In the past 30 years as a practicing lawyer, I have seen many people surprised by the reality of how assets are handled after death. Many misconceptions exist about the best way to transfer hard-earned assets and money to loved ones and family members. The following are some of my favorites.
Estate taxes won’t affect me — I don’t have a lot of money.
I am not exaggerating to say that the tax code has changed every year that I have been in practice. Just because you do not have a taxable estate under today’s law does not mean that you will not owe an estate tax at your death. The government changes the rules routinely. Moreover, estate taxes can sneak up on you. When calculating the value of your estate, include the value of life insurance proceeds, retirement plans and IRAs. Through a trust, you can devise a plan that is flexible and that allows for estate tax protection if it is needed.
Joint ownership with my spouse or child is an effective estate plan.
Joint-ownership is what I loosely refer to as the crystal ball method of estate planning. If you gaze into your crystal ball and can see who will die first, what the survivor’s mental state will be at that moment in time, whether or not either party will be sued, and what the survivor will do with assets at his or her subsequent death, AND if all of these things are in line with what you would want, then joint ownership works. It is not a plan. It is a guess. If your crystal ball is broken, think about estate planning.
In addition, adding someone other than a spouse to a deed can result in making a taxable gift. This gets complicated fairly quickly. Furthermore, lifetime gifting of assets that have built in capital gains does not take advantage of the step up in basis at death. That means that if you gift in life you could pay more taxes later.
We recommend using extreme caution when using joint ownership for asset transfers.
A Will is all I need.
Not really. A Will plus probate is what you need. A Will alone is more like a suggestion; it is used to get the probate case going, which involves publishing for claims and heirs. A Will can nominate an executor to be appointed in probate, eliminate a bond fee in probate, appoint a guardian for your minor children in probate, and can determine who will receive your assets upon your death through probate. Having a Will is a good first step.
It’s no one’s business who I leave money to.
Wills are public records. After a death, the original must be filed Will with the County where the death occurred. A willful failure to file is a crime. If you want privacy, avoid probate. Create a trust to hold assets.
Life insurance is not subject to taxes.
Although it is true that life insurance proceeds are not subject to income tax, they are included in your estate and can be taxed under the estate tax. Effectively, you may have bought life insurance to pay the government. This is very patriotic, but not good planning. One specific type of trust, an Irrevocable Life Insurance Trust, can keep ownership of life insurance policies out of your name, and out of your taxable estate.
Minor children who are life insurance policy beneficiaries will have access to money.
Nope. The life insurance company will hold the money until they reach 18; otherwise, they will need a court order to get the life insurance money into a court-regulated guardianship account. The judge will consider the requests of the guardian and will give access to assets as the judge determines appropriate and in the best interest of the child. If the amount of money is significant, the judge may require a bank etc. act as a co-guardian. If you want to determine how money will be accessed for minor children without supervision of a court and the onerous rules of guardianship, consider a trust.
My spouse will never remarry.
Maybe, maybe not. Even if they do not remarry, they may form a connection that results in future estate planning. Consider the “what if” questions. Should you leave everything to your spouse and he or she remarries, what if he or she dies, leaving everything to the new spouse? What do your children inherit? Through a trust you can provide for your spouse in a marital subtrust that allows lifetime access to assets and allows you to name beneficiaries at second to die.
My will leaves money to my favorite charity— I am all set.
If a charity is a remainder beneficiary, you should consider giving assets to your favorite charity now, while you are alive and can receive income from your donation through a Charitable Remainder trust. You also may want to notify the charity of your bequest. Let’s make sure that the money actually gets to the charity. If you have both a charitable and non charitable beneficiary (a charity and a person) then let’s make sure that the taxable assets go to the charity (which will not pay taxes on it) and the non taxable to the person or people.
I had a trust done 10 years ago. It’s still good.
The law and the world are changing quickly. If you have not updated since January 1, 2020, your documents are not drafted under the new Illinois Trust Code. Additionally, they do not reflect a major overhaul of the tax code as it applies to IRAs (The SECURE Act). If you put in certain tax planning provisions when you drafted, you may have unintended results under current law. Your trust is not the only thing that has aged. You, your successor trustees and your beneficiaries are also ten years older. Likely, their lives have also changed. You should think of your trust as a living document and get a checkup at least every other year. If you have not updated recently, I can almost guarantee you need to do so now.