Estate Planning: A Potpourri of Mistakes & Misconceptions

From Living Well Magazine
All of My Assets will be Distributed Pursuant to the Provisions of My Last Will & Testament: Maybe Not! The Last Will and Testament only controls the distribution of assets that become part of your Probate Estate. If there is a beneficiary designation, payable on death (POD), or transferable on death (TOD) designation, a contractual provision regarding the passage of the assets at your death, or the asset is titled in joint tenancy with rights of survivorship, and a joint tenant survives, then such designation or form of ownership controls the distribution or passage of ownership of those assets. The provisions of your Will are irrelevant with respect to those assets. For example, if your Last Will & Testament provides that all of your assets are to be distributed to your church, but the beneficiary on your life insurance policy is your children, your bank accounts are POD to your children, and you own your home with your sister as joint tenants with rights of survivorship, and your sister survives you, then none of these assets would pass to your Church.
I have a Revocable Living Trust, so my Assets will not be Subject to Probate at my Death: Not Necessarily! Establishing a Revocable Living Trust is only the first step in the Estate Planning Process to avoid probate (and possibly plan for estate taxes). Similar to a Will, which only governs the distribution of assets of the Probate Estate, the Revocable Trust only controls property owned by the trust or made payable to the trust. Thus, title to any of your assets in your sole name must be transferred to the trust, made POD/TOD to the trust, or the trust must be the designated beneficiary for the trust to control the distribution of the asset at your death. If an asset is owned in your name without a designated beneficiary or other designation or ownership, then the asset may end up being governed by your trust via Probate. In other words, such assets owned in your sole name without a beneficiary would become a part of your probate estate, and your Last Will and Testament will likely direct the residue of your estate to your Revocable Living Trust. [Caution: Assets should not be transferred to your trust and your trust should not be designated as the beneficiary of your assets without the advice of your attorney, as there may be income tax or other tax and legal ramifications of doing so for certain types of assets including retirement benefits and annuities].
My Life Insurance will not be Subject to Estate Tax or Probate Tax at my Death if I have Named a Beneficiary of the Policy at my Death: It Depends! Avoiding Probate does not mean the asset is not subject to estate taxes. These are two separate issues, which are often confused and misunderstood. The “Gross Estate” for Estate Tax purposes is NOT the same as the “Probate Estate.” In general (and over simplified!), all assets that the decedent owned or controlled at death are part of the Gross Estate for Estate Tax Purposes. The fact that assets have been titled to pass in a manner to avoid probate at your death does not have any bearing on whether the asset is part of the Gross Estate for Estate Tax Purposes. In other words, all assets of the Probate Estate and all other assets the decedent controlled or owned at death are part of the Gross Estate for Estate Tax Purposes.
Part of this misconception (especially with life insurance) is that life insurance on a decedent’s life is excluded from the Gross Estate for Estate Tax Purposes if the decedent did not own any incidence of ownership in the policy at death (among other rules). If set up correctly, and an Irrevocable Life Insurance Trust (ILIT) owns the policy insuring your life, then the proceeds may not be included in the Gross Estate (but again, there are many details that must be carefully followed for the life insurance proceeds paid to the ILIT to be excluded from the decedent’s gross estate for estate tax purposes).
Probate Taxes are Very High! False—in part. There is not a “probate tax” on the probate estate. There are (i) court costs (ii) personal representative or executor fees, and (iii) attorney fees charged to the probate estate. Again, the concept of Probate fees is commonly confused and interchanged with the Estate Tax (which is taxed at a marginal rate of 35% once assets of the decedent’s gross estate (which includes probate and non-probate assets) exceed the exemption amount for the year of death ($5,120,000 in 2012). In other words, probate does not have any bearing on the estate tax and vice versa, these are two separate issues.
If I do not have a Will then all of my assets will pass to my spouse, or if my spouse does not survive they will pass to my children. It depends on where you live! If you die without a Will, then any assets without a beneficiary designation or other ownership or contractual designation controlling the transfer or disposition at death, will be distributed pursuant to the state’s (usually the state of domicile) “Substitute Will.” The state’s Will statute (in Missouri RSMo Section 474.010) may not match your desired division and distribution. For example, if a decedent died domiciled in Missouri without a Will, leaving behind a spouse and two children who were issue of both the decedent and the surviving spouse, the probate assets would be distributed as follows:(i) $20,000 would be distributed to the surviving spouse (ii) ½ of the balance of the probate estate would be distributed to the surviving spouse, and (iii) ½ of the balance would be distributed to the decedent’s children. This is probably not the method of distribution many people would expect or desire.
If I name my children as beneficiaries of my Roth IRAs, they won’t be required to take minimum distributions from the Roth IRA Accounts during their lifetime. Sorry, this is false as well. Roth IRAs are a relatively new provision in the tax code. While the owner of the Roth IRA is not required to take distributions during the owner’s lifetime, after the Roth IRA owner’s death, the beneficiaries are required to start taking distributions from the accounts. The amount that is required to be distributed each year is called the “minimum required distribution” or MRD. There is an exception if the spouse is named as the beneficiary, as the surviving spouse has the option to treat the Roth IRA as their own IRA and delay the MRD until after their subsequent death.
Jennifer K. Huckfeldt is a shareholder in the Springfield, Missouri, law firm of Carnahan Evans Cantwell & Brown, PC, where she practices primarily in the areas of estate, gift and income taxation. Huckfeldt is a lifelong resident of Missouri. She was born and raised in Kansas City and moved to Springfield in 1999 with her husband and two daughters. She graduated from William Jewell College, obtained her law degree from the University of Missouri–Columbia, and has an advanced law degree in taxation from New York University School of Law. Jennifer is a board member of NOVA Center of the Ozarks Inc, The Summit Preparatory School of Southwest Missouri, and the Greene County Estate Planning Council.