Over the years I’ve heard a lot of people talk about wills and trusts, etc. And don’t get me wrong, I think the legal terminology is really confusing, but I want to clear up some misnomers that I’ve heard in the past. Also, if this article is still confusing after reading it, I highly encourage you to schedule an appointment to discuss it with an attorney. And if you don’t already have a good relationship with an estate planning attorney, click here to schedule an appointment with me!
Myth #1 — Life insurance is tax-free. I’ve heard this a lot from clients and even some life insurance agents. The issue is that there are lots of different types of taxes, income taxes, capital gains taxes, gift taxes, estate taxes, etc. When someone dies and they owned a life insurance policy, the death benefit paid to the family is income tax-free. However, the death benefit is includable when determining if there is an estate tax owed. In Massachusetts, the threshold that determines whether an estate is owed is $1,000,000. This means that if the decedent had $1,000,000 or more in their estate, their estate owes a tax. If they had $999,999, then they do not owe a tax. And the tax is on the whole, not just on what is over the $1,000,000 mark. So life insurance death benefits can push your estate over the $1,000,000 threshold very easily! In summary, life insurance is not completely tax-free; however, there are ways to reduce or eliminate the life insurance policy from being includable in the decedent’s taxable estate. To learn more about these planning techniques, schedule an appointment to discuss the options!
Myth #2 — My assets will automatically go to my spouse/kids. So yes, things can pass automatically to your spouse or kids, but certain things need to be in place for this to happen. If you don’t actively look at your assets and how they are titled, then certain assets may not pass automatically, and when I say “how assets are titled,” I mean what names are on the statement. For instance, if you open up your bank account monthly statement, does it have just your name or does it have yours and your spouse’s name? Moreover, do you have beneficiaries named on your accounts? Beneficiaries aren’t obvious from the statement. For a beneficiary, you will have to look at the beneficiary designation form, or log into your account online and check the beneficiary status. Any account with a co-owner (when someone’s name is listed on the statement with yours) or any account with a beneficiary (on a separate form) will pass automatically to that person(s). I highly encourage you to check all of your accounts and see how they are titled (who are the owners) and see if there are beneficiaries on the accounts. Now if you have already done this, great! Just as a heads up, if you subsequently meet with an attorney to do your estate planning documents, they may recommend something different, especially if you have a trust, but that’s ok! It’s just updating forms. Having a co-owner or a beneficiary is better than having nothing at all!
Myth #3 — I just need a simple will. I’m not saying that everyone who says this is wrong, but the will is the document that gets filed in the probate court; therefore, I do not think simply having a Will is simple. In my opinion, going through the probate process is far from simple. That concept is simple, but if they own real estate or their kids are minors, the process is not simple. I would recommend a simple trust in addition to a simple Will nine times out of 10. Why? Because a trust is like a will. It dictates who’s in charge and who gets the assets when you pass away; however, assets placed into trust while you are alive will avoid the probate process. As I mentioned above in #2, putting a co-owner or a beneficiary on an account is a great start to avoid probate. But what about the house? You can’t add a beneficiary to real estate. You can’t add your minor children to your deed. What if both parents pass away in a car accident? By placing your home into trust, it will be titled in the name of the trust, NOT your names individually. So, it doesn’t matter who passes away first, the home will avoid probate. Also, if you have minor children, a trust can be structured so they will be able to access the money at ages that you choose, and you can choose who will be in charge of the money for the kids’ benefit until they reach the predetermined age. If you do not have a trust and you pass away before your kids turn 18, then a court will create one and your kids will get everything outright when they turn 18. I can only imagine how I would have handled that when I was 18 — yikes!
So those are my three myth-busters. I hope they helped clear up any misunderstandings. Again, I highly encourage you to make an appointment with your estate planning attorney (or me!) to make sure you understand what happens when you pass away. Making assumptions about what will happen when you die only leads to extra work and stress for your family. Again, you can email us at email@example.com or call us at 508.532.8689 if you need to schedule a time to meet with an attorney.
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