As I said at the beginning of last month’s blogs on life insurance, I recently got a text from a client, friend, and blog reader that urged me to do a blog series on preparing for death. My friend felt there was an urgency in the need for education of older and younger folks alike on wills and life insurance. In his opinion, many folks don’t know enough to take care of their families after they pass, and how that lack of knowledge can break the family apart. That is why I dedicated November’s blogs to the subject of life insurance and this month’s blogs to wills and estate planning.
Let’s begin with some myth-busting, shall we? 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. Here are some of the misconceptions I hear most often:
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 riddled with the stories of celebrities who unfortunately died before creating a will, and despite the vast assets available, their families were adversely affected.
Estate planning is just for the wealthy.
Estate planning is about so much more than a dollar amount. 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 those decisions for yourself, and that your children and other heirs are taken care of when that time eventually comes.
I don’t need professional help to draft estate documents.
If your family and financial situation is relatively simple, you may be tempted to draft many of these documents yourself at no or low cost. In my humble opinion, this is mistaken thinking that could end up being quite detrimental to you and your heirs. Estate attorneys and financial advisors are very familiar with the terms, process, and procedure of preparing estate documents so that the transfer of your estate goes smoothly.
If I pass away without a will, the state will get my assets.
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 because the will also allow you to determine who would be the guardian of your children if needed, which is probably not a decision you want a court to make.
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.
To avoid probate, you have to draft a trust.
One area in which you're most likely to need an attorney is drafting a trust. Avoiding probate is one of the most common reasons people do this.
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.
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; information on your state can be found on taxfoundation.org.
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 $11,700,000). 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, 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.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.