DIY Estate Planning: Common Pitfalls and Mistakes
Creating a comprehensive estate plan is a crucial step in ensuring that your assets are distributed according to your wishes, wealth transfer taxes are minimized, and loved ones are adequately provided for after your death. Some people consider a “do-it-yourself” (DIY) approach to estate planning because they are tempted by the promise of simplicity and cost savings (at least in the short term). However, even though a DIY estate plan may seem straightforward enough, there are a number of pitfalls that can undermine the plan’s effectiveness and, in some cases, lead to significant legal complications and expense for your heirs after you are gone.
This article will provide a brief overview of some of the most frequent pitfalls and mistakes made when preparing a DIY estate plan. Understanding and addressing these hazards is essential for creating a valid, coordinated, and complete estate plan.
Failing to Follow the Legal Requirements for Creating a Valid Estate Plan
One of the most significant risks of preparing a DIY estate plan is not adhering to the legal formalities required to create a valid will, revocable trust, or other estate planning document. Estate planning laws vary widely from state to state, and failure to comply with these laws can result in your documents being declared invalid. For example, most states (including Nebraska) require a will to be signed by at least two adult witnesses, each of whom witnessed either the signing of the will or the testator’s acknowledgment of the signing of the will. Some states also impose their own unique requirements for the execution of a will, such as limitations on a witness’s relationship to the testator and certain procedures required to make the will “self-proving” (which avoids the need for the subscribing witnesses to testify to the will’s proper execution). A will that is improperly executed could result in the entire document being invalidated, leaving your estate to be distributed according to your state’s “intestacy” (default estate distribution) laws rather than your wishes.
Legal limitations - including those that you may not even be aware of - can also disrupt your plan in unexpected ways. For example, in many states, a married person cannot disinherit his or her spouse without the spouse’s written consent. Nebraska law generally provides that a surviving spouse has the right to claim an “elective share” (up to 50%) of his or her spouse’s estate. This limitation is very important to consider, especially when dealing with “blended” families with children from a prior marriage.
A common DIY mistake is assuming that a self-written will or a template downloaded from the internet is automatically valid and complete, without considering the applicable state-specific requirements. Failure to consider and address these issues can result in costly delays, potential legal challenges, and infighting among your family.
Not Having a Comprehensive Plan
People sometimes believe that a will is enough to cover all their estate planning needs but that is not true in the vast majority of cases. A DIY estate plan may be limited in scope, addressing only the distribution of assets but neglecting other important aspects such as guardianship of minor children, healthcare directives and financial powers of attorney. Focusing solely on asset distribution can create a situation where critical decisions are left unaddressed, leading to confusion or disputes between the beneficiaries of your estate.
In addition to a will, a comprehensive estate plan typically includes the following key documents:
- Revocable Trust: A revocable trust provides for the distribution of assets during your lifetime and after death. A trust is particularly important for individuals with large estates or those who want to avoid probate.
- Durable Power of Attorney: This document designates someone to make financial decisions on your behalf. It may be effective immediately or only in the event you become legally incapacitated. It is an essential part of an estate plan that many people overlook.
- Healthcare Directive / Medical Power of Attorney: This document outlines your wishes regarding medical treatment in case you are terminally ill or in a persistent vegetative state. It also allows someone to make medical decisions for you if you are unable to communicate them yourself. This is particularly important in the case of a medical emergency or if you become legally incapacitated.
A DIY estate plan that fails to address these matters can leave your family in a difficult situation when it comes time to make crucial decisions on your behalf. For example, if you do not designate a healthcare agent, then important and time-sensitive medical decisions may be delayed. Keep in mind that a will alone does not address incapacity issues, which could arise years before your death.
Overlooking the Need for Regular Updates
A common mistake made by those who take a DIY approach is not updating their estate plan regularly. However, estate planning is not a one-time event; rather, it is a process that will evolve during your lifetime. Your financial situation and family relationships will necessarily change over time, and your estate plan needs to reflect these changes in order to accomplish your family’s goals and wishes.
Significant life events - such as marriage, divorce, the birth of a child, or the purchase of new property - should prompt a review of your estate plan. If you marry after creating a will, you may need to revise your plan to include your spouse as a beneficiary. Conversely, divorce will necessitate removing your ex-spouse from your will and updating your beneficiaries.
Additionally, changes in tax laws could impact the effectiveness of your existing plan. The federal estate and gift tax system is complex, with exemption amounts that can change significantly from one year to the next. DIY estate planners might not be aware of the latest tax laws or how to effectively utilize exemptions to minimize tax liabilities.
Another common oversight is neglecting to update beneficiary designations on life insurance policies, retirement accounts and other financial assets. If the existing beneficiary designations are old and outdated, assets may be distributed to the wrong beneficiaries or may pass in unanticipated ways. Therefore, you should make it a point to review your estate plan every few years, including after any significant life event or change in your finances. You should also ensure that all beneficiary designations are current and in alignment with your overall estate planning strategy.
Failure to Address Contingencies
Planning for contingencies is a critical component of a comprehensive estate plan. DIY plans frequently lack provisions to address unforeseen or remote circumstances, such as a premature death or a situation where two or more beneficiaries die simultaneously. This does not cause a problem, of course, as long as the unforeseen event does not actually happen. But when unexpected events do occur and the documents are unclear (or silent) on how to address such circumstances, it creates uncertainty and is a breeding ground for disagreements (i.e., costly litigation) among the beneficiaries. Thus, it is essential to incorporate contingency plans into the estate plan in order to ensure that it will remain effective and provide clear guidance to address all of the possible scenarios that can occur.
Choosing the Wrong Fiduciary
Selecting the appropriate fiduciaries for your estate plan (i.e., executors, trustees, medical/financial agents, etc.) is an important decision that can affect the efficiency and overall success of your estate administration. Fiduciaries are generally responsible for collecting and inventorying your assets, paying creditors, filing tax returns, and distributing the remaining assets according to your wishes, all of which can be complex and time-consuming. Many people make the mistake of choosing a family member or friend without considering whether that individual has the time, skill, or temperament to effectively carry out the responsibilities of these roles.
A fiduciary must be able to handle complex legal, financial, and intra-family matters. They must also be impartial and capable of making difficult decisions. If you choose someone who is not well-suited to these tasks, it can cause conflict and financial mismanagement. A DIY estate planner may also forget to name an alternate fiduciary in case the original person is unable or unwilling to serve when the time comes.
To avoid these potential pitfalls, carefully evaluate the qualifications and reliability of the person (or persons) you intend to designate in your estate plan. When selecting a fiduciary, generally try to choose someone who is organized, impartial, and capable of handling complex matters. Designating a corporate fiduciary, such as a bank or trust company, is also an option if you want an independent third party to serve as your fiduciary or if you want professional expertise in handling the investment, recordkeeping, and general day-to-day responsibilities involved in an estate or trust administration. Always name at least one backup in case your primary choice is unable to serve.
Underestimating the Importance of Tax Planning
Estate planning involves complex tax considerations that require knowledge of estate taxes, gift taxes, generation-skipping transfer (GST) taxes and income taxes. DIY estate planners often fail to recognize the potential tax implications of their estate plan, which can result in unforeseen, and often unnecessary, tax liabilities for their heirs. Understanding the tax consequences of your estate plan is crucial to minimizing the tax burden on your beneficiaries.
As an example, the federal estate tax applies to estates valued above a certain value threshold, and a number of states (Nebraska included) also impose their own state-level wealth transfer taxes. Failing to account for these tax matters can reduce the wealth your heirs receive or cause friction between beneficiaries due to substantial tax burdens. Similarly, if your estate is large enough, the failure to consider and implement appropriate lifetime gifting strategies can lead to higher-than-necessary estate tax bills.
A qualified estate planning attorney can help ensure that your estate plan is structured in a tax-efficient manner. Your advisor can also propose appropriate strategies - such as lifetime gifts, charitable giving, and setting up irrevocable trusts – to help minimize the tax impact on your estate and maximize the use of your available exemptions.
Conclusion
While DIY estate planning may seem appealing, the complexities and potential pitfalls underscore the importance of obtaining professional guidance. An experienced estate planning attorney can provide personalized advice, ensure compliance with legal requirements and help you navigate the intricacies of tax laws and family dynamics. By working with a professional and avoiding the pitfalls, you can create a comprehensive and effective estate plan that reflects your wishes and protects your legacy.
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