What could go wrong with creating your own Trust or Will?
We call it the brother-in-law syndrome: your brother-in-law knows everything, even though he doesn’t. He tells anyone who’ll listen how much money he’s saved by doing things himself. Sadly, the family has to make things right after the do-it-yourself estate plan fails. This is the message from a recent article titled “Dangers of Do-It-Yourself Estate Planning” from Coastal Breeze News.
Online estate planning documents are dangerous for what they leave out. An estate plan prepared by an experienced estate planning attorney takes care of the individual while they are living and distributes assets after they die. Many online forms are available. However, they are often limited to wills, and an estate plan is far more than a last will and testament.
An estate planning attorney knows you need a will, power of attorney, health care power of attorney, a living will, and possibly trusts. These are essential protections needed but can often be overlooked when creating your own trust or will.
A Power of Attorney allows you to name a person to manage your personal affairs if you are incapacitated. It allows your agent to handle your banking and investments, pay bills and take care of your property. There is no one-size-fits-all Power of Attorney. You may wish to give a spouse the power to take over most of your accounts. However, you might also want someone else to be in charge of selling your shares in a business. A Power of Attorney drafted by an estate planning attorney will be created to suit your unique needs. POAs vary by state, so one purchased online may not be valid in your jurisdiction.
You also need a Health Care Power of Attorney or a Health Care Surrogate. This person is named to make medical decisions for you if you are too sick or injured to do so. These documents also vary by state. There’s no guarantee that a general form will be accepted by a healthcare provider. An estate planning attorney will create a valid document.
A Living Will is a personalized document reflecting your wishes for end-of-life care. Some people don’t want any measures taken to keep them alive if they are in a vegetative state, for instance, while others want to be kept alive as long as there is evidence of brain activity. Using a standard form negates your ability to make your wishes known.
If the Power of Attorney, Health Care Power of Attorney, or Living Will documents are not prepared properly, declared invalid, or are missing, the family will need to go to court to obtain guardianship, which is the legal right to make decisions on your behalf. Guardianships are expensive and intrusive. If your incapacity is temporary, you’ll need to undo the guardianship when you are recovered. Otherwise, you have no legal rights to conduct your own life.
DIYers are also fond of setting up property and accounts, so they are Payable on Death (POD) or Transfer on Death (TOD) accounts. This only works if the beneficiaries outlive the original owner. If the beneficiary dies first, then the asset goes to the beneficiary’s children. Many financial institutions won’t actually allow certain accounts to be set up this way. It also does not control funds for children after age 18, and requires guardian appointments for children under age 18.
The other DIY disaster zone is real estate. Putting children on the title as owners with rights of survivorship sounds like a reasonable solution. However, if the children predecease the original owner, their children will be rightful owners. If one grandchild doesn’t want to sell the property and another grandchild does, things can turn ugly and expensive. If heirs of any generation have creditors, liens may be placed on the property, and no sale can happen until the liens are satisfied.
With all of these sleight-of-hand attempts, if you creating your own trust or will, comes the end of all problems: taxes.
When children are added to a title, it is considered a gift, and the children’s ownership interest is taxed as if they bought into the property for what the parent spent. When the parent dies and the estate is settled, the children may need to pay income taxes on the difference between their basis and what the property sells for. It is better if the children inherit the property, as they’d get a step-up in basis and avoid the income tax problem.
Finally, there’s the business of putting all the assets into one child’s name; with the handshake agreement, they’ll do the right thing when the time comes. According to the parent’s verbal agreement, there’s no legal recourse if the child decides not to share.
The advantage of creating your own will or trust? You will never know if it works or not.
That uncertainty is also the biggest drawback. When the plan is needed, defects will be on display for all to see. Not a good legacy for a competent person creating your own trust or will.
A far easier, less complicated answer is to make an appointment with an estate planning attorney, have the correct documents created properly, and walk away when your brother-in-law starts talking.
Reference: Coastal Breeze News (Aug. 4, 2022) “Dangers of Do-It-Yourself Estate Planning”