By: Dana M. Horlick, Attorney, Woodruff Family Law Group
Have you wondered how much of your estate is your spouse entitled? What happens to all of your assets when you die? Do you have much control over the disposition of your estate? Does having a will make a difference? To demonstrate the nuances involved in determining how much your surviving spouse is entitled to, I am going to set up a hypothetical, with a Greensboro couple – Rocky and Petunia.
Petunia owns 40% of a closely-held business started by her family, Home Grown Lawn Care, and will likely inherit another 11%. Petunia’s brother will inherit the other 49%. Petunia is engaged to Rocky, an engineer with a promising future, who has joined an engineering firm. To set up the financials, Harry makes $70,000.00 per year. Petunia, as a Vice President for Home Grown Lawn Care, has a salary of $60,000.00 per year and typical K-1 dividends of another $25,000.00 per year. Petunia also gets a tax distribution to pay the federal and state income tax on the K-1 distribution.
Neither Petunia nor Rocky have been married before, have any children, or have any college debt. They do, however, have the following assets: there are Petunia’s shares in Home Grown Lawn Care valued at $100,000.00; a 401(k) with $10,000.00 for Petunia; and a 401(k) with $10,000.00 for Rocky.
Petunia’s family wants her to have a premarital agreement concerning Home Grown Lawn Care, as they want it to stay in the family. However, one is not executed. Five years after the wedding, Petunia dies in an auto accident. Her estate consists of her share of Home Grown Lawn Care, valued at $125,000.00, and a 401(k) worth $15,000.00, which she has made Rocky a beneficiary. Petunia had no children at the time of her death and had no will.
Now might be a good time to stop for just a second and get some basic definitions straight, before analyzing the facts.
First, a closely-held business is any company that has only a limited number of shareholders. Typically, a closely-held business is not publicly traded, making it difficult to value the shares. Second, an individual can die either with a will or without a will. If you die without a will, your estate passes through intestacy, and there are statutes that determine who gets what.
Before we get into that analysis, let’s take one quick detour. When you die, somebody has to act as administrator of your estate. Your estate doesn’t distribute itself; there has to be someone involved that pays off any debts and distributes your assets. You can designate this person, if you have a will, as the executor of your estate. Without a will, the appointment of the administrator of your estate falls to the statute. The statute prioritizes certain individuals when it comes to appointing an administrator. The person who gets top priority is the surviving spouse. When Petunia dies without a will, Rocky will be appointed as administrator of her estate.
Thus, if you die without a will, the person who has priority and preference to be appointed by the Clerk of Court as the administrator of your estate is going to be your surviving spouse. If this doesn’t sound appealing, drafting a will allows you to designate the executor of your estate, although they are not required to accept that role. In this respect, and many others, having a will allows you to have more control over what happens after you die. Stay tuned to our next post for the analysis of our hypothetical.
***Thanks to Erin Bailey of Tuggle Duggins, P.A. for her review and comments on this blog posts. She does estate planning and ERISA at Tuggle Duggins, P.A.***