10 Estate Planning Myths That Can Cost You
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Most adults tend to forego estate planning in their financial goals strategy. There are several misconceptions around estate planning that deter people from exploring further. These unverified myths make people exclude estate planning from their financial planning goals and ultimately leave their family in a fix after they are gone. Given below are the most common myths of estate planning. Let us see how many of these are true!
10 Most Common Estate Planning Myths
1. There is still time
Some people think that estate planning is something that should be done when you are old. There is no age to start any aspect of financial planning. Whether you are in your 40s, 50s, or 60s, estate planning should be on your list of financial goals from the very start.
2. An estate plan is expensive
This highly depends on your financial situation and family. Some people easily draft documents themselves or at very low costs from attorneys. Many hospitals also offer health care directives for healthcare decisions. There are some websites that offer free services for drafting a will or power of attorney. But it is good to not think of estate planning as an expense. It may cost you a little extra to pay an expert but it will also ensure that your hard-earned money is not wasted and goes to its rightful inheritors.
3. Estate planning is for the wealthy
Most people presume that estate planning is for people who own multiple properties and a fortune of wealth! Estate planning has nothing to do with how much you earn or own. The idea is to ensure that your wealth is taken care of after you are gone, or in case you are incapacitated.
4. Will trumps probate
Even with a will in place, it is important to have probate. Think of it this way, after you are gone, your will is out in the public and can also be contested by someone in court. In addition to this, if you own properties in different states, your will may be subjected to probate in all those states. While probate can be expensive, it is also equally important.
5. Families can manage on their own
Many people live happy and healthy lives with no familial troubles. They tend to overlook estate planning hoping that their family will honor their wishes well. Keep in mind that every generation functions in a different manner. Don’t think of your own experience when you inherited your parents will, your children may not feel or act the same way as you did.
6. 401 (k)s are not a part of estate planning
Estate planning and your other retirement accounts, like 401 (k)s and insurance, should go hand in hand. All your assets and accounts should be rightfully named. The beneficiary on your 401 (k) should match the beneficiary on your estate planning too.
7. Estate planning is a one-time job
Imagine creating an estate plan in your 50s and leaving your estate equally among your spouse and children. Now imagine a scenario when you outlive these beneficiaries. Sometimes, the beneficiaries that you have listed, may not have the same competence a few years later or your mutual ties may alter over the course of time. Depending on your family and other circumstances, you should regularly update your estate plan.
8. Combined assets are tax- free
If you and your spouse own a combined estate, your spouse will not be liable to pay tax on it after you pass away. But if at all you both pass away, your children or anybody else who inherits the estate will have to face different tax laws. Talking about taxes, it is also important to note that life insurance triggers tax too! You may not pay income tax on it but it will be subjected to federal tax when passed to beneficiaries. Calculate how tax can affect your other retirement goals.
9. The spouse automatically inherits the estate
While this is true, things may get complicated in case your spouse remarries, passes away, or is incapacitated and unable to take care of your estate due to health conditions. It is good to have an estate plan in place with directions on what happens to your estate in such cases.
10. A living trust is less expensive than probate
There is no denying that probate can be expensive. But setting up trusts comes with hidden costs too. While living trusts cost less, they also distribute your estate over the course of many years. A living trust may distribute your estate among your family members over 10-30 years depending on their ability to handle your estate. These long-term distributions can lead to accounting fees, attorney fees, and income taxes. It is a different thing to have a family member serving as a trustee for your estate, but in case of private trustees, the accumulated costs can be more expensive than a probate.
To sum it up
Estate planning is often viewed as a complex task because of various misconceptions created by different generations. It is also seen as an emotional decision as opposed to other financial decisions that are more pragmatic and rational. While emotional bonds are important, try and make estate planning decisions that will benefit your family members and not put them through unwanted chaos.
Still grappling with some estate planning myths? Reach out to financial advisors and let them guide you in the right direction.