The Perils of DIY Estate Planning: Common Mistakes and Their Consequences
In today's digital age, the convenience of online tools can be tempting for anyone looking to save time and money. When it comes to estate planning, however, the DIY approach can lead to unintended consequences. Here are several common mistakes people make when drafting estate documents online or using templates without professional legal advice, along with the potential repercussions.
1. Unintended Disinheritance
One common mistake is failing to account for specific bequests properly in a will. For example, if a parent has two children and intends to leave the bulk of the estate to one while still providing for the other, using an online template might not capture this nuance. This could result in one child being unintentionally disinherited, leading to potential legal battles between siblings and significant emotional strain.
2. Invalid Will
Another frequent error is not adhering to the proper formalities required by state law. For instance, failing to have a will properly witnessed can render it invalid. If a will is deemed invalid, the estate may be distributed according to the state's intestacy laws rather than the decedent's wishes, leading to disputes among family members and unintended distributions.
3. Overlooked Tax Implications
DIY estate documents often overlook specific tax implications. For example, without proper tax planning, a sizable estate might be subject to substantial federal and state estate taxes. This could result in a significant portion of the estate being lost to taxes, which could have been minimized with professional legal guidance. Effective estate planning includes strategies to reduce tax liabilities, ensuring more of the estate goes to the intended beneficiaries.
4. Misunderstood Trusts
Creating a living trust is a popular estate planning tool, but it's only effective if properly funded. A common mistake is setting up the trust but not transferring assets into it. If the trust is not funded, those assets remain in the individual’s name and are subject to probate, which the trust was intended to avoid. Properly transferring assets into the trust or designating the trust as a beneficiary is crucial.
5. Ambiguous Language
Using vague or unclear language in estate documents can lead to confusion and disputes. For example, a will that simply states "everything to my children" can be problematic if the testator has both biological and stepchildren. Ambiguous language can result in legal battles over the intended distribution of assets, causing delays and additional expenses.
6. Outdated Documents
Estate planning documents need to be updated regularly to reflect changes in laws and family circumstances. Using an outdated template might fail to address these changes, such as the addition of a new spouse or children. This can lead to significant legal complications and unintended disinheritance of family members who were not included in the original document.
7. Incorrect Type of Special Needs Trust
One critical mistake involves using the wrong type of special needs trust. For instance, a parent might inadvertently set up a first-party special needs trust instead of a third-party special needs trust for their disabled child. A first-party special needs trust is funded with the beneficiary’s own assets, typically used when the individual receives a settlement or inheritance directly. In contrast, a third-party special needs trust is funded by someone else’s assets, like parents or grandparents, and does not affect the beneficiary's eligibility for government benefits.
Using a first-party special needs trust instead of a third-party one can have significant consequences. The assets in a first-party trust must be used for the beneficiary’s benefit and are subject to Medicaid payback provisions upon the beneficiary’s death. This means that any remaining assets in the trust must be used to reimburse the state for Medicaid benefits provided. A third-party special needs trust, however, is not subject to these payback rules, allowing more flexibility and protection for the beneficiary’s inheritance.
8. Misallocation of Retirement Accounts
Another significant error involves misallocating retirement accounts in a way that is not tax-efficient. For example, a person might donate their Roth IRA to charity and leave their traditional IRA to their relatives. However, the opposite strategy could be far more beneficial for the relatives.
A Roth IRA is funded with after-tax dollars, and its withdrawals are typically tax-free. Charities, being tax-exempt, do not benefit from the tax-free withdrawals of a Roth IRA. On the other hand, traditional IRAs are funded with pre-tax dollars, and withdrawals are subject to income tax. Leaving a traditional IRA to a charity allows the charity to receive the full amount without any tax consequences. Conversely, leaving a Roth IRA to relatives would allow them to inherit the account tax-free, providing them with a significant financial benefit. By not considering these tax implications, the estate plan might inadvertently increase the tax burden on the heirs.
9. Equal vs. Equitable Distribution for Minor Children
A common issue with online templates is that they often default to splitting assets evenly between children. While this might seem fair, it doesn't consider the individual needs of each child. For instance, one child might require additional tutoring, medical care, or other supports that the other child does not. By splitting assets strictly evenly, the child with greater needs might receive less support than necessary, resulting in inadequate resources for their development and well-being.
Moreover, when assets are divided into separate subtrusts for each child, the child with the least expensive needs often has the most left over when they gain control of their subtrust. This can lead to an inequitable distribution of resources, disadvantaging the child who needed more support during their upbringing. A more nuanced approach would be to allocate resources based on the specific needs of each child and treat the assets as a "family pot" until the youngest child is done with college. This ensures that all children are adequately provided for and have equal opportunities to succeed, regardless of their individual needs during their upbringing.
Conclusion
These common mistakes highlight the risks and unintended consequences of using online templates or DIY methods for estate planning without professional legal advice. While it might seem like a cost-saving measure initially, the potential for costly and emotionally draining mistakes is high. Consulting with a qualified attorney ensures that your estate plan is tailored to your specific needs, complies with state laws, and addresses all potential tax implications. Investing in professional legal guidance can ultimately save your loved ones from unnecessary hardship and ensure that your wishes are accurately carried out.
The information provided on this blog is for general informational purposes only and is not intended as legal advice. Readers should not act upon this information without seeking professional counsel from an attorney licensed in their jurisdiction. Ari Weisbard is a member of the DC and NY bars and is not licensed to practice law in any other state. Consult with a qualified attorney to obtain advice tailored to your specific legal situation.