Like most people, you’ve worked hard to build a better life for you and your family. We all want our children and grandchildren to be better off and have more opportunities than we did. It also goes without saying that many people fear losing all they have worked for due to an unexpected, protracted illness, as a result of family discord, or to taxes.
A carefully constructed estate plan can help you and your family avoid or minimize the difficulties of guardianship, probate, and tax liabilities. Estate planning is powerful tool which, depending on your priorities, can help you avoid probate, reduce both estate and income taxes, ensure your assets will be handled properly upon your disability or death, and provide for your care in the event of disability or extended illness.
Unfortunately, many myths and misconceptions about estate planning, and what happens if you become incapacitated or die, persistent in the public domain. In addition to avoiding a discussion of what happens in the event of their death, many of these misconceptions about estate planning cause people to postpone planning all together. Below are some common myths you may have heard.
Myth: Only the old or very sick need estate planning.
Fact: Truth is, no one knows when they will die or become incapacitated due to natural causes or an accident. Even if you have no or little assets, it is a good idea to identify someone who can manage your financial affairs and make health care decisions on your behalf if you are unable. A power of attorney and health care directive allows you to decide in advance who will make critical decisions about your assets and health care rather than leaving such decisions up to a court appointed guardian. Without such documents, state statutes spell out who can act on behalf of another and don’t always align with what the incapacitated person may want.
Myth: Only the rich need estate planning.
Fact: Estate planning provides many benefits regardless of your income or assets. The components of a good estate plan allow for the transfer of property or business interests according to your wishes, not what the statutes direct. It also provides for care of a surviving spouse, care of a minor or disabled child, and tax minimization. Additionally, a good estate plan can minimize the impact of costly probate proceedings and allow more of your assets to be transferred to those you love.
Myth: Avoid probate means avoiding estate (or death) taxes.
Fact: Estate taxes are a creature of federal law, whereas probate, and probate avoidance, are governed by state law. How your property is transferred after you die has nothing to do with the federal estate taxes you may owe. Additionally, based on the current federal estate tax exemption it is estimated that less than one percent of all Americans will owe estate taxes. The chances are far greater that a person’s estate will be the subject of a costly probate administration. A thoughtful estate plan can help even those estates not subject to federal estate tax avoid the time and expense of probate.
Myth: Owning property in joint tenancy is better than owning it trust.
Fact: Owning property as joint tenants will result in the property passing to the other owner(s) outside of probate; however, there are some significant down sides. Placing property in joint tenancy is considered a gift to the new joint tenant(s) and may result in a gift tax liability. Additionally, property held in joint tenancy is legally owned by all the joint tenants. This means the property is subject to the creditors of all the joint tenants. Finally, transferring property into a joint tenancy is irrevocable unless the joint tenants agree to a future transfer. Transferring property into a revocable trust, however, is not usually considered a gift triggering gift tax and the transfer is revocable at any time prior to your death. Property held in a revocable trust remains under your control and you are free to sell it without having to obtain several owners’ agreement, can be transferred outside of probate, and can, if the trust agreement is drafted properly, avoid the claims of creditors.
Myth: I don’t need a trust if I have a will.
Fact: A properly drafted trust can, in many regards, operate like a will with one significant difference, it will do so outside of the probate process. Another benefit of a trust is it allows for the management and transfer of your assets in the event you become incapacitated, whereas a will only becomes effective upon your death. Finally, a revocable trust can contain directions regarding the management and distribution of your assets to minor children, disabled children, financially irresponsible beneficiaries and beneficiaries suffering from substance abuse, and control of business entities. It can also allow you to contribute to important milestones in your children’s lives, such as weddings, college graduation, the purchase of a first home, or the birth of a child, in the event you pass away before they occur.
Myth: A revocable trust means nothing has to happen after I die.
Fact: While it is true a revocable trust can avoid probate, there are still legal formalities which must be adhered to. Failure to do so could result in significant tax and administrative consequences and penalties. Some of the actions that must be accomplished are the proper transfer of property (such as real estate), filing documents with appropriate governmental entities, sending notices, and, if applicable, paying federal estate taxes.
Myth: Estate planning is only concerned with what happens after you die.
Fact: Long gone are the days when estate planners were concerned only with wills and probate. Estate planners today find themselves advising clients on an ever increasing array of subject areas separate and apart from wills and probate including: minimization or deferral of gift and income taxes; formation, sale and disposition of the family business; ensuring an estate plan doesn’t interrupt a disabled child or spouse’s government benefits; offshore trusts; advising trustees appointed to manage trusts; and asset protection, to name a few.
When you consider that your assets may end up in the wrong hands, or your estate may be quickly depleted due to no or poor planning, why make decisions based on what you’ve heard from the rumor mill? If you have any questions or concerns, take the time to speak with an attorney about your estate plan.