Dangers of DIY estate planning. Face-to-face planning may seem “old-fashioned,” but the expertise matters a lot.
by Jerry Davich
Finding tips, guidance and assistance for estate planning has never been easier via the internet, with printable legal documents just a click away. Such do-it-yourself wealth management planning is relatively inexpensive, fast to find, and seemingly simple to pull off.
Nevertheless, there is a risky downside to transferring hard-earned accumulated wealth to your heirs without professional guidance, sometimes resulting in unseen mistakes and unintended financial consequences, experts warn.
“Oftentimes, it is a client’s loved one’s urging them to meet with me based on knowledge that the client drafted the estate plan themselves,” says Dana Rifai, an estate planning attorney with Burke, Costanza & Carberry in Merrillville. “Do-it-yourself estate planning clients want to ensure that the estate plan was done correctly and will be effective upon the client’s passing.”
Cal Bellamy, a managing partner at Krieg DeVault LLP in Merrillville, says Google searches, newspaper columns and magazine articles can provide helpful general information, but too often it’s incomplete and sometimes it’s flat-out wrong.
“Face-to-face dialog is not just the old fashioned way,” he says. “It’s still the best way to develop an estate plan.”
Bellamy often points out to clients that a prepared will is not the same thing as an estate planning document.
“A will is only one piece in the estate planning puzzle,” Bellamy says. “All those pieces need to fit together. Trusts and other non-probate transfer devices can be used to maximum advantage, depending on the circumstances and only when they work together.”
He adds, “Wills speak at the moment of death, but a good estate plan also has lifetime implications.”
Do-it-yourself clients should also be aware of a set of documents known as “advance directives.” These directives include living wills (typically involving a terminal condition when you can’t speak for yourself), healthcare representative powers (not terminal, but you can’t speak for yourself), and a durable power of attorney to transact your business and financial affairs if you are disabled or out of town.
“A complete estate plan includes discussion of these issues,” Bellamy says. “In addition, trusts can provide investment and bill-paying services to older individuals.”
This is merely the tip of the estate planning iceberg, which is why professional advisors and estate attorneys often warn their clients of avoiding a Titanic-like crash with their wealth or estate. It’s what you don’t see in time that can sink the best of plans, they insist.
“The most common mistakes I see when it comes to estate planning are often a result of clients acting on partial information or utilizing a website to establish legal documents such as a trust,” says Wesley M. Kotys of The Kotys Group, a fee-only registered investment advisory firm in Valparaiso.
While there are websites which do a solid job of cranking out legal documents, he says, they are not very capable of answering certain questions.
“I find that when a client has done a DIY trust, they often fall short in some important details, such as funding the trust with all applicable assets,” Kotys says. “Wealth managers, in collaboration with an estate planning attorney, are able to address the ‘Why?’ of needing a will or trust. Not to mention the powers of attorney and other critical documents. When collaborating with professionals, a client is able to build an estate plan pertinent to their specific needs, not based on a website’s template.”
Another potential iceberg to navigate around is the floating uncertainty of when to prepare such important legal documents. According to the latest Country Financial Security Index, 81 percent of those individuals still in the workforce are worried about their level of preparedness.
“We found that money issues are driving dissatisfaction in retirement among the third of Americans who report being unhappy,” according to Joe Buhrmann, manager of financial security at Country Financial.
For decades, behavioral economists have cited chronic myopia to explain our generational problem of transferring wealth to our heirs. We tend to focus on short-term satisfaction rather than long-term rewards. It’s human nature and, for most of us, we’re wired this way, whether it’s due to instant gratification or the high-pressure demands of the “here and now.”
“Common mistakes are ineffective execution of estate planning documents, misunderstanding of the uses and benefits of each estate planning tool, and how they complement each other or work apart,” Rifai says. “An estate planning professional can help guide a client among the various estate planning documents, and then tailor the estate plan based upon the client’s circumstances, wishes and needs.”
Something else to keep in mind is the importance of a legally sound estate plan, a factor that many do-it-yourself clients fail to address until it’s too late. One common mistake, Rifai notes, is not drafting estate planning documents according to state statutory requirements, therefore making the document ineffective.
Bellamy has never had anyone come to him while alive to admit that he or she tried a do-it-yourself will. However, he has had problematic experiences with families bringing in self-prepared wills of deceased loved ones.
He’s currently involved with one estate case that is working its way through the courts system, littered with family fights and mounting fees. The estate’s main beneficiary is the deceased client’s second wife, who just happened to be the will’s only witness.
This touches on another common oversight: Two witnesses are required and they should both be “disinterested” parties, not beneficiaries. Other times, homemade wills are merely notarized, which also doesn’t work.
“Whether handwritten or typed, homemade wills are time bombs and disasters waiting to happen,” Bellamy says.
The validity of a homemade will or estate plan is just the first concern with trying to attempt it on your own, he says.
“If somehow all the formalities have been observed, then the next concern is the dispositive plan,” Bellamy says. “Sometimes provisions are inconsistent or so poorly worded it’s difficult to know what is meant.”
For example, take the bequest of “my grandfather’s clock.” Does that mean the old beat-up clock that he kept next to his bed that had been his grandfather’s? Or is it referring to the valuable antique grandfather clock in the downstairs hallway that formerly belonged to his late wife’s family?
Such scenarios look good on paper, using paint-by-number legal documents. But in real life situations, finer brushstrokes are needed, and preferably by a professional who has the proper palette of tools, support and experiences.
“Some words and phrases are terms of art, and they should be used only by professionals,” Bellamy says. “Sometimes even simple sentences, like the grandfather’s clock example, can have unintended meaning.”
Kotys also is an advocate of avoiding “rules of thumb” planning methods when more precise measures can be taken for any kind of financial canvas.
“Over the years I have met with many people who attended a seminar or got online and set up a revocable living trust just because they were on a website that said they should,” Kotys says.
“Some of these people may not have needed a trust at all, or, if they did, it is not for the reasons they think they need one,” he adds.
With this in mind, Kotys advocates that proper estate planning–just as with personal financial planning–is best executed in a series of fact-finding meetings with the appropriate professionals. Otherwise, there are gaps that need to be filled, yet often remain unfilled by surviving family members or concerned friends.
Who will ask those tough questions that no loved one wants to ask?
“This process allows all parties to determine what is best for each individual household and provide them with the appropriate plan,” Kotys says.
This type of estate plan will address several factors, including: beneficiary designations; the primary documents needed in wills and trusts; transfer-on-death for non-qualified assets; making sure a trust is “funded”; and appropriate documents for special needs children, for instance.
“Not to mention whether a couple is in a second marriage and how they desire to distribute assets to their children,” Kotys says. “As with many components of financial planning, there are nuances in estate planning which are best addressed and updated within a fiduciary relationship of qualified professionals.”
Experts insist that all these issues, and many more, need to be discussed with an estate planning professional before any legal documents get drafted.
The first essential service of this professional should be a thorough back-and-forth dialogue with the client about the nature of his or her assets, how those assets are currently titled, and to whom they should go.
Assets held jointly or with transfer on death captions or beneficiary designation may cause assets to go to people in ways other than the will provides. Clients need to gain a thorough understanding of the consequences of each form of ownership. This is something that may not be outlined well enough on a website or book or brochure.
“Careful fact-finding is essential to a proper estate plan,” Bellamy says. “All these facts need to be understood and only then can drafting begin. The estate planning professional is your guide.”
Some of that fact-finding conversation may include questions such as: What if some beneficiaries predecease the maker of the will? Who is supposed to inherit that share now? What if a grandchild is a beneficiary, and how can that 6-year-old manage his $50,000 bequest?
Although relying on websites for such nuanced questions can be risky business, finding the right professional can be done online, if anything, to get started. For example, the American Bar Association’s website has a wealth of information and is a trusted source by insiders.
Also, the Trusts & Estates journal website, at www.wealthmanagement.com, has solid, easy-to-understand information pertaining particularly to estate planning and continuous updates on estate planning issues, Rifai points out.
“These sites are helpful to gain a background and summary on estate planning matters before heading into an attorney’s office, although a good attorney will help break down each estate planning devise, answer questions, and spot the best estate plan devices for the client,” she says.