This week is Estate Planning Awareness Week (October 18–24, 2021). To that end, this article is geared toward helping you, as a professional advisor, gain awareness and understanding of the most common estate planning myths. Left unaddressed, these myths can create serious trouble for families and individuals, often leading to intrafamily conflict, permanently damaged relationships, and lengthy and expensive court battles.
Myth #1: Estate Planning is Only for the Wealthy
When the topic of estate planning comes up, professional advisors often hear their clients respond with phrases like “Oh, estate planning is only for rich people,” or “Why do I need an estate plan? I plan to spend it all before I die!”
Unfortunately, this kind of response, perhaps subconsciously, allows the person making the statement to avoid having to expend any further energy thinking about the uncomfortable reality of their own mortality and the consequences of not having planned for their incapacity or death. As their professional advisor, consider whether you have a responsibility to gently push back on such responses from a client. Most things worth doing are going to involve some effort, and estate planning is no exception.
Even individuals and couples of modest means may suddenly become incapacitated. When an individual cannot speak or make decisions during a period of incapacity, someone else will need to carry out that responsibility. Without estate planning documents in place (for example, a healthcare directive, trust, and financial power of attorney), a court will need to appoint a conservator or guardian to make decisions on behalf of the incapacitated client. Furthermore, the court will decide who will be placed in charge of your client’s accounts and property, resulting in additional expenses, delays, and significantly less privacy for your client. If the client wants to choose who will make financial and healthcare decisions for them, estate planning must be completed beforehand that names the appropriate individuals to carry out those responsibilities.
Planning with Trusts
We have heard of professional advisors telling a client that only wealthy individuals need a trust. However, such advice is too simplistic. When an individual dies owning real estate, even if they are of modest means, the probate court will need to authorize the sale or transfer of that property, which can result in additional expenses, delays, and loss of privacy. Establishing a trust and titling real estate in the name of the trust can be an effective way to eliminate the need for probate. For many people, avoiding probate is an important estate planning goal, particularly when the client desires to keep the distribution of their accounts and property private and efficient, even if they have what most would consider modest wealth. Probate avoidance may actually be more important for those of modest means because probate is not the most cost-effective way to transfer property at death.
Myth #2: Joint Ownership is Sufficient
A client may declare to you that they do not need to engage in estate planning because they have already added their children to their accounts or on the title to their property. At first impression, it can be tempting to agree that this is sufficient to avoid probate; and while this can be one method for avoiding probate (both during life and at death), there are serious risks associated with joint ownership that are commonly overlooked. For example, adding children to an account or to the title of property can result in those accounts or property getting tangled up in that child’s divorce proceeding, lawsuit, or bankruptcy.
Furthermore, there could be gift tax consequences for adding a child to the ownership of certain property, particularly if that child received instructions from the client to divide and distribute that property to others after the client has passed away. Additionally, the joint owner may be under no legal obligation to follow the client’s instructions on how to divide the accounts and property after the client’s death. The joint owner could decide to keep the money or property rather than follow your client’s instructions with no legal consequences.
Myth #3: Avoiding Taxes is the Only Reason to Create an Estate Plan
It can be easy to dismiss the need for an estate plan considering today’s historically high estate tax exemption ($11.7 million per person in 2021). Most Americans do not need to worry about estate taxes.  However, efficient tax management is only one of many goals of estate planning, and in many cases it is not the most important goal. For example, planning for the orderly passing of your client’s treasured heirlooms to avoid family discord may be far more important than tax planning in the long run. Alternatively, your client may have children who are struggling financially or with substance abuse challenges, are in a rocky marriage, or work in high-liability professions. As a result, it may be crucial for your clients to ensure that whatever inheritance is left to those children is protected from loss to lawsuits, creditors, or divorcing spouses.
Myth #4: I Can Just Name my Loved Ones on Beneficiary Designations
In some states, accounts such as retirement accounts, life insurance, and bank accounts can be left to loved ones through beneficiary designations, while transfer-on-death deeds can be used to leave real property to loved ones. Utilizing such tools can avoid probate in most cases. However, when these types of accounts and property get transferred at death, they are direct transfers that cannot be protected from lawsuits, creditors, divorcing spouses, or other threats from third parties. In addition, if minor children are named as designated beneficiaries, a conservatorship must hold the property until the minor child reaches the age of majority (usually eighteen or twenty-one years old, depending upon state law). Once the child reaches that age, the accounts and property are transferred directly to the child, and a more mature loved one or financial manager will be unable to protect the funds for the child.
In addition, beneficiary designations and transfer-on-death deeds are useless in the case of the client’s disability or incapacity. Should the client become incapacitated, a conservator must be named through the court system to manage the property for the client’s benefit until the client dies and the transfer-on-death deeds or beneficiary designations become operable.
What You Can Do to Help Your Clients
Understanding these myths will put you in an advantageous position to dispel them for your clients. By correcting these erroneous beliefs about estate planning, you can help your clients begin the estate planning process in a responsible and effective manner. As your clients begin to see the value of careful estate planning, your value to them as a professional advisor will grow.
We would love to help you and your clients better understand the value of careful estate planning and how to avoid falling victim to these and many other estate planning myths. Give us a call today at (858) 964-0500.
Another Way to Help Your Clients is Through a Dunham Donor-Advised Fund
Every Thursday over the next few weeks, Dunham will be sharing a case study that outlines a specific hypothetical circumstance in which a donor-advised fund was the most beneficial option for the individual or family involved. With year-end tax season coming up, you can also refer to these case studies for ways to use a donor-advised fund to maximize your clients’ tax benefits. If you would like to view all six case studies in advance, please fill out this form and a member of our sales team will be in touch.
 However, this historically high estate tax exemption is set to expire in 2026 and reset back to $5 million per person (adjusted for inflation); see I.R.S., Estate and Gift Tax FAQs (Feb. 19, 2021), https://www.irs.gov/newsroom/estate-and-gift-tax-faqs.
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.
Dunham Trust Company is a privately held trust company founded in August 1999. It is not a bank and is not FDIC insured.
Dunham Trust Company is licensed and regulated by the State of Nevada, Department of Business and Industry, Financial Institutions Division.
Dunham Trust Company provides this material as a potential resource. It is provided for informational and educational purposes only. Dunham does not take any responsibility for the accuracy of the comments, content, or opinions expressed herein, and are not in any way promoting or endorsing any products or services that may be referenced.
Dunham Trust Company and its affiliates are not responsible for its use with other parties.
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Federal and state laws and regulations are complex and subject to change, which can materially impact your results. Charitable deductions at the federal level are available only if you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy or completeness of the information provided. Dunham Associates & Investment Counsel, Inc. (“Dunham”) cannot guarantee that such information is accurate, complete or timely; and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.
All financial decisions and investments involve risk, including possible loss of principal. The market value of the Dunham Donor Advised Fund (“Dunham DAF”) is not guaranteed by UI and may fluctuate depending upon investment results.
Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.
A donor advised fund (“DAF”) is a separately identified account that is maintained and operated by a section 501(c)(3) organization, and is not a registered investment company.
The Dunham DAF is powered by University Impact (“UI”), a registered 501(c)(3) nonprofit in the United States who manages the charitable aspects of the Dunham DAF.
UI charges fees to the Dunham DAF for administrative services in accordance with the Fee Schedule as outlined in Appendix A of the UI Donor Advised Fund Agreement (“Agreement”). Accounts are required to maintain a $1,000 minimum balance and are subject to support investment fees as explained in the Agreement. A list of current fees and initial gift minimums is available upon request. UI reserves the right to change its fee or minimum policies at any time. There may be additional fees charged by the Financial Advisor that is separate from UI’s administrative and impact investment fees.
Contributions to the Dunham DAF are irrevocable contributions made to UI, a public charity.
Assets contributed to the Dunham DAF (once liquidated, if applicable) will be invested in the Dunham Asset Allocation Program sponsored by Dunham. Investment allocations may be changed according to Dunham’s standard policies and procedures. UI may hold up to 5% of the Dunham DAF assets in non-interest bearing cash at any time.
As the Program Sponsor, Dunham charges each donor a single service program fee (“Program Fee”) not exceeding 0.25%.
In addition, a Financial Advisor may charge a client/donor an asset-based advisory fee (“Advisory Fee”) as specified in the Advisory Agreement. Detailed advisory and expense fee information about the Dunham Asset Allocation Program is available in the Wrap Fee Program Brochure available upon request.
As investment adviser to the Dunham Funds, Dunham receives the investment advisory compensation described in the Dunham Funds’ prospectuses and such fees are borne by all shareholders in the Dunham Funds, including the donor.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.Subscribe to the Dunham Blog