5 COMMON MISCONCEPTIONS ABOUT ESTATE PLANNING

Most of us know someone who has been affected by the death of a loved one who didn’t leave a plan for his or her wishes. These situations are very difficult and can inflict real emotional and financial damage on families.

Of course, people don’t set out to harm their loved ones by failing to plan. Instead, they may believe one of the many fallacies about estate planning that cause otherwise well-meaning people to leave their assets, beneficiaries, and legacy to chance.

Here are five common misconceptions about estate planning and ways you can avoid some of the pitfalls associated with them.

MISCONCEPTION #1: ONLY OLDER, WEALTHIER PEOPLE NEED AN ESTATE PLAN AND POWER OF ATTORNEY

For every story about a wealthy individual who failed to plan, there are ten stories about “ordinary” people who did the same. We tend to believe that only very wealthy people or people who are older should be concerned about what happens to their assets upon their passing, but nothing could be further from the truth.

Consider the woman in her thirties who has three children, two of whom are with her common-law husband. Upon his accidental death, she is not eligible to receive any life insurance benefits because she was never designated as his beneficiary. She must now raise her children as a single mother without a financial cushion to help support them or provide a secure future.

Everyone, regardless of income or family status, benefits from a well-crafted estate plan. In fact, it could be argued that a good plan is even more important for those who are not independently wealthy to help preserve their limited assets for the benefit of their spouse and children.

MISCONCEPTION #2: IF YOU DIE WITHOUT AN ESTATE PLAN, YOUR SPOUSE AND CHILDREN GET ALL OF YOUR ASSETS ANYWAY

Some people assume that if you die without a will or an estate plan (known as dying “intestate”), your surviving spouse and/or children will have the legal authority to determine what happens to your assets. This incorrect assumption can be very costly.

When a person dies without a will, state law kicks in to settle the estate. The surviving spouse and children are usually the first in line for any inheritance, but the situation is complicated by the fact that every state handles this differently. There may also be claims from other family members (siblings or children by marriage) or companies with whom the deceased did business. This can quickly become overwhelming.

Without a plan, you leave your assets in the hands of state authorities whose decisions will have a profound impact on your beneficiaries.

MISCONCEPTION #3: TRUSTS AVOID FEDERAL AND STATE TAXES AND DEBTS

There are several different types of trusts that can be incorporated into a comprehensive estate plan. A trust can help your estate avoid lengthy and costly probate proceedings and can make the transfer of your assets to beneficiaries go smoothly. However, a trust will not avoid taxes or debt claims against your estate.

During your lifetime, the assets you place into a revocable trust are generally included on your tax return. Upon your passing, the trust itself becomes a taxable entity. Any distributions to beneficiaries are considered taxable to them, and any trust income that is not distributed is taxable for the trust. The trust may also be responsible for legitimate claims brought by those who are owed debts by the estate.

MISCONCEPTION #4: YOU DON’T NEED TO UPDATE YOUR ESTATE PLAN IF YOU MOVE TO ANOTHER STATE

As with all aspects of financial and retirement planning, timely updates to your estate plan are key. Life circumstances can change rapidly, and an obsolete plan may be worse than no plan at all.

It’s hard to overestimate the importance of state law when it comes to settling the matters of an estate. States differ on everything from caps to avoid probate to assets that must be included in the estate. These differences are not insignificant. In Alabama, an estate under $3,000 can avoid probate, while that number is $150,000 in California.

Not all states have estate taxes, and for those that do, the exemption amounts vary from $675,000 in New Jersey to $5.4 million in Delaware. Clearly, your state of residence can significantly impact the plan for your estate. It’s important to revisit your plan should your primary residence or that of your beneficiaries change.

MISCONCEPTION #5: YOU CAN USE COPIES OF YOUR ESTATE PLAN IF YOU DON’T HAVE ORIGINALS

The requirements for the use of original documents as opposed to copies or facsimiles vary by state. Some states will not accept a copy of a will without an investigation and determined that there is a legitimate reason the original is not available, such as in a house fire or natural disaster. You can imagine the time and potential expense of such an investigation. Similarly, some trust documents are not legally binding if they are not originals.

There are many reasons people avoid putting together an estate plan, but as you can see, a good plan is necessary to protect the assets you’ve worked so hard to accumulate and to ensure a smoother transition of your estate to your beneficiaries.

For help creating your estate plan or updating a plan you already have in place, request a call with an advisor at RAA.

Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by RAA following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, RAA accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security.