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.
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