Truth v. Myth

It seems as if everyone has an opinion about estate planning:

  • My brother-in-law did this;
  • My co-worker’s friend did that;
  • My barber said I should have these documents;
  • And so on and so on

It is our goal to do everything we can so your estate plan will do what you want it to do when you want it done. Here are some of the more common myths of estate planning.

MYTH Number 1:  Living Trusts avoid all costs after death

Truth:  This is a common misconception that is brought about by the belief that the estate plan is a “Magic Book”.  Once completed, everything will magically be accomplished after your death.   In reality, there are always administrative tasks that must take place after your disability or death.  We have tried to minimalize the administration by how our plans are constructed, but there is always administration.  It is best to rely on our experience in doing many trust administrations and avoid unnecessary delays or costly oversights.

MYTH Number 2:  The only way to avoid probate is to use a Living Trust.

Truth:  There are many methods to avoid probate. Each option has good parts and potentially dangerous parts. Only after discussion with an experienced trust attorney can an intelligent decision be made as to which is best for you.  Some of the other common ways to avoid probate include:

  • Pay on Death or Transfer on Death

These can cause probate if the beneficiary is incapacitated, deceased, on governmental assistance, a minor, or cause the asset to go to a divorcing spouse. You are not able to protect your loved ones.  You may unintentionally disinherit a loved one.

  • Beneficiary designations on life insurance or retirement assets

These can cause probate if the beneficiary is incapacitated or dead or on governmental assistance or is a minor or cause the asset to go to a divorcing spouse. You are not able to protect your loved ones. There may be disadvantageous tax consequences. You may unintentionally disinherit a loved one.

  • Joint Tenancy with rights of survivorship

These can cause probate if the beneficiary is incapacitated or dead or on governmental assistance or is a minor or cause the asset to go to a divorcing spouse. You are not able to protect your loved ones. There may be disadvantageous tax consequences. You may unintentionally disinherit a loved one.

MYTH Number 3:  If I love my children, I should give them their inheritance and not control it from my grave.

Truth:  Remember the average inheritance is spent in 18 months.  Do you want to allow your well minded children to fall into this trap?  It may not even be them, but their desire to make life easier for their spouse or their children.  Or you can allow your children to have access to their money yet protect it for them from a divorcing or overassertive spouse, children, creditors, catastrophic medical expenses or other unforeseen challenges.  Most clients have this desire to protect their children, but do not know how to do that.  Many estate planning attorneys for whatever reason are not aware of these techniques.

This is the advantage of working with an attorney that limits his or her practice to estate planning, continually enhances their practice with continuing education and belongs to a national and network of estate planning attorneys to use as resources.

MYTH Number 4: I can avoid probate by placing my property in Joint Tenancy with one of my Children.

Truth:  The best you can hope for is that you die before your Child does and that your Child is never sued.  A joint tenancy can cause probate if the beneficiary is incapacitated, deceased, on governmental assistance, a minor, or cause the asset to go to a divorcing spouse.  You are not able to protect your loved ones. There may be disadvantageous tax consequences. You may unintentionally disinherit a loved one.  What if you Child decides not to share with his or her siblings?  There is no legal reason to do so.  Many of our Clients say their Child will never do that.  Unfortunately, you are not here to fix it if they do.

 

MYTH Number 5: I can use the unlimited marital tax deduction to avoid having my spouse pay estate taxed.   

Truth:  Leaving property to your spouse does not avoid estate taxes, it merely postpones it.  In fact, it may make the amount of tax due higher.  A very common scenario is leaving life insurance proceeds or retirement assets directly to the surviving spouse via a beneficiary designation.

By doing this the property may be taxed in both spouses’ estates and all asset protection has been lost.  Also, if the surviving spouse remarries, the property could end up in a different family altogether.  This can cause an unintended disinheritance.  It may be lost if the surviving spouse has to enter a nursing home or gets sued.  There are methods to allow the surviving spouse to enjoy the property or use the property if needed without giving it outright to them.

The loss of the property can be disastrous.  An experienced counseling oriented estate planning attorney can help avoid this.

These results can occur when the focus of the estate plan is in “avoiding taxes” and not in protecting the assets.  More attention is paid to what the lawyer fee is or what the estate tax liability may be instead of how to maximize the protection for the surviving spouse and the loved ones.

MYTH Number 6:  Naming my Revocable Living Trust as a beneficiary of my Retirement Account(s) will force an immediate payout of my account causing a loss of the tax deferral and stretch out.

Truth:  A properly written Revocable Living Trust will prevent this from occurring by allowing the stretch out to continue for the beneficiaries.   The tax deferral will be there, if the beneficiaries do not withdraw the money voluntarily.

Asset protection is another advantage of naming the Trust as the retirement account beneficiary when the Revocable Living Trust is properly structured.  Retirement accounts have some asset protection while the owner is alive but, in many instances that is lost when the owner dies.  The protection can remain when the Revocable Living Trust is the beneficiary.

When a properly written Revocable Living Trust is named as the beneficiary of retirement account, it is less likely that the beneficiaries will withdraw all the assets and pay the taxes upfront.

MYTH Number 7:  Life Insurance is Tax Free

Truth:  Life insurance proceeds generally are not subject to income tax or capital gains tax.  However, life insurance is potentially subject to estate taxes appropriate for whoever owns it.  If life insurance is owned by a natural person, the amount of the death benefit is added to all the other assets the person owns at their death and if over the federal exclusion amount, estate taxes will be owed.

There are several techniques used by experienced estate planning attorneys to avoid this from occurring.  One is a special trust.  This will allow access to the proceeds without subjecting them to being taxed in anyone’s estate.

Review

These are some of the myths that we are asked about on a regular basis.

Hamilton and Associates maintains this web site as an educational service to the general public.  It is not to be relied upon by anyone as legal advice to any reader.  Hamilton and Associates is a law firm licensed to practice law in the State of Michigan.  Legal representation is done by an agreement entered into by both the Client and Hamilton and Associates.  Representation cannot occur via the internet or this web site.  Please call Hamilton and Associates to schedule an appointment if you would like to enter into a relationship with our law firm.