The importance of proper estate planning shouldn’t be overlooked, although it can sometimes be an uncomfortable subject.
While many people plan their estates diligently, with input from legal, tax, and financial professionals, others plan earnestly but make mistakes, falling prey to common misconceptions. Here’s the reality behind some common estate planning myths.
1: Your Family Knows What You Want and They'll Work It Out
An estate plan is about your wishes for your estate, but it is also a way to protect your survivors from decisions they may not want to make. If you don’t prepare an estate plan, your family could face costly legal issues and possibly even bitter disputes. Making a plan now can provide you and your loved ones with the comfort of knowing that your wishes are honored when the time comes.
This isn’t just about your property. Advance directives for your health care can eliminate unwanted medical procedures, contentious disputes and litigation, and even unwelcome public scrutiny of your personal life which can follow from disputes between family members with different ideas about your preferences. Make your wishes for your health care known in writing by following your jurisdiction’s approved process and documents.
2: You Don’t Have Enough Assets for an Estate Plan
Estate planning is about determining how what you have now (money and assets) will be distributed after your lifetime. And while it might come as a surprise to some, almost everyone has an estate. And rich or poor, at your death, your estate is the property you leave behind.
No matter how limited (or great) your means, you should have a plan for what will happen to your assets after your passing. Your estate could be just the $10 bill in your wallet and the clothes on your back, or it could include real estate, cash, an investment portfolio, collectibles, and more. Either way, anything you leave behind when you die is your estate.
Even if you’re leaving behind just the $10 in your wallet, who will inherit it? Do you have a spouse? Children? Is it theirs? Should it go to just one of them or be split between them? Is there someone else you would like to receive something of yours? If you don’t decide, you could potentially leave a legacy of legal headaches to your survivors.
3: You Can DIY Your Estate Plan
While it may be possible to create a will on your own, it can be risky to do so, and we strongly recommend against it. In one example that became a public story, Aretha Franklin left multiple handwritten wills among her personal effects.1 This reportedly left the heirs at odds over which of the wills might be valid or enforceable.
The fees for properly preparing your estate will never look smaller than they will to your intended heirs who are up to their necks in litigation expense with someone else who claims a right to some or all of your property.
Even those with moderate means shouldn’t try to do it themselves. Ken once worked with someone who wanted to be sure his children got his house at his death. He bought a form, filled it in, and filed it with the proper authorities. But he didn’t realize he’d actually given his house to his children that day—he no longer owned his house. (And created an obligation to file a gift tax return, but that’s another story.)
There are lots of things you can safely DIY, but your estate plan isn’t one of them.
4: All You Need Is a Will
While your will may state who your beneficiaries are, those beneficiaries may still have to seek court decrees to have assets transferred from your name to theirs. In such a case, those assets won’t lawfully belong to them until the court procedure (known as probate) concludes. Estate planning can include methods to help your heirs avoid probate, like trusts and listing beneficiaries on each account you own.
While your individual circumstances will dictate how you should prepare your estate, It’s not uncommon for an estate plan to include some or all of these documents:
- Power of attorney
- Beneficiary designations on accounts, pensions, and other property.
- Pre- or post-nuptial agreement
- Life insurance
- Living will
- Health care power of attorney
5: You Did Your Estate Plan Once, So It's Done
Any major life event should prompt you to review your estate planning documents. So should a significant life event that affects one of your beneficiaries, executors, or trustees.
Here are some examples of milestones that might require a change to an estate plan:
- Birth or adoption
- Purchase of significant assets
- Death of an immediate family member
6: You Don’t Need to Share Your Plan With Others
Before your passing, you might not want to explicitly reveal who will get what. But your heirs should understand the purpose and intentions at the heart of your estate planning. If, for example, you want to leave more of your wealth to one child than another, consider writing a letter explaining your reasoning, to be read after your death.
7: Everyone Has Your Estate’s Best Interest at Heart
We want to see the best in our closest friends and family, but it’s important to be realistic regarding your assets. Caregivers and relatives can exploit a loved one to revise estate planning documents for their own financial benefit. When naming beneficiaries or executors in your estate plan, think carefully about who you trust to execute your wishes. In some cases, you may find it beneficial to work with a third-party professional to help handle and distribute your possessions after your passing instead.
8: Probate Will Be Long and Drawn Out
Of course, some estates are complicated and spend a long time in probate. This usually reduces the value that transfers to heirs. In some cases, probate can take more than a year, and attorney’s fees, appraiser’s fees, and court costs may eat up a substantial part of a beneficiary’s accumulated assets.
Planning your estate typically reduces probate expenses. Preventing disputes, clarifying your intentions, and passing property outside of probate (such as with beneficiary designations on financial accounts) can significantly simplify the process of getting your property where you want it to go.
Smaller estates can usually go through a streamlined probate process. The size of eligible estates and procedures vary from one jurisdiction to another.
Your estate plans should clearly express your intentions, and you should update them as life events demand. The care you take in preparing your estate plan is like an ounce of prevention, reducing or eliminating costly difficulties for your beneficiaries when you’re no longer around to speak for yourself.
This content is developed from sources believed to be providing accurate information and is provided at least in part by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Original content of Practical Financial Planning, Inc. only is copyright © 2021 by Practical Financial Planning, Inc.