Do It Yourself Estate Planning Leads to Bad Outcomes

While the attraction of simplicity and low cost is appealing for estate planning, the results are all too often disastrous, affirms Insurance News in the article “Mind Your Mouse Clicks: DIY Estate Planning War Stories.” The number of glitches that estate planning attorneys are seeing with clients’ plans and documents has increased, correlating with the uptick in the number of people using online estate planning forms. For estate planning attorneys who are concerned about their clients and their families, the disasters are troubling.

A few clumsy mouse clicks can derail an estate plan and adversely affect the family. Here are five real-life examples.

Details matter. One of the biggest and most routinely made mistakes in DIY estate planning goes hand-in-hand with simple wills, where both spouses want to leave everything to each other. Except this typical couple neglected something. See if you can figure out what they did wrong:

John’s will: I leave everything to my wife Phyllis.

Phyllis’ will: I leave everything to my wife Phyllis.

Unless John dies and Phyllis marries someone named Phyllis, these Wills are not going to work. It seems like a simple enough error, but the courts are not forgiving of errors.

Life insurance mistakes. Jeff owns a life insurance policy and has been using its cash value as a “rainy day” fund. He had intended to swap the life insurance into his irrevocable grantor trust in exchange for low-basis stock held in the trust. The swap would remove the life insurance from Jeff’s estate without exposure to the estate tax three-year rule, and the stock would receive a stepped-up basis at death, leading to tax savings on both sides of the swap.

However, Jeff had a stroke recently, and he’s incapacitated. He planned ahead though, or so he thought. He downloaded a free durable power of attorney form from a nonprofit that helps the elderly. The POA specifically included the power to change ownership of his life insurance.

Unfortunately, Jeff put his own name in the space designated for the agent, which means no agent is actually named with the authority to change his life insurance. As a result, the insurance company won’t accept the form, and the swap isn’t going to happen.

Incomplete documents. Ellen created an online will leaving her entire probate estate to her husband. It was fast, cheap, and she was delighted. However, she forgot to fill in the space where the executor is named. The form was set up so that the website address for the website company is the default information in the form. The court is not likely to appoint the website as her executor. Her heirs are stuck, unless she corrects this, hoping the court will understand. Hope is a terrible estate plan.

Letting the form define the estate plan. Single parent Joan has a 6-year-old son. Her will includes a standard trust for minors, providing income and principal for her son until he turns 21, at which point he inherits everything. Joan met with a life insurance advisor and applied for a $1 million convertible 20-year term life insurance policy and designated that it be payable to the trust. However, her son has autism, and receives government benefits. There are no special needs provisions in her will, so her son is at risk of losing any benefits if, and when, he inherits the policy proceeds.

Don’t set it and forget it. One couple who had a blended family created online wills when the estate tax exclusion was $2 million. They opted for the credit shelter trust (also known as a bypass trust) to reduce their estate taxes, by allowing each of them to use their estate tax exclusion amount. However, the federal estate tax exclusion today is $11.4 million per person. With $4 million in separate assets and a $2 million life insurance policy payable to children from a previous marriage, the husband’s separate assets will go into the bypass trust. None of it will go to his current wife.

An experienced estate planning attorney who is licensed to practice in your state is the best source for creating and updating estate plans, preparing for incapacity, and ensuring that tax planning is done efficiently.

Reference: Insurance News Net (Sep. 9, 2019) “Mind Your Mouse Clicks: DIY Estate Planning War Stories” 

How Much Money Do I Need to Put into a Special Needs Trust for my Child?

One of the toughest things about planning for a child with special needs is trying to calculate the amount of money it’s going to take to provide both while the parents are alive and after the parents pass away.

Kiplinger’s recent article asks “How Much Should Go into Your Special Needs Trust?” The article explains that it’s not uncommon for folks to have done some estate planning but not necessarily special needs estate planning, even if it’s something they need for their loved ones. More importantly, they haven’t thought about how much money they should earmark to fund that trust someday or any other plan to provide for their family member and which assets would be the best to use.

Special needs estate planning involves creating a special needs trust (SNT) that allows a person with a disability to continue to receive certain public benefits. Typically, ownership of assets more than $2,000 would make the individual ineligible for certain public benefits. Assets held in a special needs trust don’t count toward this amount.

A child with special needs can generate multiple expenses. The precise amount will be based on the needs and lifestyle of the family and the child’s capabilities. Public program benefits can in many cases offset many of the above-mentioned costs. However, these benefits likely will not cover the entire cost of care.

When the parents die, the budget needed to care for the child often must be increased because the things the parents did must be monetized. For instance, the parents likely managed and coordinated the child’s care holistically. After they pass, a care manager may need to be compensated to do the same thing. There are also legal and trust administration expenses to think about.

An SNT usually isn’t funded until the parents’ death. At that time, the trust would need to file a tax return each year and pay taxes on any income made by the trust assets.

It is vital to conduct a complete analysis of the future costs to provide for a child with special needs so that parents can start saving and making adjustments in their planning. If this is something you are concerned about, speak with an elder law or estate planning attorney about creating a special needs trust.

Reference: Kiplinger (June 10, 2019) “How Much Should Go into Your Special Needs Trust?”

What Do I Need to Know About Special Needs Trusts?

One of the hardest issues in planning for a child with special needs is trying to calculate how much money it’s going to cost to provide for the child, both while the parents are alive, and after the parents die. A recent Kiplinger’s article asks “How Much Should Go into Your Special Needs Trust?” As the article explains, a special needs trust, when properly established and managed, lets someone with a disability continue getting certain public benefits.

Even if the child isn’t getting benefits, families may still want the money protected from the child’s financial choices or those who may try to take advantage of them. A trustee can help manage the assets and make distributions to the child with special needs to supplement their lifestyle beyond what public program benefits provide.

A child with special needs can have some expenses that are not usually encountered when raising a typically developing child, and the amount will depend on the needs and lifestyle of the family and the child’s capabilities. One of the biggest unknowns is the cost of housing. If the plan is for the child to live in a private group home-type situation, there are options. Some involve the purchase of a condo in a building with services for those with special needs. Many families also add into the budget eating out once a week, computers and phones and other items. In determining how much to fund a special needs trust, parents must remember that, after their death, the child’s budget must increase to monetize for things the parents did for the child, such as care coordination and advocacy.

As mentioned earlier in the article, special needs individuals may qualify for public benefits that can offset some of the basic costs for a child with special needs. For example, the child may be eligible for Supplemental Security Income (SSI), as well as a Section 8 housing voucher and SNAP food assistance. When the parents retire, SSI is typically replaced with Social Security Disability Insurance (SSDI), which is one-half the parent’s payment. When the parent dies, this payment becomes three-quarters of that amount. At that time, Adult Family/Foster Care may be an option to anticipate. Parents should also consider the possibility that the child may also be working and bringing in additional income (minus whatever benefits may be offset by this income).

It is vital to do a complete analysis of the future costs to provide for a child with special needs, so parents can start saving and making adjustments in their planning right away. The laws on this planning vary from state to state, so be sure to contact an experienced elder law attorney.

Reference: Kiplinger (June 10, 2019) “How Much Should Go into Your Special Needs Trust?”

Special Needs Estate Planning When a Family Member Is Disabled

This kind of mistake can wreak havoc on many lives, which is why it is so important to work with an experienced estate planning attorney who is knowledgeable about special needs estate planning. The article, “Crafting an estate plan to include disabled family members” from The Ledger explains what is involved in special needs planning.

Supplemental Security Income (SSI) is a federal program that pays monthly benefits to disabled or blind adults and children. To qualify, an individual must have fewer than $2,000 of countable assets and very limited income. Medicaid is a Federal and State health insurance program that helps people with limited assets and income pay for their medical costs.

While it is common for people to name their spouse or children as beneficiaries in their estate plan, if your spouse or child is disabled and receiving government benefits, an inheritance will result in their loss of benefits, unless special estate planning is done.

A Special Needs Trust (SNT) is designed for disabled beneficiaries so that cash, real property, or any other assets are available for the person’s benefit, while still allowing the disabled person to receive their means-based government benefits.

There are several different ways to accomplish this, depending on your family’s situation. One way is to have a Testamentary Special Needs Trust created within a will or trust that goes into effect, when the creator of the trust or the will dies. A SNT can also be created while you are living and can be funded, instead of waiting for it to go into effect at your death.

A third-party SNT can be named as the beneficiary of life insurance policies and retirement accounts, investment accounts or real property. The third-party SNT assets that are not used for the disabled beneficiary during their lifetime, can pass to non-disabled beneficiaries upon the death of the disabled beneficiary.

These assets will be free from Medicare recovery liens, since the property in a third party SNT does not belong to the disabled beneficiary.

A first party SNT is set up and funded with assets that belong to a disabled person, and no other funds can be contributed to this type of trust by any other donors. These are often used when a large settlement following an injury is awarded. In California and in other states, first-party SNTs are subject to Medicare recovery to reimburse the state.

Special needs trusts are complicated trusts and require the knowledge of an experienced attorney who devotes most, if not all, of their practice to SNTs and trust and estate planning.

Reference: The Ledger (May 2, 2019) “Crafting an estate plan to include disabled family members”

What Are the Six Most Frequent Estate Planning Mistakes?

It is a grim topic, but it is an important one. Without a legal will in place, your loved ones may spend years stuck in court proceedings and spend a lot in legal fees to settle your estate. The San Diego Tribune writes in its recent article, 6 estate-planning mistakes to avoid, that without a plan, everything is more stressful and expensive. Let’s look at the top six estate planning mistakes that people need to avoid:

No Plan. Regardless of your age or financial status, it’s critical to have a basic estate plan. This includes crafting powers of attorney for both healthcare and finances and a will.

No Discussion. Once you create your plan, tell your family. Those you’ve named to take care of you, need to know what you’ve decided and where to find your plan.

Focusing Only on Taxes. Estate planning can be much more than just about tax avoidance. There are many other reasons to create an estate plan that have nothing to do with taxes, like charitable giving, special needs planning for a family member, succession planning in the event of incapacity and planning for children of a prior marriage, to name just a few.

Leaving Assets Directly to Children. If you leave assets directly to your children or grandchildren under age 18, it can cause unintended custodian or guardianship issues. Minors can’t own legal property, so a guardian will be appointed by the court to manage the property for them, until they reach age 18. If you don’t name a guardian, the court will appoint one for you and that person may have very different ideas about how the account should be managed and invested.

Making Mistakes with Ownership and Property Titles. With many blended families, you may want to preserve assets from an inheritance as your own separate property or from a prior marriage for your children. There are many tax consequences and control issues in blended families about which you may not be aware.

Messing Up Your Trust. Many people don’t properly fund or update their trusts. An unfunded trust doesn’t do anyone any good. Assets that aren’t titled in the name of the trust don’t avoid probate.

Finally, be sure to review your estate plan regularly, as your circumstances change.

Reference: San Diego Tribune (April 18, 2019) “6 estate-planning mistakes to avoid”

What are Common Mistakes that People Make with Beneficiary Designations?

Many people don’t understand that their will doesn’t control who inherits all of their assets when they pass away. Some of a person’s assets pass by beneficiary designation. That’s accomplished by completing a form with the company that holds the asset and naming who will inherit the asset, upon your death.

Kiplinger’s recent article, “Beneficiary Designations: 5 Critical Mistakes to Avoid,” explains that assets including life insurance, annuities and retirement accounts (think 401(k)s, IRAs, 403bs and similar accounts) all pass by beneficiary designation. Many financial companies also let you name beneficiaries on non-retirement accounts, known as TOD (transfer on death) or POD (pay on death) accounts.

Naming a beneficiary can be a good way to make certain your family will get assets directly. However, these beneficiary designations can also cause a host of problems. Make sure that your beneficiary designations are properly completed and given to the financial company, because mistakes can be costly. The article looks at five critical mistakes to avoid when dealing with your beneficiary designations:

  1. Failing to name a beneficiary. Many people never name a beneficiary for retirement accounts or life insurance. If you don’t name a beneficiary for life insurance or retirement accounts, the financial company has it owns rules about where the assets will go after you die. For life insurance, the proceeds will usually be paid to your estate. For retirement benefits, if you’re married, your spouse will most likely get the assets. If you’re single, the retirement account will likely be paid to your estate, which has negative tax ramifications. When an estate is the beneficiary of a retirement account, the assets must be paid out of the retirement account within five years of death. This means an acceleration of the deferred income tax—which must be paid earlier, than would have otherwise been necessary.
  2. Failing to consider special circumstances. Not every person should receive an asset directly. These are people like minors, those with specials needs, or people who can’t manage assets or who have creditor issues. Minor children aren’t legally competent, so they can’t claim the assets. A court-appointed guardian will claim and manage the money, until the minor turns 18. Those with special needs who get assets directly, will lose government benefits because once they receive the inheritance directly, they’ll own too many assets to qualify. People with financial issues or creditor problems can lose the asset through mismanagement or debts. Ask your attorney about creating a trust to be named as the beneficiary.
  3. Designating the wrong beneficiary. Sometimes a person will complete beneficiary designation forms incorrectly. For example, there can be multiple people in a family with similar names, and the beneficiary designation form may not be specific. People also change their names in marriage or divorce. Assets owners can also assume a person’s legal name that can later be incorrect. These mistakes can result in delays in payouts, and in a worst-case scenario of two people with similar names, can mean litigation.
  4. Failing to update your beneficiaries. Since there are life changes, make sure your beneficiary designations are updated on a regular basis. This is especially important in the case of a divorce of the account owner, or death of a family member.
  5. Failing to review beneficiary designations with your attorney. Beneficiary designations are part of your overall financial and estate plan. Speak with your estate planning attorney to determine the best approach for your specific situation.

Beneficiary designations are designed to make certain that you have the final say over who will get your assets when you die. Take the time to carefully and correctly choose your beneficiaries and periodically review those choices and make the necessary updates to stay in control of your money.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

What If My Beneficiary Isn’t Ready to Handle an Inheritance?

A recent Kiplinger article asks: “Is Your Beneficiary Ready to Receive Money?” In fact, not everyone will be mentally or emotionally prepared for the money you wish to leave them. What if your beneficiary isn’t ready to handle an inheritance? Here are some things to consider:

The Beneficiary’s Age. Children under 18 years old cannot sign legal contracts. Without some planning, the court will take custody of the funds on the child’s behalf. This usually occurs via custody accounts, protective orders or guardianships. If this happens, there’s little control over how the money will be used. The guardianship will usually end and the funds are paid to the child the second they turn 18. Giving significant financial resources to a young adult who’s not ready for the responsibility, often ends in disaster. Work with an estate planning attorney to find a solution to avoid this result.

The Beneficiary’s Lifestyle. There are many other circumstances for which you need to consider and plan. These include the following:

  • A beneficiary with a substance abuse or gambling problem;
  • A beneficiary and her inheritance winds up in an abusive relationship;
  • A beneficiary is sued;
  • A beneficiary is going through a divorce;
  • A beneficiary has a disability; and
  • A beneficiary who’s unable to manage assets.

All of these issues can be addressed, with the aid of an estate planning attorney. A testamentary trust can be created to make certain that minors (and adults who just may not be ready) don’t get money too soon, while also making sure they have funds available to help with school, health care, and living expenses.

Who Will Manage the Trust? Every trust must have a trustee. Find a person who is willing to do the work. You can also engage a professional trustee for larger trusts. The trustee will distribute funds, only in the ways you’ve instructed. Conditions can include getting an education, or using the money for a home or for substance abuse rehab.

Estate Plan Review. Review your estate plan after major life events or every few years. Talk to a qualified estate planning attorney to make the process easier and to be certain that your money goes to the right people at the right time.

Reference: Kiplinger (April 1, 2019) “Is Your Beneficiary Ready to Receive Money?”

How Do I Estate Plan for a Child with Special Needs?

Estate planning is important for everyone, but it’s even more crucial for a family with a child who has special needs. It’s difficult to create an estate plan for children with special needs, because you don’t know what type of care he will need, or the type of government benefits for which she’ll be eligible, when she turns 18. People frequently become overwhelmed about special needs planning, because they don’t have a clear picture of what their children will need in the future.

A recent Forbes article, “Special Needs Kids Require Specialized Estate Planning,” says that if you have a child with special needs, it’s critical that you look at your planning options with your estate planning attorney and discuss your child’s health, capabilities and prognosis. You can then customize a plan that works for your child, with as much flexibility as possible.

Those with enough assets often would rather not to have their child get any government benefits and will set aside an amount to cover all the child’s living expenses in trust. Since the parents aren’t concerned with government benefits, the trust can be a discretionary trust that will distribute income and principal at the trustee’s discretion for the benefit of the child throughout the child’s life.

If there is a good chance the child will get government benefits, many parents create special needs trust to supplement (not replace) the government benefits that the child will receive. The trust must be drafted, so the child doesn’t become ineligible for the government benefits. These benefits provide for the child’s basic needs like a place to live, so the special needs trust will defray the cost of extras such as trips and entertainment.

If the parents can’t determine if their child will be eligible for government benefits, another option is for the parents to give their current trustees the authority to create a separate special needs trust at the time of the surviving parent’s death. Therefore, if the child is receiving benefits, the trustee can create the trust at that time, with the goal of preserving the child’s benefits.

All these trusts can be funded now. The parents can establish the trust and transfer cash or other assets to it, or the trust can be created now and left empty until a parent passes away. At that point, money can move into the trust from the parent’s estate, another trust or from a life insurance policy.

Some parents elect not to create a trust for their child and to disinherit him completely. The thinking is that the child can be supported solely by government benefits. Others go with a combination approach. They disinherit the special needs child and leave more assets to their other children, with the understanding that the other children will care for the special needs child. However, this isn’t a great idea. The siblings have no legal obligation to care for his or her sibling with special needs, just a moral one. If the child who inherited the bulk of the estate gets divorced, the assets are also susceptible to division upon divorce. Finally, the assets are liable to a creditor’s claim, if the child is sued.

Estate planning for a child with special needs can be hard, so get a flexible plan in place that will provide peace of mind.

Reference: Forbes (March 27, 2019) “Special Needs Kids Require Specialized Estate Planning”