9 Myths and Facts About Estate Planning: What You Need To Know
Written by
Cara Danielle Brown
Edited by
Molly Sullivan
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As Benjamin Franklin once wrote, “In this world, nothing is certain except death and taxes.” And nowhere is this more relevant than estate planning.
But let’s back up. To the uninitiated, what exactly is estate planning? Put simply, estate planning is the plan an individual makes for how they would like their assets divided when they die.
Given the natural aversion to thoughts of one’s inevitable death, many avoid learning about estate planning. And it is for this reason that myths and misconceptions run wild regarding the process. GoBankingRates spoke with New York estate planning attorney Caleb Smith* to unearth the most common myths (and correct facts) about estate planning.
Myth: I’m Too Young To Need a Will
People often think estate planning is reserved for the elderly and infirm. Unfortunately, one never knows when they are going to die. And parents with minor children may actually have a greater need for a will to establish guardians of their choosing in the event of their sudden passing.
“If you have minors, everything may be subject to court order,” stated Smith. This means that in the absence of a will, the legal system decides on a guardian and they must be in frequent communication with the court until the child is of legal age to disclose how much money is being spent on the child. Not only must these accountings be frustratingly meticulous, but they can lead to costly legal fees.
Myth: I Don’t Need a Lawyer To Prepare My Documents
“There are many specific legal requirements as to what the documents have to contain and how they have to be executed,” stated Smith. “If not executed properly, they’re not valid. It’s not that easy to do online.” Smith joked this may be a matter of perspective, but ensured he’s not just saying it because he’s a lawyer. “I’ve seen things go wrong.”
Myth: If I Pass Without a Will, the State Gets My Assets
Each state has unique intestacy laws that establish a priority order to whom assets are passed — typically beginning with closest living relatives. While specifics vary across state lines, “In New York, fifty-thousand dollars and fifty percent will go to the spouse and fifty percent will go to the kids,” stated Smith. In the absence of kids or a spouse, assets may pass to siblings, parents, etc. The state will only get your assets if no living relatives are found.
Myth: I’m Not Rich Enough To Need Estate Planning
As it turns out, estate planning can have less to do with how much money you have and more to do with wanting a say in how that money is divided. And, according to Smith, everyone should want a say in that. “Perhaps you want to give one hundred percent of the money to your child instead of what the law might provide,” stated Smith. These things do happen.
Myth: I Did Estate Planning Years Ago So I Don’t Need To Do It Again
If an estate plan was put in place in the past, state or federal laws could have changed since then, therefore nullifying or otherwise impacting previous plans. It is also possible that one’s assets could have increased or decreased, or their family situation could have shifted. Smith advocated for making sure your estate plans are always current.
Myth: Trusts Avoid Estate Tax
Avoiding estate tax can depend on specific circumstances, appropriately drafted documents, and (most importantly) the kind of trust. A revocable trust — allowing the grantor to maintain control and make changes to particular designations while he or she is alive — does not avoid estate tax. A gift to an irrevocable trust, however — a trust that typically cannot be altered but remains protected from creditors — can avoid estate tax. Yet, even an irrevocable trust may only reduce tax and not all-out avoid it depending on the size of your estate.
Myth: Estate Planning Is Only for Married People with Kids
Even the single and childless want a say in how their assets are divided. Also, some may wish to allocate funds or property to extended family, close friends, or charitable organizations over a parent or sibling. Healthcare directives are also part of estate planning, which specify who can make medical decisions on your behalf if you become incapacitated. “In the absence of a suitable surrogate […] medical decisions are generally left to the judgment of healthcare professionals or court-appointed guardians,” wrote THK Law, LLP. And, for most, that is undesirable.
Myth: A Will Avoids Probate
“A will involves probate by definition,” stated Smith. To avoid probate, he suggested either putting all assets into a revocable trust or having beneficiary designations (including so-called Payable-on-Death (POD) designations) on individual accounts.
Myth: I Can Gift My Entire Estate Without Having To Worry About Taxes
While it’s true that gifts can often avoid tax, the amount of money you can give away in life and death is limited. According to Patrick Villanova, CEPF and editor at SmartAsset, “the annual gift tax exclusion is $18,000, meaning a person can give up to $18,000 to as many people as he or she wants without having to pay any taxes on the gifts.” If an annual gift exceeds $18,000, however, the difference is subtracted from one’s lifetime gift exemption, which is currently $13.61 million. If the lifetime gift exemption is exceeded, the gift giver will be taxed. And while this may not ever come into play for most Americans, it is something high net worth individuals ought to be mindful of.
*Caleb Smith is a pseudonym.
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