10 Most Frequently Held Misconceptions About Estate Planning

Here are ten commonly held beliefs about living trusts and California Wills that can easily be addressed with the assistance of an California estate planning attorney.

Belief 1: “I Don’t Have an Estate Big Enough to Require Planning”

This is the most frequently heard objection to having an estate plan. What is important is not the value of your estate but the mix of the assets of your estate. For example, a $125,000 condominium, or any other real property located in Los Angeles County, Santa Barbara County, Orange County, Ventura County or anywhere else throughout California, is the right kind of asset that would necessitate an estate plan since the avoidance of probate fees is important when the estate consists in part of real property. Probate fees on this condominium would be about $4,750. A living trust would eliminate this needless fee.

Belief 2: Leaving Everything to Your Spouse

Leaving everything to your spouse “wastes” the $2,000,000 unified credit exemption of the first spouse to die which could cause a considerable increase in the estate taxes of the surviving spouse. Further, some spouses have neither the interest nor ability to manage estate assets after the death of their spouse. Utilizing appropriate estate planning techniques and trusts, the estates of both you and your spouse gain the benefit of the largest possible tax savings, and also get proper estate management.

Belief 3: Believing That Living Trusts Avoid All Estate Taxes

Living trusts do not avoid all estate taxes. Instead, you are able to take advantage of the law permitting each person to pass this year or next $2,000,000 of their estate to heirs without paying any estate tax. This is a tax savings of between $900,000 and $1,100,000. During this year and next, an estate over $2,000,000 for a single person, or $4,000,000 for a married couple, would be hit by an estate tax even if all of the property is in a living trust.

Belief 4: Trust/Will Errors

One of the greatest mistakes is dying without a valid, up-to-date trust and will. Without them, you may lose the benefit of estate planning techniques which could have saved your heirs thousands of dollars and unnecessary grief. Every marriage, death, inheritance, adoption, tax law change, or significant change in income or assets is cause to have your estate planning documents reviewed.

Belief 5: Improper Use of Jointly-Held Property

If used excessively or by the wrong parties (especially by unmarried individuals) the otherwise “poor man’s will” becomes a poor will for an otherwise good man or woman. In short, jointly held property can become a nightmare of unexpected tax and non-tax problems.

Belief 6: Believing That Property Taxes Increase, Loans Accelerate, Refinancing, Purchasing, or Selling Real Estate Becomes Difficult

People believe that transferring their home to a living trust will cause an increase in property taxes under Proposition 13, result in the home mortgage being accelerated, or hinder any transaction involving their property. This simply is untrue. An exemption from reassessment is provided under Prop. 13 when real property is transferred to a living trust because the transfer is not a “change in ownership.” Further, banks or S&Ls cannot accelerate the loan given to buy your home under state law; re-financing, purchasing, or selling any real estate is not changed much since those events occur in your capacity as “trustee” of your living trust rather than as ordinary individuals.

Belief 7: Improperly Arranged Life Insurance

Life insurance has retained its “tax-preferred” status through recent tax acts and continues to provide an income tax-free death benefit, the chance to use your $2,000,000 tax credit-equivalent today, and removal of the death benefit from the insured’s estate – as long as the life insurance contract is properly arranged. Improperly arranged life insurance policies can cause the death benefit to be included in the insured’s estate thereby greatly diminishing its value for providing estate liquidity at a time it is needed most. Improper ownership and beneficiary designations can even subject the entire death benefit to gift taxes as well. Inadequate insurance can hurt estate planning goals, and payment of the life insurance proceeds to the wrong beneficiary or at the wrong time can deprive the estate of badly needed funds.

Belief 8: Lack of Liquidity

Most people do not have any idea about how much it will cost to pay their estate taxes or how quickly the taxes and other expenses must be paid. Worse yet, they do not realize that a forced sale of their most precious assets such as high income producing property, or loss of control of their family business will result from insufficient cash being available to pay for these taxes and expenses.

Belief 9: Choice of the Wrong Trustee/Executor

Naming the wrong “manager” to administer the estate can be disastrous. The person who administers the estate must often, without compensation, with great financial risk, and without conflict of interest: collect all assets, pay all obligations, and distribute the remaining assets to the beneficiaries.

Although this process sounds simple, in reality these tasks are highly complex, time consuming and in some cases technically demanding.

Belief 10: Failure to Stabilize and Maximize Value

Many business owners have not stabilized the value of their businesses in the event of the disability or death of key personnel. Buy-sell salary continuation agreements are essential to a business that is to survive the death of one of its owners. Yet many businesses have no such agreement, or at other times the agreement is not in writing, or not properly funded.

Speak with a qualified estate planning attorney about these and other questions. Call Mitchell A. Port, Esq. at (310) 559-5259.