

Step 4: Inform your heirs

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 should draft a letter of instruction, so key individuals will know what steps to take after your death. If you'd like heirs to understand and carry on the values you tried to live by, you may want to create an "ethical will," which can be written or videotaped. You also may want to videotape a final message to loved ones. A few states now recognize videotaped wills. While that option is still limited, a videotaped reading of your written will can help demonstrate that you were "of sound mind" when you drafted the will. That could help deter any legal challenges to the will if you end up with a few disgruntled family members.
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.
Next steps

Footnote 1 In most states, a will must be typewritten 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.

Footnote 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.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.