Financial Planning: Wills And Other Ways

When you think about leaving money to heirs, the process seems simple. You put your decisions in your will (you have one, right?). When the will is read, your family and friends bless your sainted memory. If you yourself are an heir, you expect to collect your promised share.

Think again. That picture is from the movies (old movies). Nowadays your will may affect only a fraction of what you own. Most of your serious property will probably pass outside your will, through joint ownership, living trusts or the beneficiary forms attached to life insurance and retirement accounts. If the forms aren't in sync (and they're often not), the wrong person might inherit or an adult child (maybe you) might get less than the parents intended. Risks multiply with divorce and remarriage. An ex-wife might still be named on an old insurance policy. A new husband might inherit and cut his stepchildren out.

Errors, omissions and greed can rend family relationships for generations. Forget polite Thanksgivings--get ready for angry phone calls and lawsuits. What can you (and your parents) do to help everyone walk away reasonably happy? Here's a guide:

Give yourself heirs. Your will tells the family how you want your property distributed when you die. But here's something you might not know: your will?and your wishes?can be overridden by other forms you've signed and forgotten about. Take the beneficiary form that came with your life-insurance policy. If it names your two children as beneficiaries and later a third child is born, only the first two will get the money. To include the third, you'll have to change the form.

Then there's your 401(k) retirement plan. If you're married, your spouse automatically inherits the whole amount even if the marriage is just one day old, and even if your will and the beneficiary form say something else. If both of you think the 401(k) should be left to someone else say, to the kids; the spouse has to file a notarized statement waiving his or her rights.

And take the beneficiary form for an Individual Retirement Account. That, too, trumps the will. In a typical story, an unhappy young husband e-mailed Ed Slott, author of "Your Complete Retirement Planning Road Map." His wife had died. The IRA she'd opened before their marriage named her sister as beneficiary of her $80,000 account. The wife had intended to change it but tragedy intervened. The sister got the money and wouldn't share. Was there anything the husband could do? In most states, no, Slott replied. IRA trustees look only at beneficiary forms, not wills or spousal "rights." (But spouses have rights in community-property states.)