What Your Will Can't Do: Beneficiaries Beat Wills Every Time

***The following is a transcription of this podcast episode. Listen Here.

What Your Will Actually Does (And What It Can't Do)

Today, we are continuing in our lovely journey down the road of understanding probate, wills, and living trusts. I know—not too exciting, but super important to know.

Now, last time I was talking to you about the nightmare that probate is. And I said that I would be doing a two-part series, but I've decided it's going to be more because I have not actually talked to you about what your will does. So before I talk to you about a living trust, which will be next week, we've got to talk about a will.

What Most People Think a Will Does

Most people understand that a will is a bunch of papers that you sign that tell the world what you want done with your stuff when you're dead. So essentially, a will is your instruction manual to your family, but actually, it's an instruction manual for probate court, but it doesn't avoid the process in any way.

Your will itself dictates who you want your stuff to go to, but it still has to be signed off by the court.

What Your Will Actually Says

So what your will actually says is, "Here's who I want to have handle my affairs." So it gives the naming of an executor or an administrator.

And it says, "Here's how I want to distribute my assets." So it kind of is giving directions for beneficiaries.

"Here's who should raise my kids" if you have little children, right? So that's where we have guardian nominations.

And a will also says, "Here's how to handle my debts and my taxes."

Like I talked about in the last episode, your will is your intention of how you want things handled, but that will is essentially going to get volleyed over to a court system that can take six to 18 months.

What Passes Outside of Probate

Now, I talked about how in my last episode, I talked about how things get hung up and all these five steps. But what I didn't tell you is there are a few things that do pass outside of probate.

First thing you need to understand is that probate does not require life insurance to be evaluated and used in the probate process. And so this is one of the reasons that as long as you've known me, I've been like, "People, we need life insurance. We need it for a lot of reasons."

But life insurance passes outside of probate. And so when somebody passes away, we immediately have a large sum of money that we can use that will not be taxed, that allows your estate or your heirs a sum of money that they can work with to bury you, and also just to provide some inheritance while all of your stuff is stuck in court.

What Wills Do Well

Wills do a really good job handling personal property and sentimental items. Think like your mom's wedding ring or something that's really sentimental to the family. Wills do a wonderful job naming guardians for minors and they're pretty inexpensive to create and update.

The Big Clencher: What Wills Cannot Do

But here's the clencher. Wills cannot do some very important things.

When you come and see me and we're talking about life transition, you're going to notice that I ask you from time to time if we need to update your beneficiary designations. And here's why.

Wills cannot override beneficiary designations. Blah, blah, blah. What does that mean?

Well, that means that if your will says, "Hey, I want my entire 401k or the entire value of this IRA to go to XYZ charity as just a donation or an endowment"—if your will says that, but while you were working, you had designated your spouse as your beneficiary, your will will not override the beneficiary designation with your 401k.

So beneficiary designations always beat your will every time.

What Else Wills Can't Do

And wills are also not going to avoid probate, which we've already talked about, and they are not actually going to be any help at all during incapacity. So wills don't do jack until you're dead, right? So they don't actually help define maybe what you want to have done with your assets and with your body and with your health while you're still alive.

And your will does not keep your affairs private. As soon as you die, your will becomes public.

I'm Not Here to Beat Up on Wills

I'm not here to beat up on wills. They're actually great. But there's a lot of marketing and a lot of money to be made in the area of living trusts. And so next week, we're going to be talking about the alternative to this idea of wills and probate in the world of living trusts.

But I'm telling you right now, living trusts are not for everyone.

The Bottom Line

And that's why it's so important that when you come and talk to me about your financial life that you tell me what's important to you. And if you haven't updated your will or we haven't had this conversation or we have had this conversation and you haven't done anything about it, you let me know because we need to make sure that we are taking care of your estate planning needs.

And if you need a referral to a wonderful attorney or several wonderful attorneys, you know how to get ahold of me.

The key takeaway here is that wills are good for some things—like naming guardians and handling sentimental items—but they have major limitations. They don't avoid probate, they can't override beneficiary designations, and they don't help you at all while you're still alive. Understanding these limitations is crucial before we dive into living trusts next week.

See you next week.