There are some myths that circulate about the estate planning process, and if you buy into them, you can make errors because you have incomplete information. With this in mind, we are going to debunk a handful of them in this post.
DIY estate planning is simple, effective, and inexpensive.
If you search for estate planning information, you will invariably see ads for sites that sell do-it-yourself legal documents, including wills and trusts. They have convincing marketing material, and it can seem like it is a very simple matter that you can easily handle on your own.
In reality, when you are planning your estate, you are taking a very big step. You are facilitating the passing of your legacy, and this is a profound endeavor that has serious financial ramifications for your family.
There are certainly some handyman projects that you can successfully complete on your own without taking any real risks. However, estate planning is another category, and there is no substitute for qualified legal counsel.
You don’t pay taxes on inheritances.
There is a great deal of truth in this statement, but it is not an absolute. A direct inheritance that is received through the terms of a will is not considered to be taxable income. If you are the beneficiary of a life insurance policy, you do not have to report the proceeds.
Distributions of the principal in a living trust are not taxed, but you have to report distributions of the trust’s earnings. The beneficiary of a traditional individual retirement account must pay taxes on the distributions, but Roth account distributions are tax-free.
While there is a federal estate tax, most people do not have to pay it because it is only applicable on the portion of an estate that exceeds the exclusion. Right now, the exclusion sits at $11.7 million.
There are also some states that have state-level estate taxes, but Ohio is not among them. If you own property in a state with an estate tax, it would apply to your estate if its value exceeds the exclusion there.
A small handful of states have state-level inheritance taxes, which is a tax that can be levied on distributions to each nonexempt inheritor. Once again, Ohio is not one of them, but there is another consideration.
An inheritance tax would be applicable if you inherit property that is located in a state with this type of tax. For your information, they are Iowa, Kentucky, Maryland, New Jersey, Pennsylvania, and Nebraska.
Trusts are only for the wealthy.
If you are exposed to the estate tax, you could use an irrevocable trust to facilitate transfers at a tax discount. This leads some people to believe that trusts are only for the super wealthy, but this is a misconception.
There are other types of trusts that can be used to satisfy objectives that are held by people that are not among the financial elite. You should discuss your goals with an estate planning lawyer before you assume that a trust is not right for you.
The state will take care of everything if you die without an estate plan.
It is true that the state would initiate an estate administration process that would be supervised by the probate court if you die intestate. They would appoint a personal representative to act as the administrator, and final debts would be paid during probate.
Ultimately, the assets would be distributed under the intestate succession laws of our state. Under these circumstances, people that you would never leave out could be disinherited. Short of complete disinheritance, the distribution percentages may not be consistent with your actual wishes.
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There is no reason to take chances with intestacy and acting on your own without any legal assistance is risky business. Another widely held myth is the idea that legal fees are prohibitive, but in reality, a properly constructed estate plan can save your family money in the long run.
If you are ready to work with a Cincinnati estate planning lawyer to put a plan in place, our doors are open. You can send us a message to request a consultation appointment, and we can be reached by phone at 513-721-1513.