Estate planning can be extremely confusing for a lot of people. In last week’s blog post, I addressed 5 common estate planning myths that often cost individuals and their loved ones time and money and add extra stress to their lives. Here are 5 more common estate planning myths:
- If I have a will, I don’t have to worry about probate. Although a will gives the court guidance on your wishes, having a will doesn’t make it so that you can avoid probate. Probate can be a long and expensive process in which one or more courts decide who will inherit your assets, so wanting to avoid it if possible is certainly understandable. It is important to note, also, that if you have real estate in multiple states, each of your properties may have to go through probate in its respective state.
- To avoid probate, you have to draft a trust. If you plan to draft a trust, this is definitely one area for which you may want to hire an attorney. Although avoiding probate is one of the most common reasons for people to want to draft a trust, there may be other methods that are easier and/or less expensive that will still meet your needs.
Here are other situations where probate can be avoided:
- Jointly owned property, which may be owned with your spouse, etc. typically does not go through probate and passes to the other owner(s) (unless it’s a “tenancy in common”).
- Life insurance, annuities, and anything in a retirement plan such as a 401(k) or IRA avoids probate if it has at least one living beneficiary listed.
- Some states let you add beneficiaries to your bank accounts with a “payable on death” registration and avoid probate that way. You may also be able to add them to brokerage accounts, real estate, and vehicles with “transfer on death” registrations. Here you can see what is available in your individual state.
- Finally, different states have methods that can speed up or skip probate for “small estates,” which in some states are still relatively large.
- Trusts avoid estate tax. Most trusts, in and of themselves, do not help you avoid estate taxes. If you are worried about having a taxable estate, it is best to work with a qualified legal advisor who can help you put together a strategy (that may use certain trusts) to reduce or even eliminate estate tax liability.
- I don’t have enough money to worry about the estate tax.Even if this is currently the case for you, on the current track, estates over $5 million are going to be subject to a 40% estate tax after 2025. Once you add up the value of your home, life insurance proceeds, and your retirement accounts, you may be closer to $5 million than you expected. Also don’t forget, many states, including Illinois, have their own estate and inheritance taxes, often with much lower exemptions.
- I’ll have to pay a gift tax if I give someone over $15k per year. With the exceptions of money paid directly to a medical or educational institution or charity, nearly anything over $15k that you give someone aside from your spouse in a single year simply reduces your lifetime gift and estate tax exclusion amount, currently set at $11,580,000. (You can front-load 5 years of gift tax exemptions to a 529 plan). You don’t start paying anything until after using up that exclusion amount. However, you would still need to file a gift tax return and keep track of the amount you have left of your lifetime exclusion amount, so you may prefer to avoid that hassle and stay within the $15k annual exclusion.
It’s easy to see that there can be a lot of misconceptions about estate planning, and it can be very complicated, especially as it is often changing and isn’t often in focus in our day-to-day lives. Knowing the truth regarding common myths can help you avoid mistakes and needless hassle and stress.
For questions or assistance creating your estate plan, contact us at Wilson and Wilson Estate Planning and Elder Law, LLC at 708 482 7090 for our main office in LaGrange, Illinois or at 847 656 8958 for our Northbrook, Illinois office.