Common Misconceptions About Estate Planning

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December 28, 2023

There is a lot of confusion about estate planning. This is understandable. Most people don’t deal with these issues on a regular basis, and planning for what happens when we die or become incapacitated isn’t something most of us like to think or talk about.

Common misconceptions about estate planning include:

1. Having a will avoids probate. Probate is a court-supervised proceeding to administer someone’s estate when they die. A probate proceeding is only needed if the decedent owned “probate assets” (for example, assets titled solely in the decedent’s name with no beneficiary designation). Having a will doesn’t determine whether probate is needed, although it does determine who will receive the probate assets remaining after claims and expenses are paid. (If someone dies without a will, the heirs entitled to receive the remaining probate assets will be determined in accordance with Wisconsin’s intestate statute.)

2. Naming individual beneficiaries on all of your assets to avoid probate is a good idea. It is possible to avoid probate by naming beneficiaries on individual assets, including financial accounts and Wisconsin real estate. This is an attractive option because it is inexpensive. However, by doing this the person named as personal representative in your will does not have access to these assets to pay final debts and expenses; it is up to the beneficiaries receiving the assets to use them for these purposes.

3. Having a revocable trust automatically avoids probate. A revocable trust is created for the primary purpose of avoiding probate. The person setting up the trust (the settlor) is the primary beneficiary and can amend or revoke the trust. The trust becomes irrevocable on the settlor’s death and directs how the remaining trust assets will be distributed. In order to avoid probate the trust must also be “funded.” This means the settlor must either transfer ownership of assets to the trust during lifetime or name the trust as beneficiary of assets at death by means other than a will (i.e., in a beneficiary designation).

4. Heirs will owe significant taxes on their inheritances. Assets received as an inheritance are generally not taxed to heirs as income (although if the inherited asset earned interest or other income following the decedent’s death, heirs may be taxed on their share of that income).

In addition, gains on assets that appreciated in value during the decedent’s lifetime are not taxed when the asset is sold. Assets owned at time of death receive a new income tax basis equal to their fair market value as of date of death. If the assets are subsequently sold, income taxes will only be owed on appreciation that occurred after date of death.

There are exceptions to these rules. Most notably, assets like IRAs, 401(k)s and other retirement accounts, and annuities, do not receive a basis adjustment at death and beneficiaries of these assets will be taxed on them.

There is a federal estate tax imposed on the transfer of wealth at death. However, because there is an exemption from estate tax ($12,920,000 per decedent in 2023), many estates are not large enough to trigger an estate tax. While some states have a state-level estate or inheritance tax, Wisconsin does not.

5. Your immediate family can make financial and health care decisions for you and talk to your doctor if you become incapacitated. If you want to authorize someone to make health care and financial decisions for you, you should sign powers of attorney granting that authority. In the absence of a power of attorney, a court will have to appoint someone to make decisions for you, and there may be disagreement among family members over who this should be. Signing a HIPAA authorization giving named individuals access to your medical information, even if they are not your decision-maker, can also be a good idea.

6. Title alone determines what assets are controlled by a married person’s estate plan. Under Wisconsin law, except for assets received by gift or inheritance, assets owned by spouses are presumed to be marital property even if titled solely in one spouse’s name. For example, unless there is a marital property agreement providing otherwise, assets acquired in one spouse’s name using wages or other compensation are marital property and each spouse’s estate plan will control his or her 50% marital property interest in them.

By planning your estate and reviewing your plan at least every three – five years, you can avoid making the wrong decisions based on these and other misconceptions and ensure that your wishes are carried out.

© 2023 The Business News. Northcentral and Westcentral editions. Reprinted with permission.

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This document provides information of a general nature regarding legislative or other legal developments, and is based on the state of the law at the time of the original publication of this article. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations, or issues, and additional facts and information or future developments may affect the subjects addressed. You should not act upon the information in this document without discussing your specific situation with legal counsel.

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