5 Myths of Estate Planning

Myth 1: I know probate is bad, but I’ve got a will so I’m covered.

Probate is the legal procedure that assets of a deceased person goes through before being distributed to their family and other heirs. Probate costs a lot of money, takes a long time, and is a huge headache of red tape and bureaucracy. Naturally, a lot of people try to avoid probate by making out a will saying where they want their assets to go after they pass.

However, having a will does not by itself allow your assets avoid probate. This is probably one of the biggest myths in estate planning. A will can be used to tell the court who should receive your assets, who you want to be the guardian of your minor child, and who should administer your estate – but it does not take your estate out of probate. This can only be done with a valid and fully funded trust or nonprobate transfers.

Myth #2: I don’t need to pay for a trust, I can just use joint ownership and TOD’s to avoid probate.

Lots of people try to be frugal and avoid paying the few extra hundred dollars for a trust by using a combination of joint ownership and Transfer On Death (TOD) designations on bank accounts and car titles. If used properly, they can reduce the size of your probate estate – but they have significant problems. This approach requires everyone to be alive and have capacity to make decisions or a power of attorney to make decisions for them.

A TOD designation is only valid if the person receiving it is alive – otherwise it has to go through probate. Simultaneous death or close in time death can frustrate your probate avoidance tactics. Moreover, if you acquire assets after you lose capacity, then those assets cannot be given a TOD designation if you lack capacity – you would have to have an agent under a power of attorney realize what is going on and take care of that for you. This also supposes that your TOD beneficiary will have capacity to receive and manage those assets, because otherwise a conservator will need to be appointed for them.

Joint ownership is sometimes suggested as a viable alternative to avoid probate. Only assets where there is no living owner go through probate, so by sticking your child’s name on your bank account and house as co-owner, the bank account funds avoid going through probate. The problem with this is that joint ownership of your assets limits your rights, and gives rights to unintentional parties. Your son now can withdraw and use all of the money in that account. If you put your son’s name on your house, your half still goes through probate. Your son’s ex-wife may have a claim to your house in any divorce, as well – something you definitely don’t want!

If you want to be sure your assets will go where you want them to, the only safe option is to have a trust.

Myth #3: I should put every asset in my trust.

There are significant tax consequences for what you put in your trust. Is it better to pay taxes out of the trust? Pass all income on to your beneficiaries? Have your spouse or child inherit your IRA, or have it pay into the trust? Have your house in the trust now, or have to transfer automatically after your death? The answer depends upon your family and financial situation. Don’t just throw everything in your trust, consult with an attorney and financial planner on what should and should not go in.

Myth #4: I just need a simple will/trust.

Your estate planning needs are a lot more complicated than you think. Are you single, married, widowed, separated, divorced? Do you have no children? Minor children? Adult children? A business? A house? Out of state property? A special needs beneficiary? A beneficiary with addiction problems?

Every family has something unique about them which requires their estate planning documents tailored to them. If there wasn’t, then everyone would use the State of Missouri’s default rules for estate planning and we would be out of business. Your situation is unique, you just aren’t thinking about it since you are too close to the situation. A “simple” one size fits all estate plan is exactly the wrong size for everyone.

Myth #5 – I’ve signed the forms, I’m done!

Don’t get too excited after signing all of your estate planning documents. There’s still lots to do. If you have a trust, you need to make sure the specific assets you decided on actually go into your trust. A trust does you no good if you forget to put your financial accounts or house into the trust. In the years following, you need to make sure your assets get put into and stay in the trust. If your family grows, shrinks, or ages, you need to update the people you nominate in case of incapacity and your beneficiaries. Further, estate planning laws change over time, so you need to check in with your attorney every couple of years to make sure everything is still up to date. It is an ongoing process.