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Couple does estate planningWhen you die, a section of law known as estate and probate law governs how your assets are distributed. Someone who dies (known as the “decedent”) with a legitimate will has set up what is known as a testate inheritance. This means that their assets are distributed according to the wishes set forth in their will. Someone who dies without a legitimate will has what is known as an intestate estate. This means that their assets are distributed according to the laws of inheritance. Estate planning is best done in close consultation with a financial advisor.

Estate planning is one of the most local areas of the law. It might be second only to criminal law in this respect. This means that the specific rules governing estate planning, testate inheritance and intestate transfers vary widely from state to state, and even sometimes between cities.

This article provides an extremely brief overview of common estate principles. However, the rules may be completely different in any given state. Readers should not take this article as individual legal advice and should seek the counsel of an attorney before making any decisions regarding their own circumstances.

Testate Estate Planning

Testate succession means that someone has died with a legitimate last will and testament in place. While the details are beyond the scope of this article, a legitimate last will and testament typically requires only two elements:

  • The will must be a written document;
  • The decedent must have been legally competent to make decisions at the time of death.

Handling Testate Estates 

Many of the external elements that people associate with a will (witnesses, notaries and attorneys) are not always necessary for the document to be legally binding. That doesn’t mean that they’re irrelevant, though. Having your will witnessed and notarized makes it more likely that the document in question will be recognized as your will, and that the probate court will acknowledge that you wrote it while in a sound state of mind. Having your will drafted by an attorney not only makes it more likely that the court will recognize and enforce it, but that your will’s provisions will not contain any illegal or unenforceable language.

A will written with no third party involvement is known as a holographic will. In most states the only requirement for this document is that it must be hand written rather than typed.

When you die, all of your remaining assets are collectively known as your estate. If you die with a valid and enforceable will, then your estate is distributed in the following manner:

  • First, all attorney’s fees related to managing your estate are set aside for payment;
  • Then, the individual managing your estate, known as your executor, pays any and all debts that you had (including taxes, contracts and everything else) with the assets in your estate;
  • Finally, after paying off all debts, your estate is distributed according to the terms set forth in your will.

Testate Estate Liabilities

Liabilities do not ever transfer through an estate, meaning that while you can inherit someone’s property you cannot inherit their debts. (Depending on your relationship with the decedent you might have a share of their debts from when they were alive, but this cannot pass through inheritance.) However, that said, debts can affect an inheritance in a number of ways. The two most common are:

  • Liabilities can transfer with property. For example, say the decedent owed unpaid property taxes or a mortgage on their house and then left you that property. If you wanted to take the house you would need to also take responsibility for paying those debts. Otherwise the executor would sell the house, pay off those debts and then transfer any remaining money to you.
  • Liabilities can also reduce potential inheritance. For example, say that someone leaves you $100,000 in their will but also has $40,000 in unpaid debts. You would end up receiving only $60,000 because that’s what would be left. If the debts exceed the value of the estate, the individual died insolvent and their heirs receive nothing.

Aside from managing liabilities such as debt and taxes, someone can use their will to distribute their assets in virtually any way that they see fit. This is extremely important to understand, as many people mistakenly believe that family members automatically have a right to inherit money or property. With two major exceptions (see below) this is mistaken. Someone can generally use a valid simple will to distribute their assets in any way that they could have legally done while still alive. Put another way, if it was legal for someone to make this transfer while alive, it’s legal for them to do so after death.

Adjusting Testate Estate Distributions

Elderly couple doing estate planning

A will can distribute any and all assets that the decedent had rights to. This can range from money and investments to real property, personal property, intellectual property, land use rights and beyond. They can divide up this property, leave it to multiple heirs order the sale and distribute the proceeds and generally take any other legal action that they see fit.

It is not uncommon for a will to contemplate more assets than the estate actually had at the time of death. For example, someone might give away $250,000 in their will, but die with only $100,000 in assets. When this is the case the estate is divided up on a pro-rata basis according to the terms of the will. In this example, say, someone who had been given $125,000 in the will would receive $50,000 of the actual estate. Since their share of the will came to 50% of the estate, they receive 50% of what actually was left.

In the reverse, it is also relatively common for a will to contemplate fewer assets than the estate actually had at time of death. This is called “partial intestacy.” It is relatively rare because most wills include a clause along the lines of “any remainder to” or “the rest to” or some other catch-all clause. This cures partial intestacy because it establishes who inherits any assets not specifically distributed. In cases of partial intestacy, the courts will distribute any remaining assets according to local or state laws of intestate inheritance.

Testate Estate Exceptions

There are many exceptions to estate law, and this article should be read as nothing more than a very quick look at a very complicated subject. However, the two most common exceptions to testate inheritance are:

  • Marital estates – If you die while married, some or all of your assets will constitute marital assets. This means that they belong to both you and your spouse jointly. Other assets may automatically transfer to your spouse and become marital assets after your death. Marital assets do not transfer until after the death of both spouses.
  • Evasion – If you transferred assets before your death in an attempt to avoid paying your debts, those transfers can be unwound and the assets returned to the estate. This is a relatively common form of tax or creditor fraud.

Intestate Inheritance

If you die intestate, this means that you died without a valid will in place. This can mean either that you had no will or that you had one, but it was deemed unenforceable for some reason.

Intestate inheritance is governed by state law. Every state has its own set of statutes governing who inherits and in what order, and these are some of the most detailed laws on the books. They are known as the laws of succession or the laws of inheritance. The best general reference on this subject is known as the Uniform Probate Code, which is a template for inheritance laws. Many states have based their own code on the UPC, although none have adopted it entirely.

Intestate estates are overseen by the probate courts. (Most, if not all, testate estates must also receive clearance from a probate judge as well. However, once the judge has established that there is a valid will, the probate court rarely intervenes again unless there is a dispute.)

Handling Intestate Estate

An intestate estate goes through the same three-step process as a testate one. Attorneys get paid first, although this will rarely be relevant. Debts, taxes, administrative fees and other legal liabilities are paid second. Thirdly, heirs receive their portions.

Most probate codes distribute assets on the basis of closeness. Essentially, close relatives inherit before distant relatives in “tiers” of inheritance. In many, if not most, cases intestate inheritance will proceed in the following order:

  • Spouse;
  • Legal descendants (i.e. children);
  • Parents of the decedent;
  • Siblings of the decedent;
  • Grandparents of the decedent;
  • Nieces, nephews, aunts, uncles and first cousins;

As a general rule, any given category of heir will inherit the entire estate, which is divided up into pro-rata shares among all heirs. For example, say that someone died intestate with neither spouse nor children. They had no surviving parents, but two sisters and several aunts and uncles. The two sisters would each receive half of the estate, while the aunts and uncles would get nothing.

Intestate Estate Exceptions

Asia couple cooks dinner

The major exception to this rule is spouses. While in most cases a spouse will automatically inherit all non-marital assets, the Uniform Probate Code does carve out exceptions for heirs such as parents and descendants. This is particularly important when it involves children to whom the surviving spouse is not related.

In most states, first cousins are the farthest removed that you can be and still inherit from an intestate estate. If someone dies intestate and they have no legal living heirs, their assets go to the state.

The Bottom Line

Testate succession happen when you die with a valid will in place. So long as your distributions are legal, you may hand out your assets however you please. Intestate succession happens when you die without a valid will in place. In this case your assets will be distributed according to state probate law.

Tips on Estate Planning

  • While the details of a legal will were beyond the scope of this article, SmartAsset dives right into the weeds here.
  • Don’t leave this kind of planning until the last minute. And by all means avail yourself of the insights and experience of a financial advisor. Finding one doesn’t have to be hard. With SmartAsset’s matching tool, you can find a financial professional near you, in just minutes. If you’re ready, then get started now.

Photo credit: ©iStock.com/davidf, ©iStock.com/shapecharge, ©iStock.com/Punnarong

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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