Many people have misconceptions about who receives assets when they die, how they receive those assets, when their heirs receive them, and whether they are taxed. The most common myths relate to who receives assets when there is no Last Will and Testament, how a will works after death, and if taxes will be owed.
Solving the Puzzle of Five Estate Planning Myths
Myth #1: My assets will go to the state if I don’t have a Last Will and Testament.
Rarely do people’s assets transfer to the state when they die without a will. All states have a plan for who receives a person’s assets if they do not have a will. You just might not like the plan. Even though the assets do not often go to the state, they often do not go to whom you think or want them to go.
For example, in Alabama, spouses only receive 100% of their deceased spouse’s assets through probate if they have no children and both parents are deceased. Imagine a house or a business you built from the ground up with your spouse – now shared with children, stepchildren, or in-laws. That’s probably not what you want or had planned.
Myth #2: All my assets follow my Last Will and Testament.
Most assets do not pass according to a person’s will because of how assets are titled and the assets having beneficiaries.
To determine who receives the asset after someone passes, first look at whether the asset has a joint owner. If the asset has a joint owner with right of survivorship, then the asset is passed to the joint owner. For example, most joint bank accounts or deeds with both spouses on the property are joint with right of survivorship.
If there is no joint owner or the joint asset does not have right of survivorship, see if there is a beneficiary or POD (paid on death) or TOD (transfer on death). If the asset has a living beneficiary, the asset goes to the beneficiary. The asset goes according to the will only if an asset is not joint with right of survivorship and does not have a beneficiary.
Myth #3: If I have a Last Will and Testament, I can avoid probate.
For a will to determine how and to whom an asset transfers, the will has to be probated. The nominated Personal Representative or Executor cannot administer the estate until:
– the will has been accepted by the appropriate Probate Court,
– the person has been appointed as Personal Representative by the Court, and
– the person has been given Letters Testamentary by the Court authorizing them to act on behalf of the estate.
A will has to be probated after death to be effective.
Myth #4: My children are going to have to pay taxes on all of my assets.
The current estate tax exemption amount is $13.61 million per individual. That means married couples with proper planning could pass $27.22 million without any estate tax being paid on the transferred assets.
Additionally, assets receive a step-up in tax basis upon death. This means if your children inherit your house and sell it shortly after your death, they will not have any capital gains tax upon the sale.
The main assets that children inherit that have tax consequences are retirement accounts. If a person inherits an IRA, 401(k), or 403(b), they will pay income taxes as they withdraw the money.
Myth #5: Life insurance is not subject to estate taxes.
Generally, life insurance does not have income tax consequences. However, life insurance is still part of your gross estate and can be taxed if you are over the estate tax exemption amount. The estate tax applies to all assets you had an interest in at the time of your death. Therefore, the life insurance proceeds are part of your gross estate.
Is It Time to Update Your Last Will and Testament or Estate Plan?
Call MSN’s estate planning attorneys to discuss the specifics of your will and estate plan. We’re here to help you navigate the many applicable laws and create an estate plan that fits together to execute your wishes.