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Great Myths of Estate Planning

The number of myths surrounding estate planning never ceases to amaze us. We have listed below what we feel are the most common myths. While there is no singular, encompassing solution in estate planning that applies to everybody, there is one principle that does apply across the board: EVERYBODY SHOULD HAVE THEIR ESTATE PLAN REVIEWED BY A QUALIFIED ESTATE PLANNING ATTORNEY.

MYTH: Because I have not created a Will or a family trust, I do not have an estate plan.

FACT: EVERYBODY HAS AN ESTATE PLAN. If you have not created your own estate plan, the State of California has created one for you. It is called intestacy, and it provides who will receive your property upon your death, without regard to your wishes or tax planning. This set of laws is completely arbitrary in the way it distributes your property. Therefore, the real question is not whether you have an estate plan, but whether you are satisfied with the one you have.

MYTH: I am not worth more than $500,000; therefore, there will be no probate when I die.

FACT: Probate generally applies to anyone worth over $150,000 when they die.

MYTH: My assets are in joint tenancy with my spouse; therefore, there will be no probate when I die.

FACT: If your spouse survives you, there will be no probate. However, when your spouse dies (and is the only owner of the assets) there will be probate since the assets will no longer be held in joint tenancy. Joint tenancy is only a band-aid approach to avoiding probate.

MYTH: There are no benefits to owning my assets as community property with my spouse, as opposed to joint tenancy.

FACT: If you sell an asset (which has appreciated in value and was held in joint tenancy) after your spouse dies, there can be an income tax on the sale of the asset. If the property were held in community property instead, there may be no income tax on the sale of the asset.

MYTH:I have a will; therefore, there will be no probate when I die.

FACT: Wills do not avoid probate; living trusts can avoid probate.

MYTH:I have a living trust; therefore, there will be no probate when I die.

FACT: Living trusts avoid probate only with respect to assets that are held in the trust name at the time you die.

MYTH: My assets are in joint tenancy with my children; therefore, there will be no probate when I die.

FACT: If your children survive you, there will be no probate. However, there are some disadvantages of owning assets in joint tenancy with your children.

  • You may be making a gift to your children (for gift tax purposes) by adding your children on the title to your assets.
  • If you place a piece of real estate in joint tenancy with your children, you may trigger a property tax reassessment (although there are exclusions for certain transfers between parents and children).
  • If you want to refinance or sell the real estate at a future date, you will not be able to do so without the consent of your children (the other owners).
  • If you place assets in joint tenancy with your children, the property may be subject to the claims of their creditors (including the IRS).
  • If a child predeceases you, his or her share will not go to his or her children (i.e., your grandchildren); rather, it will go to your surviving children (which may not be your intent).
MYTH: My living trust states that all of my assets are in the trust; therefore, there will be no probate with respect to those assets when I die.

FACT: Assets have to be individually transferred into the living trust; merely mentioning them in the trust document may not be enough to avoid a court process.

MYTH: I have a living trust; therefore, I have a completed estate plan.

FACT: Estate planning includes much more than a living trust. It includes matters such as your family’s financial security, planning to avoid or minimize estate taxes, and other matters. Estate planning is a method of planning for the creation, conservation, use, growth and distribution of your assets, both during your lifetime and at your death.

MYTH: I have a living trust; therefore, there will be no estate taxes when I die.

FACT: Estate taxes can be minimized or avoided only by doing specific tax planning. Living trusts, by themselves, do not eliminate or reduce estate taxes. Wills can also eliminate or reduce estate taxes; the difference is Wills do not avoid probate.

MYTH: When I die, my family will not have to see an attorney because there will be nothing to do with my living trust; all they have to do is distribute my assets.

FACT: Trust administration after a person dies can be one of the most complicated areas of estate planning. It requires an intimate knowledge of trust law and income, estate and property taxes. Improper administration can result in taxes being owed that would not have had to be paid if the trust had been properly administered.

MYTH: If my spouse and I have an A-B or QTIP trust, the survivor of us does not have to open separate bank accounts for each trust after one of us dies.

FACT: When one of you dies, the trust must be divided into multiple trusts, and some of those trusts have to get federal taxpayer-identification numbers (similar to social security numbers) and file tax returns, even though no income tax is owed. In fact, if you have a QTIP trust, you may end up with four separate trusts when your spouse dies (while you are still living). Your failure to properly divide the trusts can wipe out all the tax planning you did for your family.

MYTH: Even if my spouse dies and I divide the trust into several trusts, it is not necessary to divide our assets between the trusts.

FACT: You must allocate the assets among the trusts. If you do not do this, the assets may be subject to death tax when you die, even though there would not have been a tax if the assets were properly allocated.

MYTH: Since the assets my spouse and I owned when my spouse died were owned by both of us, I do not have to tell our children what the trust says or how much is in each trust after my spouse dies.

FACT: Depending on how the trust was set up, you may not only be required to give your children a copy of the trust after your spouse dies, but you may be required to give your children annual accountings of what is in each trust, what was earned that year, how much was spent, and what is left.

MYTH: I am married; therefore, my spouse and I can automatically leave to our children the maximum amount the government allows a married couple to pass estate tax-free.

FACT: The amount you can leave estate tax-free to your children depends on the estate tax laws in effect when you die and how your living trust was established. Maximizing the amount that can pass estate tax-free to your children does not happen automatically; it requires establishing either an A-B trust or a QTIP trust.

MYTH: If my spouse and I create either an A-B or QTIP estate plan, there will be no estate tax when one of us dies.

FACT: If either you or your spouse is not a United States citizen, there will be an estate tax on the death of the first of you to die (if the survivor of you is not a U.S. citizen), unless you establish a special trust called a Qualified Domestic Trust.

MYTH: I have enough life insurance for all my estate planning purposes.

FACT: Often, additional life insurance is needed for support of surviving family members, payment of estate taxes, and replacement of retirement monies lost to various taxes.

MYTH: My family will receive my life insurance tax-free.

FACT: Life insurance is not tax-free unless it is owned by an irrevocable life insurance trust or by your children. If your spouse will receive the life insurance proceeds when you die, the remaining proceeds will be subject to a death tax when your spouse dies.

MYTH: My IRAs will go to my children tax-free at my death.

FACT: IRAs are not only subject to an estate tax, but they are also subject to income taxes.

MYTH: There is no way to defer the income taxes for my children on distributions from my IRAs.

FACT: Depending on how the beneficiary designations for your IRA were set up, your children may be able to withdraw the monies from your IRAs over their life expectancies (thereby deferring the income taxes), rather than having to immediately withdraw all the monies from the IRA and pay immediate income taxes. The IRA can be protected for your children by establishing a Designated Beneficiary Trust.

MYTH: When our children inherit from us, those assets will not be subject to their creditors or attack by spouses, nor will those assets be subject to estate taxes when our children die.

FACT: Assets inherited by your children can be attacked by their creditors. If community property monies are commingled with inherited assets, that commingling can convert some or all of the inherited assets into community property and may be subject to attack by spouses. Assets inherited by your children will be part of their estate when they die and will be subject to estate taxes when those assets are left to their children.

MYTH: There is no way to protect my children from creditors and spouses with respect to assets they inherit from me.

FACT: You can establish a Heritage Trust for each of your children, which will hold their inheritance from you. A child can be his or her own trustee of the Heritage Trust, making all decisions with respect to the trust, with one exception. Distributions to a child can be made only with the consent of a Distribution Trustee (selected by you) who has to approve all distributions. If the Distribution Trustee does not approve a distribution, the child can remove the Distribution Trustee and replace him or her with a friend who will act in that capacity.

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