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Estate planning is a powerful tool that among other things, enables you to direct exactly how your assets will be handled upon your death or disability. A well-crafted estate plan will ensure you and your family avoid the hassles of guardianship, conservatorship, probate or unpleasant estate tax surprises. Unfortunately, many individuals have fallen victim to several persistent myths and misconceptions about estate planning and what happens if you die or become incapacitated.
Some of these misconceptions about living trusts and wills cause people to postpone their estate planning – often until it is too late. Which myths have you heard? Which ones have you believed?
Myth: I’m not rich so I don’t need estate planning.
Fact: Estate planning is not just for the wealthy, and provides many benefits regardless of your income or assets. For example, a good estate plan includes provisions for caring for a minor or disabled child, caring for a surviving spouse, caring for pets, transferring ownership of property or business interests according to your wishes, tax savings, and probate avoidance.
Myth: I’m too young to create an estate plan.
Fact: Accidents happen. None of us know exactly when we will die or become incapacitated. Even if you have no assets and no family to support, you should have a power of attorney and health care directive in place, in case you ever become disabled or incapacitated.
Myth: Owning property in joint tenancy is an easier, more affordable way to avoid probate than placing it in a revocable living trust.
Fact: It is true that property held in joint tenancy with rights of survivorship will pass to the other owner(s) outside of the probate process. However, it is usually a very bad idea. Placing property in joint tenancy with rights of survivorship may constitute a gift to the joint tenant, and may result in a sizable gift tax being owed. Furthermore, once the deed is executed, the property is legally owned by all joint tenants and may be subject to the claims of any joint tenant’s creditors. Transferring a property into joint tenancy is irrevocable, unless all parties consent to a future transfer; whereas property owned in a living trust remains under your control and the transfer is fully revocable until your death.
Myth: Keeping property out of probate saves money on federal estate taxes.
Fact: Probate, and probate avoidance, are governed by state law and address how property passes upon your death; they have nothing to do with federal estate taxes, which are set forth in the Internal Revenue Code. Estate planning can reduce estate taxes, but that has nothing to do with a discussion regarding probate avoidance.
Myth: I don’t need a living trust if I have a will or vice versa.
Fact: A properly drafted trust contains provisions addressing what happens to your property if you become incapacitated as well as what happens to the property owned by your trust after your death. On the other hand, a will only becomes effective upon your death and specifies who will inherit the property. Many times, it’s a good idea to have both documents. If you have a living trust as your primary dispositive vehicle, you should have something known as a “pour over will” to make sure that any assets which don’t get titled in the name of the trust during your life, will pour over to your trust after your death.
Myth: With a living trust, a surviving spouse need not take any action after the other spouse’s death.
Fact: Failure to adhere to the proper legal formalities following a death could result in significant administrative and tax implications. While a properly drafted and funded living trust will avoid probate, there are still many tasks that have to be performed after the death of your spouse, and you should seek the advice of an experienced estate planning attorney for advice and counsel.