Understandably, some people want to save money by doing their own estate planning, often by using such sites as legalzoom.com or similar resources. These can sometimes be a good option for the simplest of estate plans. However, this one size fits all approach to estate planning is too often based upon the fallacy that in getting a Last Will and Testament, a person is paying for only a small amount of paper and ink.
Nothing could be further from the truth. The value in a comprehensive estate plan lies primarily in the advice provided by your attorney to ensure that you protect your wealth. Listed below are the 12 costly pitfalls of engaging in do-it-yourself estate planning.
Pitfall Number 1: Using a program, website, or resources to churn out a Will that is not valid under Louisiana law.
Some websites produce last wills and testaments that are not valid under Louisiana law. For example, Louisiana law has particular requirements as to the necessity of signing the will at the bottom of each page of the will, and that the will have an “attestation clause.” Not all wills purchased from websites or databanks have these very important provisions.
What could happen? In general, if you die with an invalid will, it is just like having died without a will (if a prior will was not executed). In other words, your property will pass according to the Louisiana laws of “intestacy”.
Also keep in mind that if you executed a will prior to the date you executed the invalid will, and if that prior will remains in existence and has not been destroyed, the probate court is required under Louisiana law to probate the prior will. This could potentially be disastrous. In other words, not only can your executor or succession representative be placed in a position of attempting to probate an invalid will, but an entirely different will than what you can actually be given the force and effect of law.
Pitfall Number 2: Failing to consider the potential impact that you or your spouse (or both!) will have to go into a nursing home.
No one can force you into a nursing home. Nor will I suggest this. This is a personal decision to be made by the client and his or her family members.
However, may of my clients find it necessary to enter a nursing home because their loved ones simply do not have the means (time, and physical and emotional strength) to care for my clients full time.
However, nursing home costs can easily exceed $50,000 per year (roughly between $4,200 and $5,000 per month). If you do not have long term care insurance (as most of my clients don’t), this can be catastrophic for your estate. If you had to spend that amount of money over a relatively sustained period of time, there may be nothing left for your heirs, and therefore, you Last Will and Testament can become largely irrelevant.
Therefore, I counsel many of my clients to consider an estate plan meant to qualify them for Medicaid long term care benefits. This type of plan is best for those who (1) are not wealthy; (2) have not purchased long term care insurance, and (3) worry that their estate may be seized due to long term care costs. Few attorneys are able to provide this level of advice, and no do-it-yourself estate plan that I know of can adequately protect you from this risk.
Pitfall Number 3: Bequeathing all of your property to your surviving spouse, not realizing that your property can be subject to seizure by the state if you spouse is later required to stay in a nursing home.
Most people cannot afford the costs of long-term nursing home care. If you pass away and leave all of your property to your surviving spouse, then the entirety of your property can be subject to the Medicaid reimbursement rules if your surviving spouse has to be cared for in a nursing home after your death.
However, if you grant a usufruct over your property to your spouse, or your property is placed in a trust for your spouse’s use, then your portion of the property will not be subject to seizure by the state.
For example, assume you die owning a residence valued at $200,000, that it is the only asset you own, and that the residence is community property as between you and your spouse. If you bequeath your one-half community share of the residence ($100,000) to your spouse, she will own the entirety of the residence after your death, valued at $200,000. That is because the other one-half share belongs to him or her under Louisiana’s community property laws. Your surviving spouse is now the sole owner of the house, and as such, the entirety of the residence can be subject to a Medicaid lien if your surviving spouse has to go into a nursing home.
On the other hand, if you grant your surviving spouse a usufruct over the residence, your surviving spouse would have the right to live in the house for the remainder of his or her life, and only her one-half share ($100,000) will be subject to a Medicaid lien. Your spouse could be given near complete control over the use and disposition of the residence, assuming your will is drafted correctly. Thus, by visiting with a qualified estate planning attorney, you have avoided this pitfall and you have just saved your heirs $100,000.
Pitfall Number 4: You and your spouse will have assets valued at over $1 million on the date of death of the last spouse to die, and you fail to take full advantage of the estate tax exemption.
Beginning on January 1, 2013, the federal estate tax exemption will be reduced to $1 million. That is, each person is entitled to an “exemption” of up to $1,000,000 from the estate tax. In other words, you and your spouse together can potentially transfer up to $2,000,000 estate tax free.
However, if you properly fail to take advantage of the exemption, a couple can loose the exemption available to the first spouse to die. In other words, if you engage in faulty do-it-yourself estate planning, your heirs can loose the $1,000,0000 of the total $2,000,000 exemption available. This mistake can be easily avoided by engaging an experienced estate planning attorney.
Pitfall Number 5: Failure to take the entirety of your property into account in your estate plan.
Your Last Will and Testament does not control the disposition of property rights that you have pursuant to a contract with a life insurance company or custodian. Accordingly, if you have life insurance, and/or substantial assets in an IRA, 401(k), or qualified annuity, it is very important to review of your beneficiary designations, because your beneficiary designations will control the disposition of those assets under your contract with those agents. By and large, Louisiana probate laws will not have effect, unless the proceeds are made payable (or by default are payable) to your estate.
Also keep in mind that improper life insurance planning can potentially make all or part of your life insurance policy proceeds subject to estate tax.
Pitfall Number 6: Leaving property to a child who is subject to a court judgment, bankruptcy proceedings, or other creditor collection efforts.
In many cases, Louisiana residents leave their property to their children who are subject to large court judgments, or are subject to bankruptcy proceedings or other collection actions by creditors. The end result is that these creditors can, in effect, be substituted as your “heirs” rather than your children. This painful result can be avoided easily. This is particularly relevant due to the state of the economy.
If you believe that one or more of your heirs may be subject to a collection action, their inheritance can be placed in a trust for their benefit. The “inheritance” of that heir can then be administered by a Trustee so long as your heir is in financial difficulty. Once the financial difficulty passes, the Trustee can be authorized to distribute the inheritance to the heir. The same approach can be taken if the heir is going through a period of substance abuse, or a messy divorce.
This is a very simple plan that can be put into effect by an experienced estate planning attorney, that likely cannot be achieved by most do-it-yourself estate plans.
Pitfall Number 7: Leaving property to a minor child outside of a trust.
If a minor child inherits part of your estate, that child’s parent(s) will have general authority to administer the inheritance for the benefit of the child. This may not pose a problem, but in many cases it does.
For example, suppose you want one of your grandchildren, “Jimmy” to be an heir under your will, but your son, Jim, who was Jimmy’s father, has passed away before you. Your daughter-in-law, who may be a spendthrift, can obtain control over these assets because your grandchild is a minor.
This problem can be avoided easily with a simple trust in favor of Jimmy, with the Trustee of the Trust being a close relative who you can rely on. Furthermore, the assets of the trust can be delayed, not only past Jimmy’s 18th birthday, but as long as you deem necessary. Many of my trusts have an “ages and stages” distribution mechanism meant to give the inheritance to the child when he or she is sufficiently mature. For example, portions of the trust balance can be distributed at certain ages such as 30, 35 and 40.
Pitfall Number 8: Failure to leave property to a disabled heir in a Special Needs Trust.
If you want to leave an inheritance to an heir that is, or may become, institutionalized due to the heir’s inability to care for him or herself, then it may be best to leave the inheritance in what is known as a “special needs trust”, also known as a “supplemental needs trust” (“SNT”). If you fail to leave the property in a SNT, the property can be subject to a state Medicaid lien if the heir enters into an assisted living facility being paid for by Medicaid.
A special needs trust allows the heir to receive benefits from the SNT which are “supplemental” to the maximum benefits that can be provided by the state Medicaid system. A SNT permits the Trustee to pay for these items on behalf of your heir, who is the beneficiary of the SNT, while qualifying for Medicaid, and thereby permit the beneficiary to live a more comfortable and fulfilling life.
Pitfall Number 9: Failure to name a curator (guardian) over the person and/or property of minor children.
When Parents with minor children engage in estate planning, they often fail to name a curator (guardian) over their minor children, and over the property to be inherited by the minor child. This could mean that there would be a costly court custody suit to determine which family member has the right and duty to raise the minor child, and who would have the right to exercise control over the child’s inheritance received from you.
Often this does not pose a problem where one parent survives the other parent, because under Louisiana law, the surviving parent is by default the natural tutor (guardian) over the minor child and his or her property. Even in such a case, however, you have a right to specify the extent that such surviving parent will have control over the assets that the minor child inherits from you. This is particularly important if the surviving parent is a spendthrift, has a criminal history, or has a history of substance abuse.
Pitfall Number 10: If you want to disinherit a child, failing to recognize the special issues under Louisiana law.
In general, you have the right to disinherit a child in Louisiana if the child is not a “forced heir”. Despite what some people may think, Forced Heirship is not dead in Louisiana. Under Louisiana Civil Code Art. 1493, Forced Heirship continues to apply to persons under the age of 24, and persons 24 years of age and older who, because of mental incapacity or physical infirmity, are permanently incapable of taking care of their persons or administering their estates at the time of the death of the decedent.
The phrase “permanently incapable of taking care of their persons or administering their estates at the time of the death of the decedent” includes descendants who, at the time of your have, according to medical documentation, an inherited, incurable disease or condition that may render them incapable of caring for their persons or administering their estates in the future. La. C.C. art. 1493(E).
At least one Louisiana Circuit Court of Appeal has interpreted this standard to mean that a person over 23 years of age with moderate bipolar disorder is a forced heir, even though that person could generally function normally with medication. Other Louisiana Circuits have yet to weigh in on interpretation of this standard.
This means that you, or even some attorneys that you employ, may not be aware that an attempt to disinherit a child may be subject to expensive and protracted litigation on the interpretation of the above-referenced code article.
Pitfall Number 11: Failing to take into account the special planning needs for of second or subsequent marriages, where there are children of a prior marriage.
Special estate planning issues are presented in cases of second or subsequent marriages. Frequently, people who enter into second or subsequent marriages enter into it with a substantial amount of separate property. Additionally, some or all of the children of the spouses are not related siblings. You may not realize that if you die without a will, all of your separate property, which may include the house that your surviving spouse expects to live in for the remainder of your life, will be inherited by your children alone. Your spouse may be disinherited completely. This is because the Louisiana Civil Code Article establishing a usufruct in favor of a surviving spouse only applies to community property, not separate property. See La. C.C. art. 890. This could subject the surviving spouse to a costly and injurious eviction proceeding brought by the children of her husband.
The opposite can also be true. If you bequeath ownership of your separate property to your surviving spouse, your surviving spouse is much less likely to bequeath any of that property to your children upon his or her death. In effect, your children can be disinherited.
Proper estate planning may include language in your will establishing a usufruct or trust in favor of your surviving spouse, which may not be a an option in a do-it-yourself form package purchased at Wal-Mart.
Pitfall Number 12: Failure to avoid probate in a state other than Louisiana where real estate is located.
If you have property in another state, it is imperative that you take steps to avoid probate in that other state.
For example, if you have land in Mississippi, you should take steps to ensure that your estate is not subject to probate proceedings in both Louisiana and Mississippi. This is because it is not only true that you want to avoid two probate proceedings, but also because Mississippi’s probate process is typically much more costly than Louisiana’s. People who engage in do-it-yourself estate planning often do not realize that this is can be a major factor in developing a customized estate plan.
Pitfall Number 13: Failing to realize that hiring a competent estate planner will not cost as much as you think, and can be very cost effective.
Most people don’t realize that a simple Last Will and Testament, with associated “living wills”, powers of attorney, and medical directives, can be obtained from a competent estate planner for much less than they think to get the piece of mind that their plan has been thought through and implemented by a competent advisor. Costs can be minor in comparison to the costs that your estate and children may incur if you engage in do-it-yourself estate planning, which may not take into account all of the particular issues applicable to you. As the above Pitfalls illustrate, many thousands of dollars can be spent by your children correcting the errors in a do-it-yourself estate plan.