Estate planning is complex, and often misunderstood. Regardless of its size, there are several useful tools you can use to protect your estate.
Let’s debunk seven common myths and clarify how proper planning can protect your estate and its assets for future generations.
What is estate planning?
Estate planning is the process of arranging how your assets will be distributed and managed after your death or incapacitation.
Myth #1: Estate planning is only about avoiding estate taxes
The biggest concern I hear from our estate planning clients is “I don’t want my family to pay taxes when I die.” Sure. This concern is justified. If you do have an estate tax problem, your beneficiaries will pay a 40% tax on anything over the federal estate tax threshold.
However, each your unique situation requires further scrutiny. You might be worrying about an issue that just isn’t present.
What is an estate tax threshold?
Beneficiaries pay estate taxes on any amount over a specific threshold.
As of 2024, a single person can give $13.6M* over their lifetime without estate tax implications. Married couples can give close to $27M.
*Note: These thresholds are set to expire at the end of 2025. While the exact amount is unknown, experts estimate the new thresholds will be around $7M for a single person and $14M for married couples.
The Reality
Most Americans don’t have to worry about their beneficiaries paying estate taxes, because most American estates fall below these federal exemption thresholds. More common concerns are income taxes on inherited retirement accounts and capital gains on transferred assets. Not avoiding estate taxes.
The only tax that most people will deal with in terms of inheritance is income tax on a retirement account. For example, you pay income tax on distributions from an IRA or 401k, right? So when the owner of a retirement account dies and someone inherits the unused funds, the beneficiary of that account has to pay income tax on it.
The second most common concern are capital gains taxes on transferred assets. We discuss this, and the step-up in basis rule in Myth 3.
Key Takeaways:
Most estates fall below federal estate tax exemption thresholds, therefore estate planning focuses more on income taxes and/or capital gains on inherited assets—not estate taxes.
The most common tax for inherited assets is income tax on a retirement account.
If your estate is nearing or exceeding the estimated $7 million threshold (2026), speak with an attorney now to help you consider available options.
Myth #2: Assets automatically go to the state if no plan is in place.
A common misconception about estate planning is how easy it is for your assets to transfer to the state upon your death. Especially without a valid will.
The Reality
It’s exceedingly rare for assets to escheat to the state; they generally pass to heirs under intestacy laws if no will or trust exists. However, it is highly recommended that you have an estate plan in place prior to your death, regardless of the size of your estate.
Tools like a trust can help your executor and beneficiaries receive trusted elements of your estate without going through probate court.
Key Takeaways
It is rare for assets to pass to the state, even if a valid will is not in place.
It is still highly recommended you have a will and an estate plan in place prior to your death
Myth #3: Prematurely transferring real estate to heirs simplifies inheritance
While transferring real estate during one’s lifetime might seem like a way to simplify inheritance or avoid probate, it can unintentionally lead to a larger tax burden for beneficiaries. Instead, allowing the property to pass through the estate (or a properly structured trust) ensures heirs can take full advantage of the step-up in basis rule.
The Reality
When an individual inherits an asset, its cost basis (the value used to calculate capital gains taxes) is adjusted to the current market value at the time of the original owner's death.
If property is transferred to heirs during the original owner’s lifetime, the step-up in basis does not apply. Instead, the heirs inherit the original cost basis of the asset.
For example, if a property was purchased for $100,000 and its market value at the time of the owner’s death is $500,000, the heir’s cost basis becomes $500,000. If the heir sells the property at $500,000, there are no capital gains taxes due because there is no gain above the stepped-up basis.
However, if the property is gifted to the heirs before the owner’s death, the cost basis remains $100,000. If the heirs sell the property at $500,000, they must pay capital gains taxes on the $400,000 increase in value. This premature transfer erases the potential tax savings from the step-up in basis, creating a higher tax liability for the heirs.
Key Takeaways
Transferring real estate during one’s lifetime eliminates the step-up in basis, potentially creating significant capital gains taxes for the heirs when the property is sold.
Allowing the property to pass through the estate (or a properly structured trust) ensures heirs can take full advantage of the step-up in basis rule, and therefore pay less capital gains tax if they sell the property.
Myth #4: Having a will means your family won’t need to go through probate
Probate court supervises the process of validating a will, settling debts, and distributing a deceased person's estate to beneficiaries.
The Reality
A will must still be probated to transfer assets to beneficiaries. Only assets held in a trust or designated Payable-on-Death (POD) or Transfer-on-Death (TOD) accounts can bypass probate avoid the court process.
These designations allow assets like bank accounts, investment accounts, or real estate to pass directly to named beneficiaries without court involvement.
Key Takeaways
A will does not eliminate the need for probate; it simply guides the court on how to distribute assets.
To avoid probate, consider transferring assets into a trust or using designations like payable-on-death (POD) or transfer-on-death (TOD) accounts.
Proper estate planning, including trusts and other probate-avoidance tools, can save your family time, stress, and expenses after your passing.
Myth #5: Trusts eliminate the need for a will
Trusts are often marketed as the comprehensive estate planning tool to efficiently distribute assets. Yes—trusts are powerful tools for managing and distributing assets after death. However, this myth creates the impression that a trust alone is sufficient to cover all aspects of an estate.
The Reality
The safest approach to estate planning is having both. A trust allows a trustee to manage and distribute their assets after death. A will is still necessary as a failsafe to handle any assets not included in the trust or unexpected payments after death.
People may assume that once a trust is established, all their assets are automatically included in it, not realizing that any assets left outside the trust or acquired after the trust’s creation still need to be addressed by a will.
You can also create trust structures without putting any money or assets in. You can always create the trust structures first, and then move assets in later. This strategy is ideal because it gives you time to set up the structure now, so that when and if the time comes, you can begin moving money in.
Key Takeaways
Trusts are powerful estate planning tools; however, a trust alone isn’t sufficient to manage and distribute all aspects of an estate.
A will is still necessary as a failsafe to handle any assets not included in the trust or unexpected payments after death.
You can create trust structures without putting any assets into them.
Myth #6: Trusts are self-executing and don’t require ongoing management
It’s a common misconception that once a trust is created, it automatically manages itself without any further effort or oversight.
The Reality
A trust only works as intended if it is actively funded with assets during the grantor’s lifetime. Trusts need periodic reviews to accommodate new assets, changing financial circumstances, or updates in estate planning laws. Without proper management, unfunded or outdated trusts may leave assets vulnerable to probate or unintended distribution.
Key Takeaways
Trusts must be properly funded during the grantor’s lifetime to function effectively.
Regular updates ensure trusts stay aligned with your financial goals and legal requirements.
Poorly managed trusts risk leaving important assets unprotected or subject to probate.
Myth #7: Storing estate documents in a safe deposit box is a good idea
While safe deposit boxes may seem secure place to store estate planning documents, they can create significant delays for executors trying to access essential estate documents and assets after your passing.
The Reality
Safe deposit boxes can only be accessed by authorized individuals, and if the executor isn’t listed, they may need court approval to retrieve its contents. This process can cause delays in estate administration and add unnecessary stress for your loved ones. Storing documents in accessible, secure locations ensures smooth estate management.
Key Takeaways
Executors without access to a safe deposit box may face delays and added expenses.
Store estate documents in a fireproof safe or with a trusted attorney for easy access.
Grant prior access to executors or trustees to prevent administrative bottlenecks.
Understanding these common estate planning myths can save you time, money, and stress. If you’re unsure about your plan or want to maximize current exemptions, schedule a consultation with our experienced estate planning team today.
This article is written by our friend and former client, Bud Simpson.