One of the top things we can do to help protect our families is to think about the future. And for many of us, that means estate planning. That’s the process of looking at what would happen to your loved ones if you were no longer around, like who would inherit your belongings and who should take care of your children if you and their other parent or guardian were to pass away.
But as the millennial money expert at Fabric, I also see a lot of confusion out there around various estate planning lingo. What is probate? How does life insurance actually work? What’s a payable on death account, and do you still need to write a will if you have one?
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Today I want to break down some of those barriers, since this is such an important topic, especially for families. And I’ll start by defining some of these key terms that trip up all too many responsible parents.
What's the deal with probate?
Probate is a fancy legal term for the process of distributing someone’s estate after their death. If you have a last will and testament in place, probate will involve going to court to prove that your will is legally valid—in other words, that your wishes are compatible with the law and that a judge deems your wishes to have been made of sound mind and not under duress. It’ll also involve carrying out your instructions and paying applicable taxes.
If you don’t have a will when you die, the probate court will distribute your law according to “intestate law,” which often involves distributing your assets to your closest blood relatives. (You know how Prince’s heirs had trouble inheriting his assets because he didn’t have a will? Yeah, like that.)
Some more probate terms to know:
- Decedent: The deceased person whose estate is going through probate.
- Executor or personal representative: The person in charge of carrying out the instructions in the will.
- Administrator: A court-appointed executor, if someone dies without leaving a will.
- Intestate: A case where someone dies without a will.
- Intestacy: State laws determining how to distribute such estates.
- Letters testamentary: A document from a probate court authorizing the executor to start carrying out the will.
- Notice of probate and notice to creditors: Notices that the executor has to submit, in writing, to the heirs (“interested parties”) and creditors.
- Small estate affidavit, summary probate and/or summary administration: Documents or processes that can allow you to skip or shorten certain aspects of probate (i.e. distribute property without a lengthy court process). Estates below a certain value (depending on your state) are eligible for this.
What's a POD account, and do I need a will if I have one?
POD stands for “payable on death.” In many cases, a POD account is as simple as your bank account, since most checking and savings accounts and investment accounts let you name a POD beneficiary.
That means that if you were to pass away, that’s the person who’d inherit the money in that account without going through the whole probate process. In addition to sparing that person the hassle, it also means he or she is likely to get the money faster—as soon as a few days or weeks after the death.
Payable on death beneficiaries can apply to joint accounts, too. If you were to pass away, the account would first pass to the co-owner of the account. But if you were to both pass away, then it would go to the POD beneficiaries you named.
POD beneficiaries could be especially helpful if you are in a relationship but keep your finances separate. That way, you could name your spouse or partner as your POD beneficiary and feel calmed by the knowledge that he or she could gain access to that account more quickly than if you went through the probate process. You might find a payable on death beneficiary helpful, too, if you’re supporting another adult (like a grown child or another family member); if you name that person as your POD beneficiary, then he or she would continue to receive your money with minimal interruption.
Other helpful POD situations? You might name someone POD of an account that you’ve set aside for your final expenses. Otherwise, your family might have to front the cost of your funeral and wait for your will to be fully executed before being reimbursed.
That said, although probate isn’t fun, not all assets can or should skip the process. PODs are generally meant to be a very simple instruction: “Give the money in this account to X.” If you want to do something more complicated than that, a will or a trust might be a better option. Life itself can get tricky, too. In some states, a divorce invalidates a POD account—but in some states, your ex might still inherit your money if you haven’t updated your accounts. And if your POD and your will have conflicting instructions, the POD account usually wins out.
Plus, a will is still essential in many other ways. It lets you name legal guardians to take care of your children if you (and their other parent or guardian) were no longer alive. A will also lets you leave property behind, like a home or a car—some states off a “transfer on death” option for these types of assets, but not all. A will lets you leave more nuanced instructions, too, such as naming multiple beneficiaries who inherit your assets in different percentages.
What Is Term And Whole Life Insurance And How It Works?
Life insurance is important, but for many people it’s too complicated and opaque to make much sense. Here’s the most basic definition: Life insurance is an agreement saying that if you die, an insurance company will pay money to the people you’ve designated as your “beneficiaries.” That’s true as long as you’re up to date with your monthly payments and that you met other requirements like answering all of your application questions truthfully.
Within the world of life insurance, there are two key phrases you’re likely to hear over and over: term and whole life insurance. So, really, what is the difference between term and whole life insurance?
Term life insurance is straightforward: It provides a death benefit to the people you’ve chosen if you pass away during the specific time period, or “term” of your policy. “Death benefit” is the technical (and, OK, maybe kind of offputting) phrase that just means “the money that the insurance company pays to the people you’ve designated.”
Most people get life insurance to help protect those who depend on them financially, like their kids. You might choose a 20- or 30-year term to help cover your family while you’re raising young children, but you might figure that after that time periods your kids should (hopefully) be self-sufficient.
Meanwhile, unlike term life policies, whole life insurance policies (also known as “permanent life insurance”) cover you for your entire life. In addition to paying a death benefit, whole life can build cash value over time, which you can borrow against or withdraw even while you’re alive. That said, whole life insurance tends to be more complicated and expensive than term. Plus, fees and expenses can reduce your cash value over time, and that can affect how much your beneficiaries might receive as their life insurance benefit.
Whether you’re just starting out on your estate planning journey or you’re already deep in the trenches of research, one of the most important things you can do is to make sure you understand all the jargon floating around. Understanding the landscape of your options—and what your own individual needs might be—is the key.