Estate Planning Myths

by Center for Personal Finance editors

Myth: All trusts avoid estate tax.

Fact. All trusts do not avoid estate tax. Property in a revocable (living) trust is subject to estate tax, to the extent that its value exceeds $2 million in 2006. Property in an irrevocable trust, however, is generally not subject to estate tax because an irrevocable trust cannot be modified.

Myth: Having a will avoids probate.

Fact. You must admit a will to probate for it to be carried out. A probate court determines how your estate will be divided. The court looks to your will for instructions as long as it is valid and uncontested. Probate proceedings must take place to transfer ownership of real estate, to appoint a guardian for minor children, and to appoint an administrator. The court monitors administration of the will to ensure the decedent's wishes are followed accurately and in a timely fashion. In some states, you may avoid probating a will in court if the value of the estate is less than $50,000 and the decedent did not own real estate or have minor children.

Myth: Life insurance proceeds are exempt from estate taxes.

It depends. Generally, life insurance proceeds avoid probate and pass directly to the named beneficiary--as long as the estate is not the named beneficiary. The beneficiary receiving the proceeds does not pay income tax on them. However, the value of life insurance proceeds usually is included in the federal taxable estate and subject to estate taxes unless the decedent owned the policy. If your life insurance policy is owned by an irrevocable trust or by someone other than the decedent, it will not be taxed as part of your estate.

Myth: A will covers disposition of all your assets.

Fact. A will only covers property titled in your name alone at your time of death. Property such as jointly held assets, retirement plans, and life insurance will pass to the surviving owner or designated beneficiary.

Note: This information is not to be taken as legal advice. Always consult with your estate planning attorney and tax professional for advice specific to your situation and the state where you live.

March 31, 2006