Common estate planning myths

Several beliefs about estates are held confidently by a great many people and are simply wrong. Each of them produces a predictable failure.

"A will controls everything I own"

The most consequential misconception.

Retirement accounts, life insurance and payable-on-death accounts pass by beneficiary designation. Jointly held property passes by survivorship. Trust assets pass under the trust.

A will governs only what is left, which for many households is a small fraction of their wealth.

"We've lived together long enough to have rights"

Common law marriage exists in only a small number of states, requires specific elements beyond cohabitation, and does not arise automatically from any period of living together.

Unmarried partners generally have no rights on intestacy, no automatic authority over medical decisions, and no claim on property they do not own.

"Estate planning is for wealthy people"

Guardianship nominations for children, powers of attorney, healthcare directives and beneficiary designations matter regardless of wealth.

For a young family with modest assets, the guardian nomination alone justifies the exercise.

"A trust avoids all taxes"

A revocable trust is generally disregarded for income tax, does not reduce estate tax, and provides no creditor protection during life.

It avoids probate, which is a procedural benefit rather than a tax one.

"I'll add my child to my accounts and property"

Joint ownership gives immediate access, exposes the asset to that child's creditors and divorce, may be a taxable gift, and passes the whole asset to them on death regardless of what the will says.

Which frequently disinherits other children by accident.

A payable-on-death designation, or a power of attorney for access, achieves the intention without any of these consequences.

"Giving away my house will protect it from care costs"

Medicaid lookback rules examine transfers over a period of years and can impose a penalty period of ineligibility.

Transferring a home also forfeits the basis adjustment, creating a substantial capital gains liability for the recipient.

And where the person continues to live there, the property may be included in their estate anyway.

"My spouse gets everything automatically"

Intestacy rules in many states divide an estate between spouse and children, sometimes in proportions that require the family home to be sold.

The share may also depend on whether children are shared or from a previous relationship.

"Divorce automatically removes my ex from everything"

Some states revoke provisions in favour of a former spouse, and federal law governing many workplace retirement plans has been held to preempt those statutes.

Which means a former spouse can inherit a retirement account despite a state statute apparently preventing it.

"I don't need to update it, nothing has changed"

Named individuals die, move or become unsuitable. Accounts are opened. Property is refinanced out of a trust. Laws change.

The change to inherited retirement account rules alone rendered a great many existing trust arrangements ineffective.

"My family will work it out"

The belief underlying most avoidance.

Families in which everyone gets along still produce disputes when a parent dies, because the parent was frequently the thing holding the relationships together.

The absence of documented intentions is what those disputes are about.

"An online form is as good as an attorney"

For a genuinely simple situation, a properly executed template is adequate.

For a blended family, a business, a beneficiary with a disability, property in several states, or any intention to exclude someone, it is not — and the errors surface when nobody can correct them.

"I'm too young for this"

Powers of attorney and healthcare directives matter from adulthood, since incapacity is not age-dependent.

Parents of minor children have the strongest reason of anyone to have a will, and they are among the least likely to have one.

"Probate is a disaster to be avoided at all costs"

The final one, and it is the most heavily marketed.

Probate varies enormously by state. In some it is slow and expensive; in others it is routine and inexpensive.

It also provides genuine benefits: court supervision, a defined creditor claim period that provides finality, and a forum for resolving disputes.

Trust arrangements sold on the basis that probate is universally catastrophic are frequently sold to people who would not have needed them.

The reasonable approach is to find out what probate actually involves in your own state before deciding whether to plan around it.

General information only, not legal advice. Rules vary substantially by state — consult a qualified attorney about your own circumstances.