Myth #1: Estate Planning is only for Wealthy Fat Cats!
Fact: The reality is that estate planning can be just as important for people of lower or middle income as it can be for wealthy people. Factors other than passing on great wealth to future generations affect the need for estate planning. One such factor is transferring ownership of property in accordance with your desires. If you don’t create a valid will, the state of California has a series of laws, known as intestate succession that will determine where your assets will go when you pass away. Rather than distributing your assets to the people you want, such laws may distribute your assets to family members you have not spoken to in years or possibly to distant relatives you have never even met. Another factor affecting the need for estate planning is providing future care for minor or disabled children. Estate planning allows you to name a guardian for your children if something should happen to you. Otherwise, a court will appoint a guardian, and it may not be an individual you would choose to raise your children. Also, proper advance planning can allow you to name someone to manage money that you leave to your minor children or designate exactly how you want to care for disabled children. Lastly, estate planning can provide you with a way of making health care and financial decisions for yourself in the event that you become incapacitated. With estate planning, you can have a health care power of attorney in place to enable someone that you trust to make health care decisions for you in the event that you become ill or are in an accident and cannot make decisions for yourself. Also, you could designate someone as a durable power of attorney to allow that person to manage your financial affairs if incapacitated.
Myth #2: In today’s world I can do my own estate plan, its easy!
Fact: Although estate planning do-it-yourself kits and software are available, they typically result in higher costs down the road for the friends and family you leave behind. For example, trusts drafted and administered through kits or from internet forms are a leading cause of trust and probate litigation. Spending the money now to secure good documents will save your family and friends a significant amount of money in the future by avoiding such costly litigation. Another issue that can arise with do-it-yourself methods is that each state has its own requirements for each of the various legal documents. So, if you create your own document and it doesn’t meet the specific requirements of the state in which you live, then your documents may not even be effective. In the end, spending money in the short run on an attorney who can guide and advise you in developing a sound estate plan can end up saving you and your loved ones a lot of money in the long run.
Myth #3: I already planned my estate, I have a will and that is the only estate planning document I need.
Facts: A will only comes into effect at death. As such, it does not help you manage your property in the event you become incapacitated. A well drafted trust has provisions for how your property should be managed in the event you cannot manage the property yourself. Also, dying with an outdated, incomplete or unsigned will can cause a number of problems for the loved ones that you leave behind. So, even if you have a will, or an entire estate plan already written out, it is important to review your documents every couple of years. In particular, it is important that you review your plan if any of the following events happen in your life: [1] the birth, death or disability of a child; [2] a change in marital status; [3] a significant change in the value or character of your financial assets; and/or [5] a change in state residence.
Myth #4: Who needs an estate plan when I can just hold all of my assets jointly with another person?
Fact: Although holding property in joint tenancy will avoid probate when you pass away, it is a terrible way to transfer property at death. When you add another person to your bank account or to your real estate as a joint tenant, you are exposing that asset to every current and future creditor of that new joint tenant. Therefore, if a parent puts a house in joint tenancy for a child, that house is subject to the child’s creditors and could be liquidated without the parent’s consent. Also, executing a deed is a present gift to the joint tenant. As a result, there may be significant gift tax consequences for that gift. Furthermore, although holding property in a joint tenancy will avoid probate upon your death, it merely delays probate until the last joint tenant’s death. Finally, unlike an estate plan which can be set up to be fully amendable and revocable, a gift of property into joint tenancy is not revocable without the cooperation of the donee. Thus, if you have a falling out with the joint tenant you cannot just simply take back the property.
Myth #5: All trusts avoid estate tax.
Fact: Everything a person owns and controls at death will be included in his or her taxable estate. This includes assets that pass under a will or revocable trust, assets held in joint tenancy with others, life insurance, retirement accounts, etc. Nonetheless, once the value of the taxable estate has been determined, there are deductions, exemptions and exclusions to apply which may reduce or eliminate any estate tax liability. Additionally, property in a revocable trust, also known as a “living trust,” may be subject to estate tax. However, property in an irrevocable trust is generally not subject to estate tax because it cannot be modified by you, the trustor.
