Common Estate Planning Myths

There are many common estate planning myths that can threaten your family's financial well being. These myths can adversely affect married couples, unmarried couples, and any children that may be involved. No one wants to think about the unexpected events and life changes that can affect their loved ones, but not facing these sensitive matters can result in serious consequences to your loved ones.

Estate planning MYTH #1:

We inherit our parents' debt.

Here’s what happens when they die.

It is a frequent misconception that children are automatically responsible for their parents’ debt after the parents pass away. Creditors can seek payment from a parent’s estate or assets, but they cannot seek payment from the children directly unless the children co-signed for the debt in question. Unsecured debt such as credit card accounts, personal loans, or medical debt will expire after a number of years, which will vary by state. With secured loans, such as a house or property, you would need to take over the financing and continue making payments. In the case of a car that is still being paid off, you might need to refinance or pay off the loan.

While children do not inherit their parents’ debt, as noted, any money or assets in the parents’ estate can be subject to collection through the probate process or a claim against the estate. You can however, greatly reduce the impact of debt distribution claims against an estate through the creation of a trust. Ask an experienced estate attorney about how to create a trust to protect your estate from creditors and maximize the assets you can pass along to your children and heirs.

Estate planning MYTH #2:

I will have to refinance my parents’ mortgage when they die.

Nope, federal law is clear on what happens.

Under federal law, children can assume their parents’ mortgage under the existing terms. Banks are not allowed to make changes to the interest rates, monthly payments, term of the loan, or call the loan due and require an immediate payment in full. Children can assume the parents’ loan regardless of their credit score or income, but they will still be expected to continue the mortgage payments. If they don’t maintain the mortgage payments, the bank can still foreclose according to the terms of the loan.

These laws also cover home equity lines of credit and second mortgages. It should be noted that according to the Garn St. Germain Act, the right for a child to assume a parent’s mortgage applies to both government-backed loans such as FHA, VA, and USDA loans as well as conventional loans.

If you find yourself in a situation where a bank is attempting to prevent you from assuming your deceased parent’s mortgage due to your income, credit profile, or for any other reason, reach out to a qualified estate planning attorney as soon as possible.

Estate planning MYTH #3:

The people you trust to raise your children should be the beneficiaries of your life insurance policy and accounts.

Absolutely not. Here’s why.

The decision on who you trust to raise your children is one to be made with the utmost care and thought. Even though you are comfortable having these individuals take care of your children should you pass, they still should not be the beneficiaries of your life insurance policy, bank accounts, or any other assets.

If they receive this money directly and it goes into their name, it legally becomes their money and not your child’s. If this is the case, they could lose the money in a number of ways. If they owe, or end up owing money, that money can be subject to their creditors’ claims. In the event that they file for bankruptcy, the money can be used in a Chapter 13 payment plan to satisfy their obligations.

The money can also be lost if this person goes through a divorce and the money or assets received have already been commingled into the marital assets. In the event that the person passes, the money they have will pass to their heirs but not your children. The only exception would be if there is legal documentation stating otherwise. This could also work against the chosen individual’s best interest in the event that they become incapacitated. If the person needs to go on government benefits, the money received can be considered an asset and hinder their ability to qualify for assistance.

The drafting of a trust is the most effective way to help protect the assets you want to pass on to your children. Contact an estate planning lawyer to discuss this most sensitive matter.

Estate planning MYTH #4:

Marriage is just a piece of paper.

Not at all.

Marriage encompasses what is sometimes referred to as a bundle of rights that pertains to joint property ownership, joint tax returns, as well as the rights of succession and guardianship. These legal rights and many others are automatically established through the act of marriage. This “piece of paper” as marriage is sometimes referred to, offers solid legal protections that cover significant financial matters and also highly sensitive logistical and emotional issues.

There are legal rights that come along with marriage like these:

A marriage is so powerful that a surviving spouse cannot be fully excluded from all inheritance rights. Unmarried partners have no legal inheritance rights at all.

If the deceased spouse has a last will and testament that specifically excludes the surviving spouse from receiving any inheritance at all, the surviving spouse can challenge it in court. A surviving, unmarried partner doesn’t have this protection. In a situation where there is no will, a surviving, unmarried partner has absolutely no inheritance rights.

A surviving spouse has the right to collect the deceased spouse’s social security if it’s higher than their own. This does not apply to a surviving significant other.

If one spouse needs to go into a nursing home, Medicaid cannot force the sale of the couple’s house to recover the cost while the other spouse is still alive. While an unmarried couple can purchase a house in common, if one of them needs to go into a nursing home, Medicare can force the sale of the house to recover half of the proceeds to help cover the nursing home costs.

While marriage doesn’t grant an automatic power of attorney or guardianship, family members, including spouses, are the first consideration to act as a guardian or conservator, or make healthcare decisions. If one unmarried partner becomes incapacitated, the other partner does not receive this consideration even if they live together and provide care and support for one another.

Spouses meet the definition of a family member and have full hospital visitation rights if the other spouse is hospitalized. In severe cases, an unmarried partner or significant other can be denied visitation of their hospitalized partner. Again, this can be despite the fact that they live together and provide care and support for each other.

Marriage may not be the right decision for everyone. While wills, trusts, and other legal documents can be created by unmarried couples, serious couples should be aware of the comprehensive legal rights and protections that are afforded by the “piece of paper” known as a marriage. Whether a couple is married or not, both partners to the relationship should have their own power of attorney. An experienced estate planning attorney can help with this.

Estate planning MYTH #5:

My ex will never inherit from me.

It happens more than you’d think. Here’s why:

Designations for beneficiaries of bank accounts, as well as retirement and other financial accounts, usually name the spouse as the beneficiary or primary beneficiary. If this isn’t changed after a divorce, the ex-spouse can still receive the funds in these accounts.

There are a few state laws that limit this on certain accounts but these are the exception rather than the rule. In one instance, an ex-wife received $400,000 from a deceased ex-spouse that had been remarried for 20 years, but never updated his beneficiary designations.

If a divorced couple shares a child, and one ex-spouse passes and leaves an inheritance to that child, the other ex-spouse becomes the child’s heir unless the child is married or has their own children. In the case of minor children with accounts in their own name, their estate is usually the beneficiary of the funds. If one spouse contributes funds to this account after the divorce and the child passes, the ex-spouse is entitled to half of this amount even if they didn’t contribute at all.

While these situations are unpleasant to think about, they can be avoided with proper estate planning. With the assistance of an estate planning attorney, you can review all of your financial accounts and designations and if needed, set up a trust that designates all intended heirs and beneficiaries.

Estate planning MYTH #6:

Biological children and legal children are the same thing.

False. You can be a bio parent and not a legal parent and kids can only inherit from legal parents (unless there’s a will). Here’s how.

Many states consider children born out of wedlock as the children of the mother. The father in these cases may not have automatic parental rights and some states will require proof of paternity for inheritance purposes. This proof can be in the form of a DNA test, an acknowledgment of paternity, court ordered visitation or support, or being listed as the father on the child’s birth certificate.

If a father dies before paternity has been established, the child would need to prove the relationship through a DNA test that the father left behind or that of a close relative. Some states limit the time a child can provide paternity to one year or less after the father passes.

In one instance, close members of the deceased parent refused to offer a DNA sample so that the siblings of the deceased could have inheritance rights and deny them to the deceased’s child, an adult in this case.

As is widely known, adoption can establish a non-biological parent as a legal parent. Another instance where a non-biological parent can have legal parentage is in states that automatically presume and deem the child of a married mother to be the child of her husband, even if this isn’t necessarily the case. Unless otherwise established, the husband would be a legal parent. Still, if the child can prove the paternity of the biological father, they can be entitled to their father’s social security benefits and become sole heir of his estate.

Contact an Estate Planning Attorney

These above-mentioned estate planning myths are only some of the common misconceptions about estate planning laws. By making important decisions now, you can get out in front of these matters and make sure your loved ones are protected. Your loved ones can possibly even avoid probate or at least minimize the effects of the probate process.

With the right attorney, you can better understand the estate planning process and avoid letting these estate planning myths jeopardize your loved ones future. Amanda Jelks is an estate planning lawyer who can help you draft essential estate planning documents such as trusts, wills, and powers of attorney. Contact Jelks Law today to discuss your estate planning needs!