Estate Planning in Omaha, NE

Estate Planning Law Group of Blazek & Gregg – Estate and Business Planning Attorneys Serving Nebraska & Iowa

Estate Planning for Families in OmahaBlazek and Gregg — Effective Planning Made Easy

Truth vs. Myth

There is a lot of misinformation going around about estate planning. We want you to be sure to avoid a failure in your estate planning, so we have outlined some of those common myths below, with the Truth about estate planning following each.

MYTH 1: LIVING TRUSTS AVOID ALL LEGAL FEES FOR ADMINISTRATION OF YOUR ESTATE UPON DEATH.

TRUTH: This is a very dangerous myth that we sometimes call the "Magic Book theory." No documents can avoid the need for some legal work being done upon death. Even a Living Trust has to be administered, and lay people are not trained to do the administration. It may involve transferring deeds, establishing trusts for children or other heirs, setting up supervised bank accounts, and other such work. Also, on modest to larger estates, estate tax returns have to be filed. While some of these tasks may be simple, others are very complex. However easy or difficult, they must all be coordinated for a successful outcome. Professional advice and assistance is crucial.

By way of illustration, Florida has established by state law that the reasonable legal fees for administration of a Living Trust are 75% of what the same estate would be charged if it were being administered through probate. In other words, if the probate administration costs were 4%, it is reasonable for an attorney in Florida to charge 3% to administer the same estate with a Living Trust.

The best way to control the costs of administration of your estate is to get a low fee commitment, in writing, from the attorney preparing your plan. We offer plans with a maximum charge for administration fees.  We believe this is a better way to plan.

MYTH 2: THE ONLY WAY TO AVOID PROBATE IS TO USE A LIVING TRUST.

TRUTH: There are many ways to avoid probate. Living trusts, in our opinion, generally offer the best way to avoid probate while accomplishing other, more significant goals. Some of the other ways to avoid probate include the following: (1) "pay on death" or "transfer on death" designations on accounts; (2) properly designated beneficiaries on life insurance or retirement accounts; (3) joint tenancy property, as long as both joint tenants are not killed in a common disaster.

There is one common, overriding problem with each of these other ways of avoiding probate: each results in an "OUTRIGHT" distribution, the subject of another Myth, below. And in each of these probate avoidance methods there is little, if any, opportunity to protect the inheritance from predators waiting to take the inheritance from your heirs: lawsuits, divorce, catastrophic medical costs, to name a few.

MYTH 3: IF I LOVE AND TRUST MY CHILDREN, I SHOULD GIVE THEM THEIR INHERITANCE OUTRIGHT AT MY DEATH SO THEY CAN HAVE IMMEDIATE CONTROL AND USE OF IT.

TRUTH: Did you know you can give your children their inheritance in such a way that they can spend it as they need it, invest it as they see fit, and take it with them to any state they live in or move to, yet have the property (including money, investments, etc.) remain protected from loss to a lawsuit, divorce, catastrophic medical need? Most people have little idea that they can do this, yet some attorneys provide this kind of protection to their clients’ families as a routine planning matter. But it cannot be accomplished by giving the inheritance to them "outright."

Another common reason to avoid "outright" distributions is the stress you can add to your son or daughter’s marriage. Intended or not, you might be giving your heir a can of worms to deal with when you give them an outright inheritance. (See web page "When In-laws Become Outlaws")

This is where a counseling-oriented attorney will discuss with you the many opportunities for good planning, based upon the fears, dreams and expectations you express. This is why estate planning should not be a simplistic, fill-names-in-and-print-it-out process. It is why there are no "one-size-fits-all" estate planning solutions.

MYTH 4: ONE GOOD WAY TO AVOID PROBATE IS TO PLACE MY PROPERTY IN JOINT TENANCY WITH MY CHILDREN.

TRUTH: The very best you can hope for if you do this is that your children are never sued and that you die first. If those things work out right, then your children receive the property as an "outright" distribution from your estate. If your children die before you, the property will be included in your estate and will still go through probate. If one of your children dies before you, and the surviving children get it, you just disinherited the children of that deceased child—did you intend to?

If while you are living any of your children are sued because of a traffic accident, for example, the person who sues them can take that child’s share of the joint tenancy property—while you’re still living!

Owning property in joint tenancy should almost always be avoided.

MYTH 5: LEAVING MY PROPERTY OUTRIGHT TO MY SPOUSE IS A GOOD WAY TO AVOID ESTATE TAXES, BECAUSE OF THE UNLIMITED MARITAL DEDUCTION.

TRUTH: Leaving your property to your spouse doesn’t avoid estate taxes—it postpones them until your spouse dies. One of the biggest and most common estate planning disasters involves people leaving their life insurance or retirement account directly to their spouse as the beneficiary, or holding assets like real estate in joint tenancy with the spouse.

All property left directly to your spouse will be part of your spouse’s estate when he or she dies. While your spouse is still living, all of that property is also subject to claims of creditors (if your spouse were sued), can be depleted as a result of a nursing home stay (if your spouse has to go), and will be subject to a new spouse taking one-third to one-half as a matter of right (if your spouse remarries and then dies with the new husband or wife living).

A much better approach is to have a trust created for your spouse upon your death, a trust that will allow your spouse access to the money or other property if he or she needs it, but which will keep it from being included in their estate for estate tax purposes. Such a trust can provide protection from your surviving spouse’s creditors/lawsuits, nursing home costs, or subsequent spouse.

So often people focus on things like what we call "the 5% problem" (probate lawyers’ fees) and "the 50% problem" (estate taxes) but they ignore the 100% problems! All of your estate can be or simply taken away from your intended heirs by these predators, each of which you can plan around by working with a counselling-oriented attorney.

MYTH 6: IF I NAME A LIVING TRUST AS THE BENEFICIARY OF MY RETIREMENT ACCOUNT, MY HEIRS WILL HAVE TO PAY INCOME TAX ON THE WHOLE THING WHEN I DIE AND MY TAX DEFERRAL WILL END.

TRUTH: The way most living trusts are written, this would be true. But with a properly drafted living trust it is a myth. With a properly drafted living trust, you can still take minimal taxable distributions from the retirement account while you are living, according to the new Uniform Table of life expectancy; then after your death your living trust beneficiaries can spread the distributions from the account-—and the income taxes--over many years, continuing the tax deferral on that account for many years into the future.

Many advisors just tell their clients to name the spouse, children or even grandchildren as the designated beneficiaries. Using children and grandchildren can result in a "stretch-out" IRA. But under new regulations issued in April 2002, a trust for those children or grandchildren with a mature trustee is the only way to assure actual tax deferral over the longest possible time.

It is crucial to get sound advice from an expert in this field, to make sure your heirs don’t end up paying 55% estate tax and around 40% income tax on the account.

MYTH 7: LIFE INSURANCE IS TAX FREE

TRUTH: Life insurance proceeds are generally not subject income taxes or capital gain taxes; but life insurance is included in the estate of whoever owns it. If John owns a policy of $500,000 face amount on his own life, no matter who is designated as beneficiary that $500,000 is included in his estate for purposes of calculating the estate taxes due. If there are other assets in John’s estate, so that he exceeds the current exempt estate amount ($1,000,000 in 2002) then his heirs will pay 37% to 50% estate taxes on those life insurance proceeds!

About 15 –20 years ago, the common practice was for each spouse to own the insurance on the other’s life; it was called "cross ownership" of the policies. Cross ownership of policies between spouses now provides no estate tax benefit. If John owns the policy on his life and leaves his wife Mary as the beneficiary, when she receives the $500,000 it is not taxed because of the unlimited marital deduction (spouses can make unlimited gifts to each other, tax free). But now $500,000 is added to Mary’s estate, so that when she dies her estate is at least $500,000 (plus any interest or other growth, if she invests it) larger than it would otherwise have been, and that much more estate will be subject to estate taxes. Having Mary own the policy and receive the death benefit when John dies leads to exactly the same result.

There are several very good ways to keep the life insurance proceeds from being taxed. One is to have the benefits payable to a special kind of trust for the spouse but which will not be part of his or her estate for tax purposes; this can be achieved with a living trust. In larger estates, a second approach is to have the life insurance owned by an entirely separate kind of trust, usually called a Wealth Replacement Trust or Irrevocable Life Insurance Trust. This keeps the face amount out of either person’s estate.

SUMMARY

These are just a few of the common myths we hear and have to dispel on a regular basis when we advise clients or prospective clients. We hope you found this informative.

We add additional MYTHS to this page periodically, as we are approached with misconceptions and misunderstandings that we think might be common to the general public. Log on again in the future to see what might be new!

This web site is maintained as an educational service to the general public, and may not be relied upon as legal advice to any particular viewer or reader. The Estate Planning Law Group of Blazek & Gregg, P.C., L.L.O. of Omaha, Nebraska, and its employees (the firm), can provide legal services, opinions and advice to any person who enters into a legal representation relationship with the firm by written agreement, but such a relationship cannot be facilitated or entered into via the internet. Please call to schedule an appointment if you would like to explore entering into such a relationship with our firm.