It’s nobody’s idea of fun to think about what happens after you die. That’s probably why there’s so much confusion around estate planning: No one wants to talk about it. In fact, one recent survey found that only about 40 percent of American adults have a will or living trust.
To help demystify the process, we turned to the internet’s favorite estate planning attorney, Pamela Garrett. Better known on social media as the “Law Mother,” she's amassed more than a million followers with her simple, straightforward advice. For our Wake-Up Call at Work newsletter, we spoke with her about everything from how to minimize taxes to the biggest mistakes she sees when it comes to passing down your wealth.
Here’s a basic question that I think a lot of people don’t quite understand: What’s the difference between a will and a trust?
Pamela Garrett: The major difference is that a will comes into effect when you die, while a trust takes effect during your life. So a will doesn’t provide for any planning if you were to become incapacitated, and if you have a will and nothing else, it usually means probate would have to get involved to figure out how your belongings would get distributed. One of the advantages of having a revocable living trust is that it allows you to avoid probate, put in additional protections for your loved ones, and dictate incapacity planning.
What are some of the biggest mistakes you see in estate planning?
I’d say the biggest mistake is not doing it. The government has a default plan for your assets when you die, and most people don’t like what that default is. One of the saddest mistakes I see is with blended families. In many states, if you’re a blended family, your kids are often disinherited if you die first and you haven’t planned correctly.
The other thing I see from a lot from clients who do their estate planning online is that they don’t quite think through how assets coordinate. There’s one woman I worked with in Texas who owned a piece of real estate and a retirement account. She had two children and decided to give her son the house and her daughter the retirement account, because they were worth about the same amount. She passed away 15 years later, and by then her house was worth a lot more money, while her retirement account had shrunk, so her daughter ended up with a few thousand dollars and her son had this very expensive house.
A lot of people also don’t understand that beneficiary designations trump what you put down in a will. I’ll see people leave beneficiaries on their life insurance or retirement accounts and then come up with a will that says something different.
What advice do you have for people who are looking to pass down property or other assets and want to minimize the tax burden for their heirs?
For real estate, a lot of people make the mistake of adding their child to the title because they don't want it to go to probate. But this creates a capital gains issue. When you make that change, they're inheriting the cost basis, which is the price you paid for the house. If you then pass 20 years later and your home is worth much more, then your child will be responsible for paying taxes on those capital gains if they decide to sell, which could be a huge bill. But if they inherit the property when you die, they receive a step-up in basis, which resets the tax value to its fair market value at the time of your death. If they sell the home soon after, they'd avoid having to pay any capital gains.
For other assets, there are federal and state estate taxes that people should be aware of. The threshold for the federal tax is quite high, so most people will be under that threshold. But in several states, the threshold is $1 million, so it’s really important if you’re a resident in one of those states to structure your estate in the most tax efficient way possible.
I think there’s some confusion around POD (payable on death) and TOD (transferable on death). What are those designations and what should people know about them?
A POD is used for bank accounts and a TOD is for investments and property, and they’re worth setting up. It’s free: You just call your bank or brokerage and ask them to add a beneficiary to your account. But what people don't realize is that they only work for the one account they're attached to — and they only kick in after you die. If you get sick or hurt and can't make decisions while you're still alive, a POD or TOD does nothing to help.
They can also cause real problems if they don't match the rest of your plan. Say you named one child on an account 15 years ago, then later, your will or trust says everything should be split evenly between all your kids. Now there's a conflict, and it usually ends up costing your family money and peace of mind to sort out. That's why many people choose to list their trust, instead of a person, as the POD or TOD beneficiary. This way, everything funnels into one place and your trust coordinates all of it, instead of each account doing its own thing. It also opens up benefits a plain POD or TOD can't give you. Instead of your kids getting a lump sum the day the account transfers, the money can be paid out slowly over time, or protected from a future divorce or creditor, the same way the rest of your trust is.
What advice do you have for adult children looking to help their parents organize their estate?
At a minimum, you want to know what your parents have and where it is, and that should all be in one place, as either a physical or digital folder. Where do they bank? Where are their retirement accounts? What about life insurance? Where are the passwords listed? Is auto-pay set up?
Then, if they have estate planning documents, get those in order. Where is the will, the trust, powers of attorney, advanced healthcare directives? Having those conversations ahead of time and understanding your parents’ wishes can really ease that stress in that moment.
What should people know about managing their digital legacy before they pass?
The majority of apps now allow you to add a legacy contact, which allows you to add a family member you want to have access to your account. And you can manage what their person does and doesn’t see. It’s a really good way to pass on that digital asset and avoid your loved one getting shut out. You can also establish that legally through your estate plan.
Cryptocurrency has also become a big issue. You have to leave a memorandum with how to access it, otherwise it’s gone when you die. I tell all our clients to put together a document that lays all this out, with passwords for your phone, laptop, and accounts. We have one in our “Sorry I’m Dead, Now What” kit.
This interview has been edited and condensed for clarity.
