What Is a Will and Why Do I Need One?

By Daniel Bucherer, Contributor Fea Money Financial Literacy School. Picture Credit Unsplash

It’s never comfortable to think about what may happen to your loved ones if you pass away. In fact, just bringing up the conversation in your own mind can be extremely discomforting. You simply don’t want to think about your legacy, how your family will get on without you and what would happen to all your finances. 

However, it’s critically important that you do. Many people don’t have a will that outlines what will happen to their assets when they pass away. This can leave loved ones with confusion and often, family tension, at a time when stability is most needed.

We’ll leave the family stuff out for the time being. Let’s take a look at some reasons why wills are critical for your financial future.

What Is a Will and Why Do I Need One?

There are two types of documents that often fall under the word will. 

  • Will – This document only takes effect after you pass away and details how your possessions are to be distributed.
  • Living Will/Advanced Directive – This document takes effect while you are still alive and dictates your wishes for medical treatment if you are unable to do so. It may also designate a person to make those decisions for you.

Both documents have similar requirements as to how and when they are created but serve very different purposes. We will detail a will, often called a last will and testament, here.

At the base level, a will simply states what the executor, or person in charge of carrying out what the will says, is to do with all of your things. This includes your home, your car, any possessions you own and any insurance policies you have. 

From a financial perspective, wills are critical because they keep your possessions where you want them. Laws differ around the world, however, in many places, your possessions can be given to anyone who claims them or can be simply sold to pay debts if you do not have a will in place.

What Does a Will Do?

Wills do a number of different things that make them invaluable tools.

  • They define an executor for your estate or the person who carries out the will.
  • They distribute your assets according to your wishes.
  • They establish legal guardianship for your children and care for pets.

It’s important to note that wills don’t control everything. If you own a home, have a checking or savings account or own other property with another person, they will generally inherit it regardless of what a will says. Additionally, any life insurance policies you have will go to the beneficiary listed on the policy.

Let’s take an example. You alone own a home, a car and have a few outstanding loans. You also have significant investments. You are not married, but have a child from a previous marriage. You and your ex-wife are not on excellent terms. You are, however, on excellent terms with your brother, who has three children. You, unfortunately, pass away. 

Regardless if you have a will, a trust you have set up for your child’s care is the beneficiary of your life insurance policy, after payment of your debts.

With a will in place, you are able to direct your remaining funds, evenly, to your child’s trust, as well as to your brother to benefit the education of his children. The proceeds from the sale of your house are directed this way as well.

Without a will, your ex-wife (depending on the laws) would be able to claim ownership of the funds in court, making it unlikely that you would be able to support all four children as you had wished.

Okay, They’re Important…Now What?

Get started! You don’t need to be married or own property to have a will, everyone should have one. Keep in mind that research will be your best friend when creating one.

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