When you eventually pass away, your estate will have to be settled by an executor, typically a family member for whom this will be a first-time experience.
Actually, the term “executor” is officially reserved for a person who was named in the will and appointed by the probate court, while the term “administrator” is used if the court appointed someone else.
Since the majority of people die without a will, it’s more common to be an administrator than an executor, but people still use the term “executor” to cover both cases (or use the larger mouthful “personal representative”).
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Regardless of the specific terminology, it’s an honor to be asked to serve, but the job comes with serious responsibilities: The average executor ends up putting in over 570 hours of hard work, according to one well-cited study. And the process takes time, often 18 months or longer.
Avoiding probate: Pros and cons
Fortunately, with proper planning, an estate can avoid probate, avoid the need to appoint an official executor and keep everything simple and quick.
At least, that’s the dream.
Most states have rules that allow “small” estates to skip probate entirely, or to go through an abbreviated version, so many people try to structure their assets so they won’t be counted when determining whether an estate is subject to probate.
Assets that bypass probate include anything held in a trust, property held jointly with rights of survivorship, accounts that are payable on death and more.
However, such approaches come with drawbacks: additional paperwork and costs, inability to easily direct percentages of the overall estate to desired heirs, loss of control and more.
These drawbacks don’t necessarily negate the advantages, but they are something to consider.
Oops: Making a mess for your executor
Moreover, people sometimes go too far with probate-avoidance strategies (especially when trying to do this without professional guidance). I’ve seen many executors facing the situation in which a well-meaning decedent placed everything into automatically transferred assets … leaving nothing for the estate.
But guess what? The estate is still responsible for paying the decedent’s final years of income tax, for paying final medical bills, for paying outstanding credit card balances and more.
This kind of overplanning results in a mess for the executor, and an insolvent estate. And don’t think this means that the heirs get off scot-free: Creditors have the right to come after anyone who received decedent assets for payment of an estate’s debts.
One potential solution in such cases is for the heirs to cooperatively agree to pay the estate debts in proportion to what they received, but this can be challenging even for families who normally get along, let alone families with pre-existing disputes, or situations in which the inheritances are not liquid and easily partitioned.
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The reality is that it can be challenging to hit the sweet spot where the bulk of your assets bypass probate, and yet the remaining estate contains enough funds to pay all obligations without triggering the need for probate.
One alternative is to include language in a trust that charters it to handle those remaining expenses, but this approach is not available to most other classes of assets that bypass probate (such as IRAs with named beneficiaries).
Estate planning can have important benefits (such as significant tax savings for wealthy estates), but it’s work, often costly and hard to get just right.
Leaving at least SOME clues
At the other end of the spectrum, we have the more common case of under-planning: as mentioned above, less than half the population has a will, let alone a living trust.
Luckily for the person handling your estate, handling an intestate estate (i.e., an estate without a will) isn’t much more difficult than handling one with a will — and may even be a bit easier.
Every state has rules about who should inherit in the absence of a will, and while it can sometimes be difficult to track down some of these heirs, the same difficulty can occur when dealing with a will.
The main drawback of intestacy to the estate owner is that you don’t get to control who gets what; the main benefit is that you don’t have to do any work, or keep updating whatever estate planning you put into place.
Whether or not you have a will, though, someone is going to have to settle your estate, usually a close family member. This job can be a lot of work, particularly if you haven’t left any guidance at all. What are your assets? What are your debts? Who knows?
Some people try to maintain lists of major assets and debts, and while extremely helpful to the executor, these lists tend to become outdated, and it’s a pain to keep updating them. Sure, you should do that, but there are a lot of things you should do, and life is short.
Still, I definitely recommend that you write a will, and that you separately put together a high-level list of major assets and debts.
Yes, these may become outdated over time, but if you keep them high level (e.g., don’t bother listing individual stocks in your portfolio), it won’t be too much work to update them on occasion. And even if your list of assets is somewhat out of date by the time of your death, at least your executor will have a starting point.
In fact, without a list of assets and debts, it can be very difficult for an executor to discover the entirety of your estate, even if it’s relatively modest (there’s a reason that states have such large amounts of money in their unclaimed-assets repositories).
A quick and easy tip that can help
Not too long ago, an executor could piece together a pretty good picture of your overall finances simply by monitoring account statements mailed to the decedent’s address (e.g., brokerage statements, bank statements, credit card bills, mortgage statements, etc.).
However, the rise of electronic statement delivery has changed things dramatically, making this inventory process much harder.
There is a nifty solution, though: Just set up a separate email account for receiving all your financial statements and make sure your executor will get the login credentials so that he or she will be able to keep things running smoothly and quickly determine the bulk of your estate … without having to wade through (and see) all of your personal emails.
Conclusion
Eventually, we all die, and someone will have to settle our estates. You don’t want to spend too much of your life planning your death, and if you care about your executor, you don’t want to put too much of a burden on them either.
There’s a sweet spot in the middle, where you can do a couple of simple things now that don’t take much effort on your part, yet will make your executor eternally grateful.