Planning for your future and the future of your family is necessary for people from all walks of life. At Martinson & Beason, P.C., our Huntsville, Alabama, team of attorneys can assist you with all your estate planning needs, and make the process as stress-free as possible.
Although these conversations about the future, death tax, and what your family will do when you’re gone are extremely difficult, there are many misconceptions regarding estate planning that can be cleared up to alleviate some of the stress involved. Here are five myths about estate planning:
Unfair “Death Tax”
You work hard your entire life, pay income tax your entire life, and then once you die, the government taxes that money you already paid taxes on. Seems unfair, doesn’t it? However, that is not always the case. Most estate tax or “death tax” is applied on income that has never been taxed.
There is “ordinary” income tax and “capital gains” income tax in the United States. Ordinary income tax involved taxing wages, stocks, interest, rent, and the like. Capital gains income tax is imposed on the increased value of things that you actually invest in: stocks, real estate, and your family business.
You have to pay ordinary income tax every year, but you only have to pay income tax on capital gains if you choose to sell the stock. Even if you build a successful family business from scratch, you won’t be taxed on the increased value of that business. So although taxing your ordinary income after death may seem “unfair,” capital gains investments can be passed down to your family and loved ones free from tax.
My Kids Will Lose the Business Without a Will
Your family business is just that—a family business—and it shall continue to be one after you’ve passed on. Many people believe that in order to pay the estate tax once a parent has passed, the entire family property or family business must be sold. That’s not true.
The first $5.4 million of estate tax is tax-free (up from $3.5 million in 2009). Many family businesses or properties might not be worth that much, which means no tax. Your kids will be able to inherit the family business or property tax free.
But what if our family business is worth more than the $5.4 million? Don’t worry, there are tax codes in place with special provisions to protect your family business and even more provisions in place to protect family property. If your estate is greater than the $5.4 million and the business accounts for more than 35% of the overall value, any taxes due can be paid over the next 14 years—making it much more manageable.
If that still isn’t enough to get your family to stop worrying, your children can have the option to pay interest for only the first five years, at interest rates around one to two percent. After those first five years, they can pay off the remaining balance at a four percent interest rate.
The Probate Process is Difficult
Emotions aside, the probate process does not mean your family will be overwhelmed with costly and lengthy proceedings. A probate is the last documented—legally binding—testament of the deceased. They are extremely important and should be handled tactfully.
Once the probate procedure opens, the executor has between six and 19 months to follow court-mandated orders to:
- Provide notice to named beneficiaries who will receive property that you designated, as well as “heirs” who will receive your property if specified elsewhere by your will.
- Permit beneficiaries to challenge the legality of your will of any provisions contained within.
- Provide a formal valuation and inventory of all of your assets in your estate.
- Liquidate any assets as necessary.
- If your estate is large enough, pay any estate tax, burial expense, and debts.
- Provide detailed distribution of the assets to the beneficiaries in the manner outlined in your will.
Barring any challenges of validity, the probate process should actually be relatively easy for families once the time comes—as long as a detailed will was provided.
No Will Means the Government Will Seize Everything
If you die without a will, the government will take all of your property. That myth is completely fabricated. If you die without a will or a trust, the state you live in determines who receives your assets.
In Alabama, your children or any surviving spouse would receive your property, followed by a surviving parent, and further descendants. Keep in mind that—although some states are expanding their law—many states don’t allow assets to be passed on without a will to a live-in significant other, stepchildren, or any non-marital relationship partner.
Having a will can certainly help avoid any of these issues down the line, but in general, state law will not take your money and property after death.
You Need a Trust to Avoid Taxes
Many people still believe that estate taxes will take 50% of everything you own unless you have a trust set up. That is not the case. Over 98% of people will have an estate tax of much less than 50%— and in most cases, it will be zero.
Estate tax is not affected by whether or not a person has a will, and there is only a chance that it could be affected by having a trust— if you are married. A trust could allow you to double the amount of estate-free taxes to be left to your children.
If you still have questions regarding estate planning in Huntsville, Alabama, contact Martinson & Beason, P.C. to talk to an experienced probate attorney.