Did you know that October is National Estate Planning Awareness Month? The importance of proper estate planning shouldn’t be understated, as it can be a lasting gift for your loved ones after your passing.
The discomfort in talking about plans after death or incapacitation may cause certain myths and misconceptions to circulate. Many people plan their estates diligently, with input from legal, tax and financial professionals. Others plan earnestly but make mistakes that can potentially affect the transfer of their estate. You may have heard some of these assumptions surrounding estate planning, but we’re here to help debunk a few popular myths.
Myth #1: You Can DIY Your Estate Plan
While it may be possible to create a will on your own, it can be risky to do so - especially if your estate is complex. Look at the example of Aretha Franklin. The “Queen of Soul’s” estate, valued at $80 million, may be divided under a handwritten or “holographic” will. The family discovered multiple wills among her personal effects. Provided that the handwritten will can be authenticated, it will be probated under Michigan law, but such unwitnessed documents are not necessarily legally binding.1
The greater your estate, the more potential for complexities when passing it on to others. For some with few assets, taking a do-it-yourself approach may be possible. But estate planning, no matter your net worth, can be a complicated process with lots of room for error when done improperly. While, in some cases, you may be able to do it yourself, this is one thing that’s usually best left to an experienced professional.
Myth #2: All You Need Is a Will
Creating an estate plan is so much more than having a will. First, there are other ways that assets pass to your intended beneficiaries other than a will. Assets can pass by operation of law (e.g., assets titled as Joint With Rights of Survivorship), beneficiary designations (especially for retirement plan assets and life insurance), and by trust (of which you may or may not need). So, estate planning should include looking at the titling of your assets and confirming that your beneficiary designations tie to your overall estate planning wishes and what is contained in the will.
Moreover, depending on your circumstances, your estate plan should often include other estate planning documents other than merely a will:
- A living will
- A financial power of attorney
- A health care power of attorney or health care surrogate
- Memorandum of Personal Property
- Pre- or post-nuptial agreement
- Funeral arrangements
- "If I Croak" Letter
Myth #3: You Don’t Have Enough Assets for an Estate Plan
You have an estate. It doesn’t matter how limited (or unlimited) your means may be, and you should have a plan for what will happen to your assets after your passing.
First, your estate may be larger than you initially think. You may have a life insurance policy(ies) that would generate a generous amount of assets for your heirs. Or, perhaps you will also inherit assets one day. Before you know it, you may have significant assets to warrant special attention to how those assets are disposed of in your estate planning. Second, you may have some personal property that does not have significant third party value, but it may have significant sentimental value in the family. These assets, regardless of the size of one estate, may cause the most problems among the heirs if it is not spelled out who gets what (and often why).
Moreover, if you have young children, appointing a guardian is critical in terms of selecting the type of home and environment in which your children will be raised.
If you don’t decide, you could potentially be leaving behind a legacy of legal headaches to your survivors. Estate planning is about determining how what you have now (money and assets) will be distributed after your lifetime and who takes care of various non-financial aspects of your life.
Myth #4: A Revocable Trust is Always Needed; Or, A Revocable Trust is Never Needed
There are few absolutes in life. Whether to have a revocable trust for everyone's estate is not one. In some cases, a revocable trust may be warranted; in other cases, perhaps the cost of a revocable trust is not needed.
The benefits of a revocable trust can be said to provide some privacy, help in the event of incapacity, and potentially help minimize probate costs. While there may be other approaches or documents to provide these advantages, a revocable trust can often be the solution to fulfill all of those goals. In some states, probate costs are minimal and the fees that attorneys charge for probate can often be negotiated (and not a pure percentage of the probate estate). In other states, probate costs can be significant and having a revocable trust may be wise.
It is important to avoid working with an attorney that suggests that having a revocable trust is needed in 100% of the cases or building up the benefits of a revocable trust such that you have to pay $5,000 extra merely for this document. You especially want to avoid these firms that have boilerplate revocable trusts that are more "promoters" than practicing attorneys. Nevertheless, the cost of a revocable trust does not generally add significantly to the price of your overall estate plan package, and in some cases it may be wise to have this drafted currently even though the benefits may not be readily apparent (the "no harm, no foul" theory).
Myth #5: I Don’t Need a Long-Term Trust Because My Heirs Can Handle the Assets
Without going into all of the intricacies of an irrevocable trust, an irrevocable trust is a legal arrangement where someone is appointed (the "trustee") to legally hold, manage, and distribute the assets for the benefit of another (the "beneficiary"). The decision in estate planning for many -- especially for those with larger estates -- is whether, at the passing of the surviving spouse, to leave assets outright to children or in trust for their benefit.
Often times, the thought is to just leave assets outright to heirs because they are mature and can handle the assets. This may indeed be the right choice in many cases, and it has the benefit of simplicity. However, the benefits of leaving assets in trust for heirs should not be too readily discounted. Some potential benefits of leaving assets in trust for heirs include the following: general creditor protection, more likely ensure assets are left to future bloodline in the case of divorce or a premature death by a child, protect heirs from future wrong decisions on how to spend the money, protect heirs from either current or future substance abuse issues, encourage or discourage certain kinds of behavior (e.g., grant the child an extra $50,000 if they received a diploma from Indiana University), and estate tax benefits (more rare except for larger estates these days), among others.
Also, you need to consider the impact if a child passed away prematurely. While you may feel strongly that the child can "handle" having the assets pass outright to him- or herself, you may feel differently if the assets passed to a grandchild (for example, in the case of a premature death of that grandchild's parent).
So, it is important to discuss with your attorney your particular situation and whether a trust would be appropriate for your situation. (Similarly, there may be some cases where a trust is needed for the surviving spouse.)
Myth #6: Naming an Individual as Trustee is Always the Prudent Thing To Do
If you do indeed create a trust, whether it is a testamentary trust that springs up through your will or your revocable trust or whether it is an inter vivos trust, choosing whom to name as trustee is an important decision. It is true that if you have a trusted family member or close confidant, then such individual may be appropriately named as individual trustee and provide a cost-effective way of administering the trust. They can always hire out professional help, when needed, and look for reasonable fees with appropriate expertise. However, in some cases, you may want to look to find professional trustees to serve in this critical role.
In some cases, some individuals should not be named due to various income and estate tax laws. In other cases, there may be family or relationship issues that would suggest naming a family member would not be appropriate. For example, if an aunt was named as trustee and she had to refuse a requested distribution to her nephew, how would sharing a meal at Thanksgiving feel for both individuals? And, in some cases, we have seen that certain individuals should never have been named as trustee due to incompetence or trust factors, or both.
Often, this means finding a corporate trustee to serve in that role. In some cases, the fees can be high, but whether the fees are appropriates depends on the value and complexity of the situation. It always makes sense to shop around for the right corporate trustee to find the best value for the given solution. Moreover, there is a growing trend to avoid the big corporate institutions and look for a directed trustee that can serve in that role for a smaller fee. This directed trustee can often be found in trust boutique firms that are focused on serving as directed trustee, and they often partner up with either individuals or Registered Investment Advisory firms to manage the assets.
Myth #7: You Should Be More Concerned About Estate Taxes Than Other Taxes
Estate taxes have historically received more attention than income tax planning when creating one's estate plan. There was a reason for this - the estate tax laws use to apply to a far larger segment of the population. With the changes to estate tax laws over the past 20 years, less and less estates are subject to estate taxes. As a result, there has been a greater realization that income taxes -- with rates reaching as high as 40% or more -- can cause more shrinkage of one's estate. The various rules of income taxes do not make it easy for the novice, including ever changing rules related to the distribution rules related to Inherited IRAs, the difference in tax structures of trusts versus individuals, the step-up in basis rules (and the threat of legislation that would impact this), the different tax treatment of Traditional IRAs v. Roth IRAs, etc.
So, it is critical to work with a specialist that understands your estate planning goals, financial situation, your family structure, and the substance areas of estate planning, income tax planning, and financial planning. Working with a combination of a specialized estate planning attorney and/or a multi-disciplined financial planner with a deep understanding of income taxes may be appropriate for your situation if you have income tax concerns.
Myth #8: You Don’t Need to Share Your Plan With Others
While you don't necessarily have to share all of your estate planning documents with everyone in your family, there should be at least one or a few close family members that know the location of your will and other key estate planning documents (revocable trust, powers of attorney, living will). To make things more efficient for your personal representative or executor, you should have a relatively recent listing of the general details of your assets and debts (e.g., values, source, contact information). You want to make sure the most recent will is probated, or you may want to make sure you receive the type of health care you articulated in your living will, for example.
There may also be a need to share the reasons behind some of your decisions on your estate plan. In many cases, the decedent may not need to share such details because the estate planning is more basic and there aren't any major issues that would cause relationships to be strained. In other cases, there may be good reason to share the reasons why certain assets went to someone or why assets were held in trust, for example. You can share this information during your life time (ideally); however, if this would cause too much strain during your lifetime, then I can't argue with the approach of laying it out in a well-thought out, clearly articulate letter that is to be found after your death.
Myth #9: Your Heirs Will Get Your Estate at Its Full Asset Value
Debts, administrative costs, professional fees, income taxes, estate taxes, and probate costs can reduce the value of many estates. In some cases, probating and administering the estate can take more than a year, and attorney’s fees, appraiser’s fees and court costs may eat up as much as five percent of a beneficiary’s accumulated assets. For what do these fees pay? In many cases, routine clerical work. Few estates require more than that. Heirs of small, five-figure estates may claim property through affidavit, but this convenience doesn't apply to larger estates.2
Myth #10: Your Estate Plan Needs To Be Updated Every 3 To 5 Years
Having your estate plan updated every three to five years may either be too soon or not soon enough. Rather, you should make changes to your estate plan - or, at least consult with a specialist -- based on changes in your individual situation (e.g., any major life event) or changes in estate planning and tax laws. Remember, changing your estate plan is not solely updating your will.
These events could include (but are not limited to):
- New baby or adoption
- Purchase of significant assets (homes, boats, collectibles, automobiles)
- Death of an immediate family member
- Death or inability of a key designee (e.g., trustee, personal representative, attorney-in-fact, guardian) to serve in that role
- Change in tax laws relating to IRA distribution rules
- Change in estate tax exemption amount
- Rollover of assets to an IRA or establishing a new retirement plan
As you work with estate planning professional to prepare your estate plan, be open to ideas that may differ with what others have said or from what you have read online. If the estate plan that is being crafted seems too boilerplate and does not tie to your individual situation, then you may want to ask more questions or consult with other professionals that are more well versed in estate planning and overall financial planning.