The 5 Most Common Estate Planning Myths

Denise McCarthy, Esquire – Partner at Cody, Cody, & McCarthy

 

TheDownsizingGuy: Myths… we hear all kinds, from gum will stay in your stomach for seven years, to cracking your knuckles leads to arthritis. The thing about myths is that they are often inaccurate and lead to false assumptions and odd behaviors. The same can be said for estate planning and the general public’s understanding of wills, trusts and the protection of assets.

Our guest today is Denise McCarthy, a partner with the law firm of Cody, Cody & McCarthy based in Quincy, Massachusetts. The firm specializes exclusively in estate planning and elder law matters. Denise assists individuals, families, and businesses over a variety of backgrounds, with a wide array of estate planning concerns, including reduction in both Federal and Massachusetts estate taxes exposure, protecting inheritance from waste and divorce, transferring wealth in a tax efficient manner, and preserving wealth in situations where loss of a major family asset to the cost of long-term care is a concern.

Originally a marketing and communications professional with a Masters in Communications Management from Simmons College, Denise was looking for an opportunity to work with people one-on-one in a manner that left an impact in their lives and their loved ones.

She enrolled in Suffolk Law in Boston, took her first trust course, and she knew she had found the right fit. Combined with her superior communication skills, Denise brings a level of compassion that most in the legal profession lack. A former NASCAR racetrack employee, Denise is driven by the need to educate the 70% of people that never address their estate planning needs. She’ll be discussing “The Five Most Common Estate Planning Myths.”

Denise, welcome to TheDownsizingGuy.

Denise: Hi Ryan, thank you for having me.

TheDownsizingGuy: I love to ask personal questions at the start of interviews so our listeners get a sense of who is on the show. You shared that you used to work for a NASCAR racetrack… how did you end up in that job? Did you ever get the opportunity to take a couple of laps behind the wheel? That’s what I want to know.

Denise: No, I never got behind a wheel, but I was definitely behind the scenes. I got into it because my undergraduate degree was in Public Relations and Marketing Communications and they were hiring a Public Relations intern for three summers up at Loudon in New Hampshire, where they have a couple of NASCAR races every season… so that’s where I was. It was a lot of fun.

TheDownsizingGuy: Nice! Are the myths behind NASCAR real? It’s like, the real, real passionate folks about it, the lines, like… I’ve never been to Loudon but I hear its miles and miles of traffic when it comes for actual race day.

Denise: That is very true, because a lot of times NASCAR is in kind of rural settings, and they don’t have the kind of support system, road wise, for events that big. So we would always joke up in Louden that for a day or two it was the biggest town in New Hampshire, and essentially NASCAR has a super bowl every Sunday – that’s how big it is… so you’re talking about a ton of people descending on one racetrack. It does get very crazy… but it is very fun, it’s a very different experience being inside of the racetrack versus outside the racetrack, but I definitely recommend it for anybody.

TheDownsizingGuy: Well I will have to add that to my bucket list. So in preparing for our talk today, you shared “The Five Most Common Estate Planning Myths“, and they are all things I have either heard before from clients, or I have said personally. So before we get into what those five myths are, do you have any personal insight on why you believe people still hold on to these myths?

Denise: Some of it is the lack of education out there. I think that people kind of glom on to what they hear on the radio or what they pick up form catchy headlines and things that worry them and kind of piece together what they think estate planning is. There is defiantly a lack of education, and I think that some people are just afraid to go to an attorney… it seems so serious and scary, and we just talk about death. People just don’t get educated about it.

TheDownsizingGuy: That makes complete sense, because it sounded like the ostrich sticking its head in the sand. If I don’t talk about it, it won’t happen. And we all know we are going to die at some point. Based on your experience, what are the five most common estate planning myths?

Denise: The five that I see more, the most common ones are:

The Five Most Common Estate Planning Myths

TheDownsizingGuy: Okay, lets start with, “I don’t need and estate plan.” One of the things when we where doing the research, and you had shared some statistics with me, you said really only 30% of people pass away with a will, why do you think that 70% of folks out there feel that they don’t need and estate plan?

Denise: The reason is that people don’t understand what an estate plan is. The term estate carries this connotation that, “Oh my gosh, I have to have a ton of money, and I have to have a lot of assets, and a high net worth to even worry about an estate plan.” And I wish that if there was anything I could do it would be to wipe that from people’s minds… because every time I sit down with clients, I always say the same thing to them. There are three goals that we look at when setting an estate plan.

The Five Most Common Estate Planning Myths

  1. Define what happens to your stuff after you pass away: That is the one that people seem to think encompasses all of estate planning.
  2. Planning for incapacities: What happens if you become incapacitated, you can’t speak or act on your own behalf? That is something that totally ignores asset level, so that is something that affects everybody. I have had clients that have come to me and said, “Oh yikes, Mom had an accident and she needs surgery and she can’t speak.” So now if you don’t have a Power of Attorney or a Health Care Proxy you have to go to court and have somebody appointed as your Guardian or Conservator and that Guardian or Conservator has requirements with the court to continue to keep updating them on what your assets are, what you’re doing with your assets. It’s a very expensive process that can be avoided very simply by doing a Power of Attorney and a Health Care Proxy… so that is something that everybody needs.
  3. Look at estate tax exposure and determine if that is an issue for you: For some people it’s not, but it doesn’t change the fact that everybody needs to address that incapacity piece, and everybody should address that first question of what happens with my stuff when I pass away. It doesn’t matter what level of assets you have, if you have any assets you want them to go to the people that you want them to go to… and if you don’t pick those people the state has a statute, its called an Intestate Statute, and it basically tells whoever ends up representing your estate what to do with the assets… it basically picks who is going to inherit your assets for you.

TheDownsizingGuy: You mentioned three goals when you are sitting down and talking with folks: What happens to your stuff, Planning for incapacity, and Estate Tax Exposure.

I’m going to skip past the what happens to your stuff right now, and the planning for incapacity, because you touched on them at a really high level – Health Care Proxy, Power of Attorney… you need to have those documents in place, and I’ll actually ask you a question later on why should someone talk to an attorney about that versus something like LegalZoom and get your documents done here.

The estate tax exposure part, I actually want to spend a little bit of time on that one because one of the things that you brought up are that people don’t understand the estate plan. You don’t need a ton of money or assets. So if somebody doesn’t have a ton of money or assets, why is it important to understand your estate tax exposure?

Denise: A lot of times people don’t understand even when you get hit with the estate taxes. Generally what I see, the biggest mistake I see people make is I see them leave everything to their spouse, and everything from the second death passes on to the children. Nine times out of ten, any time I get a call and somebody wants me to review their will, that’s what it says – leave everything to my spouse.

The Five Most Common Estate Planning Myths

The problem is that Massachusetts gives each person an exemption amount. We sometimes refer to it as a coupon because it’s easy for people to understand. So basically what Massachusetts is saying, “I’m going to charge you estate taxes on everything above a million dollars”, so basically they look at the value of your estate when you pass away, then you apply this million dollar coupon. If you leave everything to the surviving spouse, what happens in the surviving spouse only has their one coupon and you waste the exemption amount or the coupon amount of the first spouse that passed away.

So a lot of people will set up trusts to make sure that they are maximizing the use of each of their exemptions, but if you’re not in that category… so most couples, if you’re over about a million dollars, if you have life insurance proceeds and a home it’s not too difficult to be over a million dollars… then you should be thinking about doing some planning to minimize your exposure to estate taxes. In a lot of cases we can get rid of those estate taxes all together and leave more for your kids to inherit or your beneficiaries… but if you’re not at that asset level, you shouldn’t be worried about estate taxes.

TheDownsizingGuy: So really that threshold is a million dollars… and those are total assets – that’s not just money, that’s value of real estate, value of life insurance policies, all that stuff they wrap it all together.

Denise: That’s everything, and one thing that your financial advisor will not include in your net worth is the death benefit of a life insurance policy, but when I look at the estate tax exposure, I always have to add that in because when the government looks at what’s included in your gross taxable estate, even thought the recipient of the insurance policy will not pay income tax on what they receive, that value of the death benefit is included in your estate so it could get hit with estate taxes before it passes on to your beneficiaries.

TheDownsizingGuy: And we all like to try and avoid paying taxes.

Denise: Yah, and there are a lot of easy planning tools that we can use to avoid estate taxes.

TheDownsizingGuy: The second myth that you mentioned is that wills avoid probate. So why don’t wills avoid probate and what is the real purpose of the probate process?

Denise: Probate has to do with the transfer of ownership of an asset. So if you pass away and you own an asset in your name individually, well there needs to be a determination of who is rightfully going to be the next owner of this property. That’s why you are going through the probate process. If you have ever gone through the probate process or helped settle an estate, one thing you might notice is that there are certain assets that won’t go though the probate process.

The Five Most Common Estate Planning Myths

So, for instance, life insurance that has a living, properly designated beneficiary is going to bypass the probate process. Same thing with a retirement account that has a designated beneficiary, and so will joint ownership assets because you already know who the next owner is – it’s been indicated or the surviving owner is the next owner. So those assets don’t go though probate. Other assets do, and like I said you are trying to make a determination as to who is the next rightful owner of this property. So what happens if someone has a will… a will might say, “Okay I want the next owner of my property to be my three children, equally.” If that’s what you, said you have to go through the probate process to have that will authenticated, so that’s is what is really happening in the probate process.

The will goes through the court and you are getting a judge saying, yes this is, in fact, this person’s real will. Nobody has objected to it and therefore we will distribute assets and make the new owners who the decedent indicated would be the next owner through their will… but you are going through a probate process, which is a misconception a lot of people have. They think, “Oh, I did my estate plan, I did a will, I’m not going to have to go through probate.”

Probate is not the worst thing in the world. The number one reason people hate it is because it’s slow. You can’t close an estate in probate in less than a year because you have to give creditors up to a year to file a claim against the estate if the decedent owed them any money before they passed away. So it’s slow. People want to sell property that’s in an estate and that presents slight complications if it’s in probate and nobody has been appointed yet to be able to have the authority to do that.

The real way to avoid the probate process is have a trust own your assets because if a trust owned your assets what happens in the trust is the trust continues to be the owner of the assets when you pass away but the manager of the trust changes. You’re never asking the question of, “Okay, who is the next owner of this particular asset?” because the trust just continues to own it.

TheDownsizingGuy: That’s a really good point. I know we are going to get into that a little bit later, as far as trusts and whether it actually protects and certain different types of trusts. One question I had within here… actually I have two. You mentioned about the will having to be authenticated by the court. What happens if they don’t authenticate it? They look and say, “No, this isn’t a valid will”… which can happen… I’m going to assume any of those “Download your forms and do your will yourself” type things.

Denise: It could, there are a lot of reasons not to use a LegalZoom, but you’ve hit on one of them, which is, “What if you create a will that isn’t actually a valid will in the state of Massachusetts? What if you haven’t complied with the specific execution requirements for properly executing your will? There are a number of reasons I could get into, but if that happens… if your will is found to be null or void or maybe somebody has challenged it for some reason, then you fall back on that intestacy statute that I mentioned. The Commonwealth of Massachusetts basically has a default provision that says, “Okay, this is who receives this person’s assets.” I’m not even going to go into it because it gets kind of complicated if you have a spouse, and you have all the same children, or a spouse and you have different children, it can get a little dicey… but, basically Massachusetts spells it out and that’s what you want to end up falling back on.

TheDownsizingGuy: Okay, and how does it work if you have a property in different states? Do you need to file this in every state or is it just one state your main residence?

Denise: No, you have to file probate in every state in which you have assets… so that’s another huge reason people do trusts because you can consolidate ownership in the trust and then you’re not even going through probate, but you are avoiding probate in numerous states. We have a lot of clients in Massachusetts that have real estate in New Hampshire, Maine, Vermont, Florida… it’s pretty common and we try to get it all owned in the trust so you don’t have to do that.

TheDownsizingGuy: That is a fantastic tip right there for folks who haven’t done that and think that their regular plan that they put together is going to take care of it.

Now, your third myth deals with Nursing Homes, and people’s fear that nursing homes will take their home. I hear clients say that they create a trust and the nursing homes won’t be able to take their homes. Can you help us to better understand this and sort of debunk this myth, maybe share some basic information like how and when a trust should be done to help accomplish a goal of protecting a home?

Denise: One thing I always like to clear up because I don’t know if it is just sensationalism in journalism or anything out there… but the nursing home does not take your home. They never take your home. The reason people say that they take the home is because if MassHealth, which is Medicaid in Massachusetts, gives benefits to an individual, they can put a lien against the home to recover the money that they have put out as benefits for the person.

So they are actually putting a lien against it, it’s not like they are knocking on people’s door and saying that you need care and you need to get out of here. It’s not quite like that but this is a huge myth and I see this all the time, and I genuinely feel bad for people because they did put a lot of effort into doing their estate plan they have set up, typically a revocable trust, and they think that they are all set. But an estate plan is a lot of different things in life. You don’t do it once and then forget about it and it’s a one-size-fits-all solution for your entire life.

Someone’s estate plan at age 30-35 looks very different from someone’s estate plan at 70-75, so you can’t consider it one and done. So a lot of times at the younger stage, people are mainly worried about simplified administration, avoiding probate, minimizing their exposure to estate taxes – we set up revocable trusts.

A revocable trust is right there in the name – it is revocable. You can amend it. You can restate it. You can pull the money in and out of it however you want. The people that set it up, the trust makers, are actually the beneficiaries of the revocable trust… so because they are the beneficiaries they have the right to take assets in and out of it however they see fit. Those assets are accessible to them so, therefore, if you go to apply for Medicaid benefits or MassHealth in Massachusetts and they look at, “What assets does this individual have and are they eligible for benefits?”… they are going to count all of those assets in the revocable trust and that, for many people, includes their home.

There are a ton of different types of trusts. A huge group of trusts other than revocable trusts is irrevocable trusts. Within the family of irrevocable trusts there is one trust that we refer to as a Medicaid Asset Protection Trust and that type of trust is and irrevocable trust. You can segregate assets in that type of trust and eventually, after 5 years… you can’t make any transfers within five years of applying for benefits… but if you set up your plan early enough and you have segregated assets in this type of trust, then they can be outside of the purview of what Medicaid or MassHealth is looking at when they are determining whether somebody is eligible for benefits or not.

TheDownsizingGuy: Any assets need to be in the irrevocable trust for at least 5 years.

Denise: They have to be there for at least 5 years, it used to be 3 years, so that’s something that I get a lot of questions about. It used to be three years years ago and those people are grandfathered in if they made transfers. At this point it’s probably been long enough as it is.

Whenever you talk about irrevocable trusts, one thing… its like a misconception. This misconception is people often think, “Oh my gosh you have to give up total control.” People fall on two sides. Either they feel like, “I have to give up total control” or they don’t realize that they have to give up some control over the assets… it’s kind of somewhere in between.

You are parting ways with the asset when you are putting it into a irrevocable trust, but the Medicaid Asset Protection Trust can maintain income interest for the persons that have set it up… so the trust makers. So yes, you have parted ways with the asset, but you could continue to get interest or dividends if there were investment accounts that you put into that type of trust. If it was real estate that you were renting, you continue to get the rental income… it’s definitely something you have to consult with an attorney about for sure.

TheDownsizingGuy: That was news to me, the little bit I know about irrevocable trusts, my understanding, I talk to attorneys often, estate planning attorneys or financial advisors, and I talk about irrevocable trusts… and my understanding was, one it was in there it was basically hands off, you can’t do anything with it. That’s a point that we just shared, if you have income coming through there, you still have access to potential rental income or something like that, I didn’t know that.

Denise: Yep, and it all depends on the terms of the trust, I never want to make blanket statements… and that is why you consult with an attorney, because it all depends on the language because in some cases I don’t put in that right to keep income and that’s for a number of other reasons, trying to reduce exposure to estate taxes, or they don’t need that income or whatever… there are a number of different ways to do that type of planning but you need to consult with an attorney to do that piece.

TheDownsizingGuy: Myth number 4, there is nothing I can do to protect my kid’s inheritance from him or her self. Is this something you hear often and what do your clients generally mean by this?

Denise: When we talk about, we call it asset protection for the children or beneficiaries, and for a while I was confused why people didn’t know that they could do this, because in my mind, I think of estate planning as when you leave your assets to your children or beneficiaries, you can do that however you want. You can stage the distributions, you can hold it in trust indefinitely, you can give it to them outright, and have them get it as soon as you pass away. The options are infinite, so it didn’t occur to me that people would be confused about this.

I have had a lot of clients recently kind of shocked, “Wait I can do that? Oh my gosh.” It kind of dovetails from the conversation we just had about your own assets. If you’re trying to protect those for some purpose, you end up having to give up some control over those assets. When you are leaving assets to somebody else, you have the ability to offer them protection. You can basically say, okay, lets say you have 3 kids and you want to leave your assets to you three kids. You might say, this child, the eldest, because they have been married for years, is great with money, financially sound, very responsible individual, I’m going to give that third outright. The person that settles your estate with gather all your assets, value them and divide everything up three ways and give that eldest child his or her money.

Maybe the other two are much younger… one of them just got married, you don’t really like the new spouse, you’re not sure how the marriage is going to work out, and maybe the youngest is just terrible with money and leaving him or her money is just a terrible idea. Well, you can actually protect what you leave them. The way you would do that is you would say, “Okay… instead of doing what I did with my eldest and just giving them their third, I’m going to let my trust continue” so that there will be 2 buckets left at this point each holding a third for the benefit of each of those children and the trustee will make distributions for whatever that child needs… but not necessarily push the asset out of the trust for them that way.

The Five Most Common Estate Planning Myths

Every time you make a distribution out of the trust and you give the child some of the assets it’s going to get comingled with their own assets and it’s going to be as if they earned it themselves. If they get divorced, or they have creditors coming after them, the assets that have been distributed are going to be fair game. If they are sitting inside the trust not having been distributed, they are not counted as their assets, and again, this requires pretty careful drafting of language inside the trust… but that’s essentially what you are trying to do. You are trying to shelter the assets so that whatever happens in my child’s life, at least this nest egg of money is sitting here protected. Does that make sense?

TheDownsizingGuy: Yes, I was just making a note, because that one was interesting. Once it’s distributed, its considered common property for all intent and purpose. You’re getting divorced, it’s going to be fair game… it’s 50/50 or whatever that split is worked out to.

Denise: Right, and some people get pre-nuptial and post-nuptial agreements and things like that to address all of their property, where ever it came from, but this is kind of the belt and suspenders. This offers a lot more asset protection.

TheDownsizingGuy: You had mentioned that you can structure the distributions however you want. What is the craziest one that, without giving any names, what is the craziest distribution structure you’ve seen?

Denise: Honestly so many people opt for the best asset protection that they can offer their kids, because there are tax advantages to it as well. I would say probably, sometimes people will carve out very specific amounts, like 8% this year 10% the next year, 20% this year, and I’ve seen people build in some pretty crazy language about, if they join a cult, if they join this type of organization, if they do this or they do that, or if they are on drugs or whatever… then distributions stops, then is this happens they can have distributions again. It can get kind of whacky, but I think you would be surprised most people try to keep it simple.

TheDownsizingGuy: The simpler it is the easier it is for everyone to understand, and I would assume that, from a trustees point of view, its easier to administer.

Denise: Yes it is, and it’s really nice, definitely if you are opting for that protection for your kids, it’s all about who you pick to be your trustee. I always try to explain to people that asset protection is really a spectrum. So you can have one kid’s sibling serving as trustee and that offers okay protection because it’s not the kids themselves deciding when to give themselves money.

Really the best asset protection you can have is a totally independent trustee, maybe somebody that is a professional trustee, and then there is a whole bunch of gray area in between… but it definitely puts a lot of pressure on your trustee… but it’s nice, and in a lot of cases I serve as trustee. If I have a beneficiary coming to me saying, “You know what? I just got married and I want to buy a house. Can I have two or three hundred thousand dollars?”

I’ll look at them and say, “Hey, how about, because we don’t know how well this marriage is going to turn out, it’s relatively new… how about the trust buys the house and you can live in it and use it for your benefit. You can use it however you want. But if you get divorced or something happens, then at least the house is sitting in your trust, for your benefit, but it’s not distributed to you and now exposed to all of your creditors.”

TheDownsizingGuy: Spoken like an attorney!

Denise: We go through that with all of our clients and not everybody opts for it, but most people do like taking advantage of that protection you can offer for your children.

TheDownsizingGuy: Now on to our last myth, and the one I have heard the most often. Signing over assets to the kids or adding their names to accounts and deeds protect the assets from nursing homes. Can you tells us why this is probably the biggest farce out there.

Denise: This one kills me because, people do it, but they don’t have ill intentions, but it can go so horribly. I am working with clients right now where the kid that they put on the accounts took all the money from the accounts because he could. That is a worst case scenario and I know a lot of people listening to this are going to say, “Well my kids would never do that. Everything is fine. Everything is great.” But have you thought about this?

Have you thought about if you have your kids owning assets of yours because of convenience and you want them to be able to access your bank account and pay for things and help you out, and just help with your care, whatever the reason may be…. have you thought about if they have children that are going into college, those are assets now that they have to declare on FAFSA. That’s a huge one that people lose sight of that become your asset because now you’re an owner. The second thing is if now your kid has divorce or creditors, or has an accident and have judgment against them, now they own part of a bank account or whatever asset they gained ownership of. I know people are worried that their kids are going to kick them out their house… but you can get kicked out of your house that way, too.

TheDownsizingGuy: Think about it. You add your child to it, they get in a major car accident, and all of a sudden, now your assets are exposed because you added their name to the account.

Denise: You can try and make the argument that it is for convenience, but obviously the other side is going to push back on you and say, “No, look it, they are doing this, doing this, and doing that… they are using the account.” It’s an argument you don’t want to have to be making!

The biggest issue I see from a tax perspective is what happens… people do this with their homes all the time… they think, “Okay, I’ll just transfer the house to my kids and then I don’t even own it, perfect! I’m going to qualify for MassHealth benefits and there is going to be no problem here.”

But what happens is, if you can leave your house to your children through your estate plan, either through a trust or a will, what will happen is… lets say you paid $50,000 for your house and it’s now worth $500,000. If you go to sell it as an individual now, you pay capital gains tax on the $450,000 of growth that has happened from the day you bought it to the current fair market value (NOTE: less your tax exemption, naturally). If you leave it to your children, let’s say you gift it to your children while you’re alive, they are going to take that same basis, that $50,000. Then if they ever go to sell it, they are going to pay capital gains tax on that $450,000.

If you let them inherit it through your estate plan in a trust or will, the growth disappears, so that $50,000 basis gets what is called a step-up in basis to $500,000 so the children would only pay capital gains tax on the difference between, okay mom or dad died and the property is worth $500,000, we are selling now and its worth $505,000. They are only going to pay capital gains tax on that small amount and in most cases they take capital gains tax on nothing because their hasn’t been growth between the time of death to the time of sale. That’s a huge one! People are exposing themselves to unnecessary capital gains tax by making transfers like that, and there are other ways to accomplish what you are trying to accomplish of getting the ownership of the house to the children without losing your step-up in basis. That’s why you need an attorney.

The Five Most Common Estate Planning Myths

TheDownsizingGuy: That is a great point, there you have it… the five most common estate planning myths, and as just a quick review, we debunked the following myths:

  1. I don’t need an estate plan,
  2. Wills avoid probate,
  3. All trusts protect homes from nursing homes,
  4. There is nothing I can do to protect my kids inheritance from themselves, and
  5. Adding my kids’ names to bank accounts or deeds or whatever assets you have is the way to go to protect your assets from nursing homes.

Is there anything you want to add in closing, Denise?

Denise: I would say, in my case… I don’t know if all attorneys do this, but we offer free initial consultations. You can get so much out of them, so don’t be afraid to just sit with an attorney and figure out what puts me in the best possible tax situation? What are the things I should be thinking about? Here is what I am worried about, give me your reaction. It’s a really comfortable conversation… it’s not all about death, it’s not all negative, and I don’t bite so it’s not scary.

TheDownsizingGuy: So if any of our listeners or readers have any questions for you, what is the best way to reach you and just Cody, Cody, & McCarthy in general?

Denise: You can reach us at 617-472-5151, we have an office in Quincy and an office in Newton and my email address is Denise.McCarthy@Cody-Cody.com, and Cody-Cody is also our website. You can find a lot of information there as well. We are also on Facebook, LinkedIn, and Twitter, and its just CCM, on FaceBook it is Cody-Cody & McCarthy.

TheDownsizingGuy: Well Denise, thank you for taking the time to share here on TheDownsizingGuy. I’m Ryan Cook. If you have any comments or questions, please visit TheDownsizingGuy.com. Our guest today was Denise McCarthy with Cody, Cody & McCarthy in Quincy Massachusetts and we appreciate your listening and again if you have any questions feel free to leave them here and we will get responses back to you as soon as we can.