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What Do You Know about Wills and Trusts? Test Your Estate-Planning Smarts

the editors of Kiplinger's Personal Finance

Don't freak out, but you're going to die. Not today (we hope!), not tomorrow, but someday. And you're probably not ready. Who is? But doing some planning could help put your mind more at ease about the inevitable, and it could really help your loved ones. Estate planning, wills and trusts aren't fun to think about, but they are important to understand. So take this quiz to see if your ideas about the process are accurate.

1: About what percentage of people ages 18 and up don't have a will? (Hint: It's higher than you might think.)

  1. A. 24%

  2. B. 44%

  3. C. 64%

  4. D. 84%

The correct answer is C. C. 64%

Are you one of the few, the proud, the prepared? Then you get a gold star. But 64% of us aren't prepared, according to a 2016 estate-planning survey for online legal services company Rocket Lawyer. The No. 1 reason people don't have a will? The survey found that 55% of folks just haven't gotten around to it yet.

2: If you're not married, don't have children and don't own property, then you don't need to worry about estate planning.

  1. True

  2. False

The correct answer is B. False

Estate planning is about more than just who gets your money or your stuff. One key aspect of estate planning is creating a durable power of attorney, which names a person to make financial decisions for you if you become incapacitated. Another part of estate planning is creating a "living will," also known as an "advance medical directive." It spells out what care you would want when you can't speak for yourself, say, if you're in a car crash or suffer an unforeseen, catastrophic health problem.

3: Who decides what happens to your assets if you die without a will?

  1. A. Your spouse

  2. B. Your children

  3. C. A judge, following the laws set by your state legislature

  4. D. Your lawyer

The correct answer is C. C. A judge, following the laws set by your state legislature

If you die without an estate plan in place, your assets will be distributed according to the probate laws in your state. During probate -- a process that usually takes a few months to about a year -- a judge in your local probate court will appoint an executor whose job it is to inventory your property, have it appraised, pay your debts and taxes, and distribute what's left according to your state's laws. And we all trust our lawmakers implicitly to make the best decisions for us and our families, right? No? Then you might want to get your affairs in order.

4: You need a will to make sure the money in which of these accounts goes to the heirs of your choice?

  1. A. Your 401(k)

  2. B. Your IRA

  3. C. Your savings and checking accounts

  4. D. Your life insurance policy and annuities

  5. E. None of the above

The correct answer is E. E. None of the above

You don't need a will to make sure the people you want to inherit any of these particular assets get them. The only thing you need to do is to name beneficiaries for each of these accounts. If you decide to write a will, keep in mind that your beneficiary designations for these accounts take precedence over anything you might put in your will. So make sure to keep your beneficiaries updated...unless you don't mind your ex walking away with your retirement savings when you die. And be sure to name contingent beneficiaries as backups.

5: Federal estate taxes are an issue for individuals with estates worth how much in 2019? (Hint: It's more than you might think.)

  1. A. $500,000

  2. B. $1.1 million

  3. C. $5.9 million

  4. D. $11.4 million

The correct answer is D. D. $11.4 million

Uncle Sam gives individual taxpayers a healthy $11.4 million exclusion from federal estate taxes in 2019. That's up from $11.18 million in 2018. For married couples, that figure is doubled. So unless you're very, very wealthy, federal estate taxes aren't anything you'll ever have to worry about. In fact, only 1,700 estates would've owed federal estate taxes in 2018, estimated the Tax Policy Center. However, 12 states and the District of Columbia charge a state estate tax, and their exclusion limits can be much lower than the federal limit. See States with the Scariest Death Taxes for more details.

6: If you die with a will, your heirs can skip probate and your personal financial life will remain private.

  1. True

  2. False

The correct answer is B. False

Even if you have a will, your finances will become an open book to your neighbors, friends, enemies and any person who's just plain nosy. Details about your personal financial life -- including such things as the value of your estate, your beneficiaries and those who owed you money at your passing -- will now be a matter of public record, because your will would still have to be validated in probate court (usually a routine matter). If you don't have a will, your estate will be settled in probate court as well. A revocable living trust is an alternative that could help you maintain your family's privacy. Unlike a will, it does not go through probate. Setting up such a trust is more expensive and time-consuming up front, but once complete, the costs to administer it are minimal, and it could deliver savings in time and money later on by avoiding probate.

7: Estate taxes and inheritance taxes are the same thing.

  1. True

  2. False

The correct answer is B. False

The difference lies in who pays the tax. An estate tax is levied on the deceased person's estate. An inheritance tax is levied on the person who is inheriting. Seems simple, right? But it can make a difference in how you plan your estate. Only six states charge a state inheritance tax, so it could pay to carefully consider which heirs to leave your estate to, depending on where they live. In addition, you could avoid state estate taxes by choosing which state you call home. See how all 50 states rank for taxes for more.

8: Which of the following documents do you probably need a lawyer's help to draft?

  1. A. A last will and testament

  2. B. A revocable living trust

  3. C. A durable power of attorney

  4. D. Advance directives

  5. E. Both A and B, but not C or D

The correct answer is E. E. Both A and B, but not C or D

Printable forms for power of attorney and advance directives are available free online and are pretty simple to fill out. Wills, of course, are more complex. You can go online to draft your own will and even a living trust at minimal expense with sites such as LegalZoom.com, Nolo.com and Rocket Lawyer. However, unless your finances are extremely simple, it probably makes sense to pay up for professional help. Any mistake you make could cause your will to be contested or have other unintended consequences. And trusts are even more complicated. But look at it this way, you can pay to get it right now, or your heirs can pay for it later. You can search for a lawyer who specializes in estate planning at www.actec.org or www.naepc.org.

9: People with assets in which of the following forms should probably consider a revocable living trust?

  1. A. Pensions

  2. B. Government bonds

  3. C. Life insurance death benefits

  4. D. A vacation home in another state

The correct answer is D. D. A vacation home in another state

Assets in pensions, life insurance, bonds, bank accounts and the like are passed on to designated pay-on-death beneficiaries. There is no need for a trust (or even a will!) to make sure they get to the right beneficiary. However, owning out-of-state property could trigger probate in some states. A living trust also might be a good idea if you might want to leave unequal amounts to your heirs or disinherit a child. In a living trust (which is so-named because it is established while you're alive), you retitle your assets in the name of the trust. One of the main benefits of a properly written trust is that the estate it covers doesn't go through probate, so your privacy is protected. Also see Should You Treat Your Kids Equally in Your Will?

10: You need to update your will or trust frequently, at least every one to two years.

  1. True

  2. False

The correct answer is B. False

While it is necessary to update your estate plan when warranted, for many people every year or two would be overkill. It's better to think about doing it when you have certain life events or changes in circumstances. Here are some instances where an update would be in order: 1. You get married or divorced; 2. Your family grows with new children or grandchildren; 3. Your estate changes in value significantly; 4. Tax laws change significantly.


Copyright 2017-2019 The Kiplinger Washington Editors