10 Common Myths About Estate Planning

Do you find estate planning confusing? In my experience, estate planning is one of the areas of financial planning with the most widespread confusion and unfortunately, this can lead to costly mistakes in terms of time, money, and stress for people’s families. In particular, here are ten estate planning myths I hear most often:

1) I’m too young for estate planning. We never know when we might need estate planning and by then, it will be too late. For example, history is replete with the stories of celebrities who unfortunately died before creating a will, many of them at a relatively young age.

2) Estate planning is just for the wealthy. This myth comes from the focus of so many attorneys and financial advisers on the estate tax, which may not be an issue this year until your estate surpasses $11,580,000, an amount that most of us would characterize as pretty well-off, if not downright rich. Estate planning is about so much more than that though. It’s also about making sure that your finances are taken care of if you’re incapacitated, that decisions about your health care are carried out the way you’d like even if you’re not able to make them, and that your children and other heirs are taken care of when that time eventually comes.

That’s why estate planning isn’t just for the Donald Trumps of the world. Estate planning is for anyone who may become seriously ill or pass away. In other words, it’s for everyone.

3) I need a lawyer to draft these documents. If your family and financial situation is relatively simple, you can draft many of these documents yourself at no or low cost. For health care decisions, you can often get a health care directive from your hospital, download a state-specific form from the National Hospice and Palliative Care Organization here at no cost or create and store one online for free at MyDirectives. Another resource for health care decisions is Five Wishes, which is a popular, low-cost living will form made available from the non-profit Aging with Dignity organization. You can draft other legal documents like a power of attorney and a simple will for free at sites like DoYourOwnWill.com and FreeWill, and your employer may also offer these documents at no or low cost as an employee benefit.

4) I don’t need a lawyer at all. While these documents may cover most common situations, there may be a complicating issue warranting legal advice that you’re not even aware of. That’s why it’s still a good idea to at least run these documents by a qualified estate planning attorney, which may cost you less than having the attorney draft them all from scratch. You can search for an attorney by asking for referrals from family, friends, and other professionals, by using the lawyer referral service of your local bar association, or by searching the membership of organizations like the American Academy of Estate Planning Attorneys and the National Network of Estate Planning Attorneys. Finally, don’t forget to ask your employer about any discounted legal services they may offer as an employee benefit.

5) If I pass away without a will, the state will get my assets. If the last two myths can lead so many to inaction, it always amazes me that this myth hasn’t led to a boom in the will-making business. If you pass away without a will, each state will apply its “laws of intestacy” to determine who will get what.

You can check out a site called heirbase to see what that outcome may look like. If you don’t like it, get a will drafted. If you’re fine with it and have minor children, get a will anyway. That’s because the will also allows you to determine who would be the guardian of your children if that need should arise, which is probably not a decision you want a court to make.

6) If I have a will, I don’t have to worry about probate. This may be wishful thinking as probate can be a long and expensive process in which one or more courts decide who will inherit your assets. If you have real estate in more than one state, each property may have to go through probate in its respective state. While a will provides the court with guidance on your wishes, it doesn’t actually avoid the probate process altogether.

7) To avoid probate, you have to draft a trust. One area that you’re most likely to need an attorney is drafting a trust. Avoiding probate is one of the most common reasons people do this, but there may be cheaper and easier methods that may be sufficient for your needs.

First, jointly owned property (like what you own with your spouse) generally passes to the other owner(s) without going through probate (unless it’s a “tenancy in common”). Second, life insurance, annuities, and anything in a retirement plan like a 401(k) or IRA avoids probate as long as there is at least one living beneficiary listed. Some states also allow you to avoid probate by adding beneficiaries to bank accounts with a “payable on death” registration and to brokerage accounts, real estate, and even vehicles with “transfer on death” registrations. You can see what’s available in your state here. Finally, each state has methods to speed up or even skip probate for “small estates,” which in some states can be quite large.

8) Trusts avoid estate tax. Most trusts do not help you avoid estate taxes in and of themselves. However, if you’re worried about having a taxable estate, be sure to seek qualified legal advice (your nephew who just graduated from law school with a focus on criminal law doesn’t count) since certain trusts can be used as part of a strategy to reduce and even eliminate estate tax liability.

9) I don’t have enough money to worry about the estate tax. This may be true today, but if nothing changes, estates over $5 million are scheduled to be subject to a 40% estate tax after 2025. When you add in the value of your home, life insurance proceeds, and your retirement accounts, that $5 million may start looking a little too close for comfort. Finally, don’t forget that many states have their own estate and inheritance taxes with sometimes much lower exemptions.

10) I’ll have to pay a gift tax if I give someone over $15k per year. Almost anything (except for money paid directly to a medical or educational institution or charity) over $15k that you give someone (other than your spouse) in a single year simply reduces your lifetime gift and estate tax exclusion amount (currently $11,580,000). (You can front-load 5 years of gift tax exemptions to a 529 plan). Only after you use up the entire exclusion amount do you actually have to start paying anything. That being said, you would still have to file a gift tax return and then keep track of how much you’ve reduced your lifetime exclusion amount by, so you may want to try to stay within the $15k annual exclusion amount just to avoid that hassle.

As you can see, there are lots of misconceptions out there about estate planning and understandably so as it can be complex, constantly changing, and removed from our everyday lives. Knowing the truth about these myths can help you avoid numerous mistakes. If you’d like to learn more, consider consulting with a qualified legal or financial professional.

Source: Forbes – Money