Seven Estate Planning Myths

There’s no good excuse for not having a good, properly structured estate plan.  The following points are common misunderstandings of estate planning.

1. I heard that my family will get everything anyway if I die without a will.

 They may or they may not. If you die without an estate plan the state has a plan for you.

 The state has a pre-written law that says who will get all of your property upon your death. If you are married, your spouse won’t necessarily get everything you own.

If you have children and you and your spouse die together or your spouse pre-deceased you then the state courts will decide who gets your kids.

You can prevent all of this from happening with the use of a proper estate plan.

2. I made a will and left everything to my spouse so I won’t owe any estate taxes.

Many people think that by leaving everything they own to their spouse they will avoid estate taxes. This is partially true. A person can die and leave unlimited amounts of property to a surviving spouse and escape estate taxes.

However, if the property is of a high enough value and the spouse doesn’t manage to use it all before he or she dies, there may be estate taxes due upon the surviving spouse’s death.

The potential estate taxes due upon the death of a surviving spouse may be reduced or even eliminated with the use of proper estate planning.

3. I own my property jointly with my spouse (or other person) so they will get it when I die without a will and give it to who I want them to when they die and no one will owe any taxes.

Only property that is titled jointly and includes the words “with right of survivorship” in the title will pass to the joint tenant automatically. The surviving spouse or other joint tenant can pass this property to whomever they wish during life or at death. This removes any control that you may have to determine the ultimate disposition of your property.

 If the property has a high value, or combined with the other property of the person who dies has a high value, a potential federal or state estate tax may be owed if a proper estate planning device is not used. Furthermore there is a potential for double estate taxation of the property if the joint owner is not a spouse. In other words there may be a tax due upon the death of the first joint owner and the property may be subject to tax again when the second owner dies.

 A proper estate plan can maximize an owner’s control over the disposition and minimize the estate taxes that may be paid.

 4. I have a large amount of life insurance and I heard that this will not be subject to estate taxes when I die.

 Many people equate life insurance avoidance of probate with the avoidance of estate taxes. This is false. Probate is the court supervised process to re-title assets in the name of your heirs. If you name a specific beneficiary of your life insurance death benefit this person will receive the money and avoid this process.

 However, both the federal and state estate tax systems take the value of life insurance into account for calculating estate taxes. By doing the proper planning an individual may remove the entire value of a life insurance policy from his or her estate for estate tax purposes.

5. My kids know what I want to be done with my property.

You have lived a long life and have probably expressed many different desires with your family. While you may hope that they do what you wish to be done, there is no guarantee. I know of many examples of siblings who fight over what seem like minor items of property, even going to such lengths as changing the locks on a house to keep each other out.

In order to avoid any issues between surviving family members put your wishes in writing by establishing a proper estate plan.

6. I wrote up a will myself (using a form, software, legal web site, etc.) so that should be enough.

One of the biggest mistakes people make is to create a will for themselves and believe it is valid. This results in “intestacy” where the state will determine who gets your property and your children.

There are a number of formalities that must occur with the drafting of a will to ensure that it is valid. The only way to ensure that the will is drafted and executed properly you should consult a qualified estate planning attorney.

 7. I have less than $1.5 million dollars in insurance and property so I won’t owe any estate taxes.

 This falls into the category of “maybe true”.  As of today (Oct 5, 2010), there is no federal estate tax, although in Washington State we do have an estate tax.  The Washington State estate tax structure exempts an estate under $2 million dollars, so this example estate would pass free of estate tax.

Unfortunately, however, this situation may not exist for long.  Under current law, the federal estate tax will be automatically reinstated on January 1, 2011, at 2001 levels.  That means that we will return to a federal estate tax that has only a $1 million dollar exemption.

Congress has indicated that it will act to address this situation prior to year end, but we remain less than optimistic.  The legislative structure has existed for the last decade and Congress has failed to muster the votes to rectify the situation.

We recommend that you continue to plan for your estate with the statutory structure that currently exists.  That is, plan for a return to the $1 million exemption.  It may result in “over-planning”, should Congress actually change the estate tax laws prior to year end, but if Congress continues to fail to act you may end up paying significant estate taxes that you could have avoided.

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