by Wendell Cayton

A “Do It Yourself” estate plan and a “Do It Yourself” appendectomy have two things in common—both can be accomplished if one reads enough of the right books and both are not wise to attempt (for obvious reasons).

Today, thanks to the world’s largest library, the Internet, it is possible to gather the information necessary to attempt your own estate plan. However, it is much too easy to overlook key planning opportunities that can cause the estate to pay unnecessary taxes, high fees, or distribute assets to the wrong people at the wrong time.

The following are a number of areas where I often see mistakes made by “Do It Yourselfers.”

1. Out-of-date wills and trusts done prior to the enactment of specific estate and gift tax laws often do not take advantage of the new regulations. Specifically, wills and trusts done prior to September 12, 1981, are likely to contain language that does not allow for a couple to take full advantage of the unlimited marital deduction. This may result in unnecessary estate taxation at the first death.
2. Family additions, deaths, and divorce are often not accounted for in out-of-date plans. The most striking example I have seen was the couple, both with prior marriages and one with children from a first marriage, who adopted an infant. Their old will left their entire estate to the older children with no mention of support for the adopted child!
3. Powers of attorney play an increasingly important role in estate plans as Americans live longer, increasing the risk that court ordered guardianship may be necessary. This expensive and cumbersome process can be avoided with proper powers of attorney in place for health care decisions and financial management. These documents allow a person of your choosing to step into your shoes and make decisions for you regarding your health, such as what care you will receive, who will provide it, where you will be treated, and how it will be paid for. A power of attorney for financial management will allow your attorney-in-fact to make property management and disposition decisions for you, access your retirement accounts for living expenses, file your tax returns, and make estate planning decisions, including gifts and formations of trusts.
4. Improper beneficiary designations for life insurance, annuities, and retirement accounts can turn a simple plan into chaos. For example, I often see instances where one spouse has had multiple jobs, with multiple 401Ks or IRAs, and multiple marriages. If that spouse dies leaving old 401K plans or company-sponsored group term life insurance to an ex-spouse, his estate will be taxed for the transfer. To add insult to injury, the tax in most cases will be paid from the current spouse’s inheritance.

Another common error occurs when the estate is named as the beneficiary of a retirement plan resulting in the immediate incursion of applicable income taxes that might have been deferred by an individual beneficiary.

Finally, deathbed checks can be used to make last-minute gifts that will qualify for the annual $10,000 exclusion. Keep in mind that the check must clear the bank while the giftor is alive for the gift to be complete. Wire transfers or certified checks should be used when possible.

There is reason lawyers are paid well for keeping us out of trouble. The above examples are but a few when it comes to proper planning.