It has been said that the only two things certain in life are death and taxes—which leads to the question—what happens to my money when I die?
After a person dies, their assets need to be distributed and their debts need to be paid. This is either done in accordance with the deceased’s wishes, if they have an estate plan set up, or it is done according to the law of the state where the person resided at the time of their death, known as intestate succession. Assets are split into two categories, probate assets and non-probate assets.
Non-probate assets include any assets held in a form of joint tenancy, including joint bank accounts or jointly owned real estate. Also included are any accounts with a “pay on death beneficiary designated” or assets titled in the name of a trust. All other assets are considered probate assets and will be subject to distribution as part of the probate court proceedings.
The best way to have control over what happens to your money when you die is to set up an estate plan that includes designating pay on death beneficiaries, where applicable, and creating a Will or Trust, along with powers of attorney for healthcare and property. This allows you to choose who gets your assets when you die. A Will does not become effective until you die. Executing a Will does not immediately transfer any assets to the named parties. The named beneficiaries do not receive the assets until after distribution by the named Executor. Executing powers of attorney for healthcare and property allows you to designate trusted individuals to manage your property and make your health care decisions while you are still alive, but unable to make decisions for yourself. Executing a power of attorney for property will not transfer assets to your named agent, it will only allow your named agent to control your property if you are incapacitated.
When you die without a Will, your assets will be distributed according to the laws of the state. Each state statute has a different structure for distribution of the deceased’s assets under intestate succession. The laws that are applied are the laws of the state where the deceased resided at the time of death.
The natural assumption is that if a person is married, the entirety of their assets will transfer to their spouse at death.However, in Illinois that is not the case. Under the Illinois laws of descent and distribution, if a decedent has a surviving spouse, and also has surviving children, one-half of the entire estate goes to the spouse and the other half goes to the children of the decedent in equal shares. This conflicts with the common logic many people use when they assume they don’t need a Will since everything will pass to their spouse automatically. If the decedent is not married and does not have children, the assets of the decedent automatically pass to the first living heirs, usually parents, followed by siblings then nieces and nephews and so on. Assets will pass to each person in the first living generation equally with no regard for decedent’s personal relationships or personal preferences. The distribution is done strictly according to the law.
By creating a comprehensive estate plan, you can direct what happens to your assets after death, regardless of what the state statute says. You can direct that all assets be given to a surviving spouse, rather than being split between a spouse and children. If you have a strained relationship with a family member you can exclude them from inheriting from your estate.You can choose to skip over certain generations in the distribution of assets, for example, leaving your estate to your siblings or nieces and nephews in lieu of your estate automatically being distributed to your parents if they survive you and you are unmarried with no children.
While you can use a Will to override the state inheritance laws, in Illinois if you disinherit your spouse, or leave your spouse less than one-third of the total estate, after payment of all claims, your spouse has a legal right to reject your Will and instead receive what is called an elective share. The elective share is equal to one-third of the entire estate if the decedent had children or one-half of the entire estate if the decedent had no children after payment of all claims against the estate. If you want to prohibit your spouse from contesting your Will and taking their elective share, you can use a prenuptial agreement to agree that each spouse will not challenge the other’s Will, forgoing an elective share rights.
Proper estate planning can also be used to preserve the assets of your estate for your heirs and chosen beneficiaries.Creditors can only make claims against assets in your probate estate. By setting up proper pay on death beneficiaries or placing assets in a form of joint ownership, the assets will avoid Probate altogether. During the probate proceedings, creditors have the opportunity to come forward and make a claim for the amount they are owed by the deceased from the estate.Creditors must be paid before distributions are made to heirs and beneficiaries. Claims are divided into classes and higher classes are paid out before lower classes. In Illinois, funeral and burial expenses and expenses of administrating the estate are paid first. The next claims paid are the surviving spouse’s or child’s award, if applicable. The third class of claims includes debts due to the Federal government. Next is reasonable and necessary medical, hospital and nursing home expenses for the care of the decedent during the year immediately preceding death followed by claims for money and property received or held in trust by decedent which cannot be identified or traced. Next are any debts due to the state, county, township, city or town within in the state. Finally, all other debts, including credit card debts, private student loans and other unsecured debts are paid.
If you are looking to have control over who gets your money when you die, it is best to set up a comprehensive estate plan to properly reflect your wishes.Setting up a comprehensive estate plan is also the best way to ensure that assets are properly preserved for your heirs and chosen beneficiaries.