11 Estate Planning Myths DebunkedJuly 25, 2018 | Jeffrey S. Greener |
Misconceptions about wills, trusts and estate planning in general abound. Here, we help you separate fact from fiction.
1. Estate planning is only for the wealthy.
Besides preserving and protecting assets, estate planning preserves dignity. It allows you to make decisions about your physical and mental healthcare while you are able to do so, before you become incapacitated through age or illness.
2. I’m too young to need estate planning.
Without creating a doomsday scenario, we all know of celebrities who died too soon. Without a formal estate plan, decisions such as who will take care of the children, and who will guard their assets until they are adults will be left to the state government.
3. If I die without a will, the state will get my assets.
If you pass away without a will, the laws in your state of domicile establish who gets what. The state gets your assets only if your heirs can’t be located. Without a will, money and property will be distributed to a person’s next of kin, regardless of the deceased person’s preferences for distributing those assets. If you are single without children, for example, your assets will go to your parents if they are still living, and if not, to your siblings, even though you might not have spoken to them in years.
4. I can draft my own will.
This is true only if your situation is simple. Rarely is this so. Second marriages and step-children, vacation homes (even if it’s just a time-share) and estranged family members are just some of the many reasons why a simple will may not be appropriate for you. Do-it-yourself software programs can’t guide you about how to create a document that will work as you intend at the time it’s most needed. Simple mistakes can cost thousands to rectify.
5. Living trusts are better than wills in reducing estate taxes.
Neither a living trust nor a will help you avoid estate tax, but both can include provisions for reducing it. The primary purpose of a living trust, also known as a revocable trust, is to avoid probate when you die, thereby reducing the time and expense of transferring your assets to your heirs.
6. Adding my child’s name on my home or bank account is a good idea.
Although some assets, like jointly owned real estate and bank accounts, transfer upon death to the surviving “joint tenants,” this tactic ignores glaring potential problems. Your child can withdraw assets at any time and for any amount. Your child can legally keep the house or the bank account’s funds upon your death without sharing the proceeds with siblings. If your child does the right thing and distributes the assets, your child may have a gift tax problem.
7. Life insurance passes tax-free to my beneficiaries.
While life insurance is almost always income-tax free, it may still be taxed under the federal estate-tax rules.
8. I only need to do an estate plan once.
Failing to periodically review your estate planning documents can result in the failure of the estate plan to accomplish your goals. Many things can necessitate a change in your estate plan. Marriage, divorce, establishing or selling a business, or a change in financial circumstance are just a few of the many life changes that should prompt a review of your estate planning documents. When you can’t remember what your will or trust says, it’s time for a review.
9. A will or living trust covers all of my property.
A will only covers property titled in a deceased person’s individual name at the time of death. It is an important part of an estate plan, but it must be coordinated with other methods of transferring assets. Even if you have a living trust, assets with a named beneficiary or co-owner will pass outside the trust.
10. Everyone in my family gets along, so I don’t need an estate plan.
The opportunity to receive money can quickly turn family members into mortal enemies. Don’t make your family members fight for their inheritance. A well-crafted estate plan is the best way to maintain family harmony.
11. Medicaid will pay for my long-term care if I can’t afford it at no cost to me.
If you meet certain financial requirements, Medicaid will pay for your long-term care if you need it. Medicaid, however, does expect to be paid back from your estate upon your death, so the assets you worked so hard to gain during your lifetime will go to the government first, rather than to your family. Proper planning can minimize the financial impact.
As with most things legal, there are no simple, one-size-fits-all answers to transferring wealth and making sure it happens according to your preferences. Nevertheless, having a complete, updated and effective estate plan can be one of the greatest gifts you can give to yourself and your loved ones.