5 Estate Planning Myths You Should Know

Although the idea of estate planning is straightforward – the process of planning for your future and your loved ones’ future after you’re gone – many people aren’t quite clear on what the planning actually entails. The confusion and mystery leads to a number of stubborn myths about the process. Discover five of the biggest myths below.

Myth 1: My estate isn’t big enough to need any planning.

Most of us don’t spend a lot of time thinking about our estate plans. In part, that’s the result of our very understandable reluctance to confront the fact that we won’t live forever, but there’s also a widespread belief that only the very rich need estate plans or checklists. The rest of us may not be sure that we have “estates” to begin with, and, if we do, we don’t see the need for a complicated plan that will manage things after we’re gone.

The reality, however, is that you need an estate plan no matter how much (or how little) property you have, and that the plan itself can be surprisingly simple and straightforward.

Without a plan, you lose the ability to determine who gets your property and assets (including personal items like family heirlooms) upon your death. You get no say in who will manage the distribution of that property. If you have specific items you’d like to leave to specific people, those items may go elsewhere. In short, an estate plan ensures that your wishes will be honored when you’re gone. You don’t have to be a millionaire for an estate plan to matter.

Myth 2: An estate plan is all about property and belongings.

An estate plan isn’t just about property. It also deals with matters that are intimately personal.

If you have young children, an estate plan allows you to select the person who will be responsible for their care following your death. The importance of that kind of planning doesn’t vary with the size of the estate.

Part of an estate plan also includes directives regarding your own health and well-being.

First, there’s what’s often called a “living will,” a document that lets you memorialize your preferences as to the medical treatment you wish to receive if you’re ever unable to express those preferences yourself.

Second, there’s the chance to appoint a person to speak for you about that treatment when you can’t speak for yourself. Those documents are part of today’s estate planning basics, and they’re at least as important as the documents that speak to the disposition of any property.

Myth 3: Probate is an estate planning nightmare to be avoided at all costs.

This is a myth that’s surprisingly hard to kill, but probate (the legal process of settling an estate) does not generally deserve its bad reputation.

That reputation is partly the product of history, as probate was generally more cumbersome and much more expensive in the past, especially in jurisdictions that based fees upon the size of the estate. These days, as any estate planning attorney can attest, the process is relatively streamlined and the costs can be kept under control.

To be sure, probate CAN BE a nightmare. If the heirs of an estate are at war with each other, all bets are off, but that’s really no different than any situation in which relatives are seriously at odds. Even then, probate is unavoidable and, in a sense, welcome, as it’s the only way to give effect to the wishes of a person who makes a will.

Without a will to put through probate, property is disposed of according to the laws of the state in which the deceased resided. The bottom line, though, is that your property may pass in a way that contradicts your own wishes, the wishes your will would have expressed, and you’ll still need to have the court’s blessing when property is distributed. In the end, the advantages of a will far outweigh the possible disadvantages of the probate process.

Myth 4: I can disinherit anyone I choose during the estate planning process.

We’ve all seen the movies in which the family patriarch threatens to disinherit the reckless son or the unfaithful wife. In reality, the script is different.

The fact is that you can cut a lot of people out of your will, but you can’t always disinherit everyone with your estate plan. In many jurisdictions, it’s especially hard to disinherit a spouse, who has the right to waive the will and receive some share of the estate, a share that’s generally well more than some nominal amount.

Even if you do have the power to disinherit someone, the act makes courts uneasy, especially if you’re excluding someone who would otherwise be what’s known in the estate planning world as “natural object of your bounty,” or the closest family members who would most likely inherit your estate. In other words, disinheriting someone is an invitation to have the will challenged, and it’s a minefield you shouldn’t try to cross without an estate planning attorney as your guide.

Myth 5: Taxes will decimate my estate.

Although estate taxes are real and estate tax rates are quite high, topping out at 40 percent, only people with estates worth millions of dollars are affected by federal estate taxes. Many states don’t have estate taxes at all.

At the federal level, an estate isn’t taxed unless it is worth more than $5 million. (This is an estimate-- every year the number changes because it’s indexed to inflation.)

Keep in mind that there are a host of exemptions, such as gifts to nonprofits (known as “charitable bequests”) that don’t count toward the taxable estate. Any assets passed on to a spouse are typically excluded, and that’s often where a large part of the estate will go. What’s more, if one spouse doesn’t use the full $5+ million when he or she dies, whatever is left is added to the surviving spouse’s exempt amount. Effectively, this means a married couple has more than $10 million in that can be passed estate-tax-free.

If you believe your estate will be large enough to be subject to federal or state estate taxes, you should enlist the help of an estate planning attorney. He or she can help you decide what tax-optimized planning strategies you can use to minimize the taxes your estate will pay, thereby maximizing the amount you will have to pass on to your loved ones.