Estate Planning: What you don’t know will cost your family

1. I am not going to die.

Denial – plain and simple! We may not know when, where or how, but the fact remains that one day we are all going to die. While we don’t have control over this fact, we can control how much our death will cost our families, emotionally and financially.

Your loved ones will grieve for you, but grief can quickly turn to anger when your estate is a mess and they are left to pick up the pieces. One of the greatest gifts you can leave your family is a properly planned estate.

2. My estate is not big enough, so I don’t have to worry about estate taxes. 

In 2020, the federal estate tax is not a concern for most estates since the tax does not apply to estates under $11,580,000 in value. Keep in mind though, the rules are scheduled to “sunset” in 2026, so unless the federal government extends the law, this figure is scheduled to decrease by about half.

Also keep in mind that many states have their own estate taxes. In New York, for example, an estate over $5,850,000 will be subject to estate tax. New York has what is known as a ‘cliff tax’, meaning that if your estate is 5% over the limit when you die, then your entire estate, not just the excess, is taxed. Ask your advisors what planning you can do now to reduce, or even eliminate, the tax.

Some states, like New Jersey, no longer have an estate tax, but have an inheritance tax. The inheritance tax in New Jersey is based on who you leave assets to, not how much your estate is worth. 

3. I am not rich enough to worry about estate taxes.  

It is important to understand that the government (state and federal) looks at ALL your assets to determine if taxes are due. This includes your home, bank accounts, stocks, bonds, IRAs, life insurance, and much more. If your name is on the asset, it is most likely part of your taxable estate.

If you own an asset with a non-spouse, the government assumes that it is 100% yours. If you own a home, have a retirement account and some life insurance, you may be closer to the tax limits than you realize.

4. I don’t need an estate plan because I own everything jointly with my spouse or children. It will all go to them automatically when I die. 

Yes and no. For estate tax purposes, it is not always wise to own property jointly. If you own everything jointly with your spouse, you will lose the ability for both of you to pass assets to the next generation free of estate taxes. The estate of the spouse who dies second may needlessly pay more taxes without proper planning.

If you own assets jointly with one child, you will effectively disinherit your other children. Don’t assume that your child will share with his or her siblings.  Even if your child wants to share the assets, sometimes there are complications – see number 5 below. 

5. I am giving everything to one child and she will do right by her siblings.

Maybe, maybe not. Your other children will not be pleased that one child got everything and they were left out, even if this isn’t what you ultimately intended.

The child who inherits your estate has no legal obligation to share with her siblings. Even if she decides to “do the right thing”, there could be gift tax and income tax consequences or other reasons why this is not a good option. If the child you left everything to has creditors or is in the midst of a lawsuit or a divorce, then she may not be able to gift assets to her siblings. 

6. My family knows where my important papers are.

Do they know where you bank? Where you keep the deed to the house? The title to your car? The life insurance policy? Your original will? Your health care directives? Where your investments are? How to access a safe deposit box? Have you hidden old stock certificates or savings bonds in a book or other hiding place? What about electronic information?

The expense (emotional and monetary) of trying to locate everything if you become ill and/or pass away can be enormous.

Don’t assume a safe deposit box at the bank is the best place to keep your legal documents – they can be difficult to get into and are frozen once the bank hears of your death. Many banks would not allow customers inside the bank during the Covid-19 pandemic. Speak with your attorney about alternative storage ideas. 

7. I have plenty of assets for my family to pay the estate taxes.

This may be true, but how liquid are the assets? Estate taxes generally are due 9 months from the date of your death WHETHER OR NOT your estate has the cash to pay them.

If an IRA or other tax-deferred assets need to be liquidated to pay the estate taxes, income taxes will also need to be paid. Real estate doesn’t always sell within 9 months. If your estate has to be probated, a delay may mean no one will have access to your estate to pay the taxes – even if there is enough cash in your accounts.

8. I have plenty of life insurance and that is tax-free money for my family.

What you heard your life insurance agent tell you was that your family does not have to pay income taxes on the proceeds. However, if you own the policy or have any control over it, your life insurance is part of your taxable estate. Your family could lose a significant portion of the proceeds to estate taxes.

But there is good news – life insurance can be estate tax-free, as long as you follow certain rules – check with your estate planning attorney!

9. I don’t have to worry about beneficiary designations on my retirement accounts.

Not having proper beneficiary designations on assets that pass this way (like retirement accounts, annuities, life insurance, etc.) can be the costliest mistake you make, but the least expensive – and easiest – for you to correct while you are alive.

If you do not have a beneficiary named or you name “my estate” as the beneficiary, the asset will need to be probated before anyone sees a penny, instead of being paid to your beneficiaries almost immediately. This means court and attorney fees.

Additionally, for tax-deferred accounts, an innocent mistake could trigger lots of additional income taxes, on top of any estate taxes owed. Check your beneficiary designations today!

10. I know what is in my estate and what it is worth, it doesn’t matter how it is held.

Even if you know exactly how much your estate is worth, you must pay attention to how you own it or how it passes upon death. Your attorney can draft an elaborate will, but if your assets pass automatically upon your death to a joint account holder or to a named beneficiary, your will isn’t worth the paper it is printed on.

It is important that your attorney knows exactly how you own everything in order to give you proper advice. Your attorney will coordinate your estate plan so that you can take advantage of the probate and tax laws and ensure that your assets pass to your loved ones as smoothly as possible.

11. If I tell my lawyer how much money I really have, he will charge me more fees.

Most attorneys do not charge you based on your net worth. However, usually the more wealth you have the more complex your plan will need to be. It is better to tell your attorney everything. He or she will be able to lay out several choices for you and explain the pros and cons of each plan.

• A simple plan may be less expensive today, but your estate may pay heavier taxes and fees when you die.
• A comprehensive plan might be more expensive now but can save your family much more in taxes and court fees.

Understand your options now, so your family won’t scramble to pay fees and taxes in the future. You should select the plan that you are comfortable with, based on your attorney’s advice.

12. I can just do it myself from a kit I bought on the internet.  

Yes, you can. You can probably also perform heart surgery using information obtained on the internet, but that doesn’t mean it is a good idea. What people save in attorney fees now by doing it themselves usually ends up costing the family thousands of dollars more upon their death or if they become ill.

An experienced estate planning attorney will be able to devise a plan to meet your family’s unique needs. This is not the place to be penny wise and pound foolish!  

13. I executed an estate plan a while ago; I don’t need to update it.

Maybe, but you won’t know for sure unless you review the documents to make sure they still reflect your wishes and take advantage of current laws.

• You may have chosen executors, trustees, or guardians who no longer can fulfill those roles.
• What you are leaving to your beneficiaries, and how they get it, may no longer make sense.
• Your estate may have increased in value so that your current plan will actually cost your family more money once you die than it would cost you to revise it today.

At the very least, your power of attorney should be updated at least every three to five years. Banks and other financial institutions are reluctant to accept what they deem “old” powers of attorneys. Having a “fresh” power of attorney will make it easier for your agents to act in an emergency.

14. Using trusts for my children is “ruling from the grave”; I don’t like it!

There can be good reasons to leave assets to your beneficiaries through a trust.

• Financially savvy children may be so savvy that they have a taxable estate of their own ~ why add to their estate tax burden?
• You can leave assets to your children in trust so that when they pass away the assets will flow to their children (your grandchildren) free of further estate tax.
• Perhaps your child is in a profession prone to lawsuits (think medical workers, attorneys, architects, landlords, and the like).
• Assets in a trust can be protected from lawsuits and creditors, addictions (gambling, drugs, alcohol, shopping) as well as from a bad marriage and divorce.
• Of course, trusts also make sense for young or financially inexperienced beneficiaries.
• Trusts are a must for beneficiaries with special needs.  

15. I should give to my children in equal shares.

Generally, yes. But if your children are very young or there is big disparity in their ages or abilities, you would not expect to spend equal amounts on them. You would see who needs what and do your best to make sure they get it.

A trustee can do this through a “common pot” trust, so that young beneficiaries can be raised to maturity, with the balance being split once they are all older (for example, once everyone is 25 or has graduated from college). 

16. I don’t know who the guardians for my little ones should be, so I can’t make a will.

A big stumbling block, for sure! Do your best; you can revise it as your children grow and circumstances change.

Remember that you can separate care of the children from money management, so kind Susie can give love, while savvy Mary takes care of the money. 

17. If I give it all away while I am alive, there won’t be anything to tax when I die.

The IRS has already thought of that. There are limits to how much you can give away during your lifetime – once you pass that very generous threshold, gift taxes are triggered.

But there are easy ways to give away assets now without worrying about taxes. Anybody can give up to $15,000 to another person each year – $30,000 if you are married and your spouse consents. There is no limit to the number of people you can give to every year. You can also pay for education or medical expenses, no matter how much, so long as the institution is paid directly…in addition to the yearly $15,000 gifts. Give to 529 plans to save for education.

Giving during your lifetime gets future appreciation out of your estate. Speak with your estate planning attorney and/or accountant before making gifts to do it right. 

18. When I die, surely charity will get something.

Charitable giving does not happen by magic. You can include gifts to charity in your plan, but you must be proactive. You can easily name a charity to get part of an IRA or a life insurance policy or make a bank account payable upon your death to a charity.

In your will or trust you can make a gift or say that a charity inherits your estate if all your other beneficiaries don’t survive you. Even though caring for your family is your main priority, a charitable gift can help you transfer your values to the next generation too and leave a legacy.