14 Misconceptions Regarding Estate Planning

Mistake #1: A Will controls the distribution of all of the deceased’s
possessions. Reality: The Will only controls the distribution of the deceased’s “probate estate”. Not included in the probate estate are jointly held property, transfer on death (T.O.D.) accounts, payable on death (P.O.D.) accounts, and property that passes based on beneficiary designations. For example, life insurance proceeds and retirement benefits pass based on beneficiary designations.

Mistake #2: If I die without a Will, the State of Minnesota gets my property. Reality: The State of Minnesota does not receive your assets unless you have no surviving heirs, but Minnesota has a formula for determining who among your relatives receive your assets. The advantage of drafting a Will is that you get to determine who receives your assets rather than following Minnesota’s formula.

Mistake #3: The face value of my life insurance policies will not be counted as part of my estate assets for calculating estate taxes because my beneficiaries – not me – receive the proceeds. Reality: If you have a $1 million dollar life insurance policy you can be considered an instant millionaire at death for estate tax purposes even if you had zero other assets. Too bad you won’t be around to celebrate your new-found wealthy status.

Mistake #4: I’m too young or too poor to worry about establishing an estate plan. Reality: If you want to control who gets whatever assets that you do have – even your favorite fishing pole – then you should have an estate plan. Without one, the State of Minnesota determines who inherits your assets and you may not like that choice.

Mistake #5: Only millionaires have estate planning issues. Reality: See the answer to Mistake #4.

Mistake #6: Estate planning is just the creation of a Will or Trust. Reality: A well designed estate plan involves much more, including a Health Care Directive and Durable Power of Attorney. It also includes management of the titling of your assets and beneficiary designations. It can also include your desires regarding organ donation, cremation and other matters. An estate plan also considers the
possibility that you may become incapacitated at some point before your death –
whether temporarily or permanently – and includes plans for handling that situation. Your estate plan should be coordinated with your financial plan. Estate planning attorneys can work with your financial advisor to coordinate your plans.

Mistake #7: Granting a Power of Attorney means that I’m giving up my rights. Reality: You can still act on your own, but the Power of Attorney also allows another person to act on your behalf.

Mistake #8: A Power of Attorney continues to be effective after I die.
Reality: A so-called “durable” Power of Attorney is effective if you are  incapacitated. However, even a Durable Power of Attorney expires at your death.

Mistake #9: The person holding Power of Attorney powers on behalf of another person can be held accountable if a bill isn’t paid. Reality: Unlike conservators, the person holding Power of Attorney powers – the “attorney-in-fact”, has no duty to act in Minnesota.

Mistake #10: Because the so-called “pour-over Will” moves any assets not already titled in the name of my Trust to my Trust after I die, I don’t need to worry about titling assets into the Trust now. Reality: The pour-over Will causes all of the deceased’s assets to be distributed in accordance with the plans spelled out in the deceased’s Trust, but the potential to avoid probate is lost. Also, because your Revocable Living Trust becomes irrevocable when you lose mental capacity, the authority of your hand-picked successor trustee to manage your assets for you is lost on any assets not titled in the name of your Trust.

Mistake #11: It is a good idea for a parent to hold assets jointly with their children. Reality: In most situations this is a bad idea. Naming a child as the joint tenant means that the child inherits the entire jointly held asset regardless of any stated desire in your Will that all children inherit equally. Moreover, if the child named as the joint tenant owes creditors money or gets divorced, the assets in the joint account may be claimed by the creditors and divorcing spouse.

Mistake #12: Having a Revocable Trust solves any problems that may arise if I become mentally incapacitated because my successor trustee can take over. Reality: A Durable Power of Attorney document is recommended in addition to the Trust because the holder of the Power of Attorney, but not the trustee, can direct that a personal tax return is filed for you and can receive income payable directly to you.

Mistake #13: Probate is to be avoided at all cost. Reality: Probate does take some time. The more complicated the estate, the longer it takes. However, probate may be the preferable route if there are family conflicts that need to be settled or if there is a concern regarding creditor claims. Under Minnesota law, creditors are given a period – usually four months after official notice of the death – to file claims. If a creditor doesn’t file a claim within that period, the creditor loses his or her right to collect.

Mistake #14: I can’t give more than $14,000 away per year to each of my children or the gift will be taxed. Reality: Gifts above the annual tax exclusion
– currently $14,000 – are taxable and a Form 709 Gift Return must be filed. (There are a few exceptions such as gifts for a child’s education or medical care when the money is paid directly to the provider of those services.) However, no tax will be paid unless you have exceeded the lifetime limit, which is based on an exemption of $5,250,000 in gift and estate asset values in 2013.

©2012, 2013 Wittenburg Law Office, PLLC. All rights reserved.

Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, Minnetonka 952-649-9771 bonnie@bwittenburglaw.com  www.bwittenburglaw.com