The Landmines of DIY Estate Planning

Many websites offer customized, DIY wills and other estate planning documents.  Although such products are convenient, using them could create serious and expensive legal problems for heirs. 

These digital services appear to offer a cost-effective and easy alternative to visiting an estate planning or elder law attorney. But is online estate planning worth the convenience and initial savings? While online services might work fine if you have little or no property, small savings or investments, and a traditional family tree, anyone whose needs are not simple should not try to create an estate plan without the help of an attorney. 

And you'll likely need a lawyer to definitively determine whether or not your needs are indeed simple. Do you have an estate that is taxable under state or federal law? Do you own significant amounts of tax-deferred retirement plans? Do you know how to fund a revocable trust? Is there anything about your estate that is unusual, such as having children from a previous marriage or a disabled child? If you have any questions about your estate plan, you need to see a professional. 

The following are some examples of what can happen if you try to create an estate plan without the help of an attorney:

• Using an online generic will, a Florida woman listed several possessions and bank accounts that she intended to go to her brother. After writing the will, the woman inherited additional money and property. However, the woman did not have a "residuary clause" in the original will to say where additional assets should go, and she never revised the will to account for this new property. After she died, her brother argued he should be entitled to her entire estate, but her nieces argued the estate should pass intestate (under the laws of her state as if she had died without a will). The court ruled that because the will had no residuary clause or general bequests that could include the inherited property, the after-acquired property would pass under Florida’s laws of intestacy. This meant the brother was not the sole beneficiary. Aldrich v. Basile (Fla., No. SC11-2147, March 27, 2014)

• A Massachusetts man used a pre-packaged will form to leave his home to his wife and his four grown children, the product of an earlier marriage. The problem was that the will didn't give the wife the option to remain in the house for the rest of her life. A court case ensued because the children, who possessed the majority interest in the property, could have legally forced the wife to move.

• A Pennsylvania man wanted his estate to go to only two of his five children. He wrote his own will, giving his pickup truck to his daughter and his summer house to his son. He also wrote in the will that he was intentionally leaving out his other three children. The problem was that the man did not specify what to do with the remainder of his estate. He died leaving an estate of $217,000. While he probably intended for that money to go to the two children he didn’t disinherit, because the will had no residuary clause, the remainder of the man’s estate passed under the state law that specifies who inherits when there is no will. This meant the estate was divided between all five children. (In Re: Estate of George Zeevering, No. 316-2012, Nov. 7, 2012)

• The company LegalZoom, one of the most prominent sellers of do-it-yourself wills and other estate planning documents, settled a class action lawsuit brought an unhappy customer in California. A niece helped her uncle prepare a will and trust using LegalZoom. The niece believed that the documents they created would be legally binding and that if they encountered any problems, the company's customer service department would resolve them. The niece could not transfer any of her uncle's assets into the trust because the financial institutions that held his money refused to accept the LegalZoom documents as valid. She had to hire an estate planning attorney to fix the problems, and the attorney also discovered that the will LegalZoom created had not been properly witnessed. All this cost the uncle’s estate thousands of dollars. (Webster v. LegalZoom Inc., No. BC438637, Oct. 1, 2014)

The irony is that using boilerplate forms in these cases not only frustrated the deceased clients’ testamentary wishes, but ultimately cost their estates far more than a simple consultation with an estate planning or elder law attorney ever would have. 

Are You a New Arizona Resident? Be Sure to Update Your Estate Plan

While legally you may not need all-new estate planning documents if you move to a different state, you should have your documents reviewed by a local attorney in your new home. 

The Constitution of the United States requires that states give “full faith and credit” to the laws of other states. This means that your will, revocable trust, durable power of attorney, and health care directive executed in one state should be honored in every other state. While that's the law, the practical realties are different and depend on the document. 

Your will should still be valid in the new state, but there may be differences in the new state's laws that make certain provisions of the will invalid. The same is true of revocable trusts.

This is less true of durable powers of attorney and health care directives. While they should be honored from state to state, sometimes banks, medical professionals, and financial and health care institutions don't accept documents and forms with which they are not familiar. In addition, the execution requirements may be different depending on the state. Some states require witnesses on durable powers of attorney and others don't. A state requiring witnesses may not allow a power of attorney without them to be used to convey real estate even though the document is perfectly valid in the state in which it was executed. In the case of health care proxies, other states may use different terms for the document, such as “durable power of attorney for health care” or “advance directive.” (And the people reviewing your power of attorney or health care proxy may not be well versed in constitutional law.)

Moving is a good excuse to consult an attorney to make sure your estate plan in general is up to date. Other changes in circumstances such as a change in income or marital status can also affect your estate plan. In addition, there may be practical changes you will want to make. For example, you may want to change your trustee or agent under a power of attorney based on which family members are closer in proximity. 

For all these reasons, when moving out of state it’s wise to have an attorney in the new state review your estate planning documents.

Biden Administration Considers Changes to Estate Tax and Stepped-Up Basis Rule

A new administration usually means that tax code changes are coming. While it remains unclear exactly what tax changes President Biden’s administration will usher in, two possibilities are that it will propose lowering the estate tax exemption and eliminating the stepped-up basis on death. The first would affect only multi-millionaires, but the second could have an impact on more modest estates and their heirs. 

In 2017, Republicans in Congress and President Trump doubled the federal estate tax exemption and indexed it for inflation. For the 2021 tax year, the exemption is $11.7 million for individuals and $23.4 million for couples. As long as your estate is valued at under the exemption amount, it will not pay any federal estate taxes, and the vast majority of estates do not owe any tax. President Biden has expressed an interest in lowering the estate tax exemption. It could be more than halved to $5 million or even reduced to the previous exemption of $3.5 million for individuals. 

Another possible tax change is to how property is valued when it is passed on at death. "Cost basis" is the monetary value of an item for tax purposes. When determining whether a capital gains tax is owed on property, the basis is used to determine whether an asset has increased or decreased in value. For example, if you purchase a stock for $10,000, that is the cost basis. If you later sell it for $50,000, you will have to pay taxes on the $40,000 increase in value. 

Under current law, when a property owner dies, the cost basis of the property is "stepped up." This means the current value of the property becomes the basis. For example, suppose you inherit a house that was purchased years ago for $50,000 and it is now worth $250,000. You will receive a step up from the original cost basis from $50,000 to $250,000. If you sell the property right away, you will not owe any capital gains taxes.

According to an article in the New York Times, the current administration may propose to eliminate the basis step-up rule. In the past it was difficult to determine the original cost basis of some property, but in the digital age that information is more easily gathered. The change could result in tax increases for some people inheriting property that has risen significantly in value. 

Another question is whether either of these changes will be made retroactively. It is unlikely, but possible, that if Congress changes these rules later in the year, they could be made retroactive to the first of the year.  If you are concerned about these rules changing, a trust may be a good way to protect your estate. Property in a trust passes outside of probate, and there are specific types of trusts that are designed to protect assets against estate taxes and capital gains. Please contact us to determine if a trust is right for you. 

Tax experts agree that while changes to the tax code are likely, they probably won’t happen right away. The coronavirus pandemic and the recession it has triggered mean that Congress has other priorities at the moment. 

Arizona Governor Approves Electronic Notary Services for Virtual Estate Planning Signings

On April 8, 2020, Arizona Governor Doug Ducey signed Executive Order 2020-26 that allows Remote Online Notarization laws passed by the Arizona Legislature to become effective as of April 10, 2020, which would have otherwise become effective on July 1, 2020.

The obvious benefit of this order is that estate planners can now execute documents remotely via electronic signature and notarization rather than risking in person execution of essential estate planning documents in light of government recommendations due to COVID-19.

If you are considering creating your first estate plan or wish to update your existing plan, please call (480)930-5859 for a free consultation.

Love in the Time of COVID-19

One of the world’s greatest novelists, Gabriel García Márquez, wrote the famous novel “Love in the Time of Cholera” in 1985. The theme of the book, while not expressly addressing a pandemic like COVID-19, compared the similarity between lovesickness and the cholera pandemic disease that was occurring in the years between 1880 and 1930. While it was in essence a novel about love and loss, written in prose reflecting Marquez’ latin romance sensibilities, it also addressed its character’s contemplation of their own death and reflection on their history and legacy.

It is a timely reminder then, as we all experience the isolation of the current pandemic, and the regular news regarding the pandemics breadth and depth, to begin considering how we can ensure the safety and security of our family, friends and loved ones — and to take care of our affairs, including our relationships, our finances, legal needs, or otherwise.

After personally experiencing the loss of a relative recently who did not have an estate plan, the necessity of planning has come into clear relief - namely, the enormous task of dealing with his possessions, his legal and financial affairs, and comforting and informing his family.

Accordingly, in order to provide some detail of what a proper comprehensive estate plan consists of, below I will illustrate ways in which certain documents can considerably ease the stress that will inevitably fall on your living family members upon your death.

Revocable Living Trust

Unlike a “Last Will and Testament”, which only addresses property that is owned in a persons individual name (and not property owned in joint accounts, joint tenancy (including joint tenancy or community property with right of survivorship), or beneficiary designated property(i.e. Life Insurance, 401k, IRA, etc.)), a Revocable Trust is a new vehicle that becomes the legal owner of an individual or couple’s assets.

By creating a Revocable Trust, a “Trustor” (the person creating the trust) transfers or beneficiary designates all of their assets to a “Trustee” (typically in a Revocable Trust the initial Trustee is also the Trustor). The Trustee holds the assets for the benefit of the Trustor(s) during their life, and then upon the Trustor(s) death, depending on the trust terms, the Trustee distributes or hold the assets for the benefit of the Trustor(s) chosen beneficiaries.

Unlike an irrevocable trust, a revocable trust can be changed and amended at any time (unless the Trustor is incapacitated due to dementia or another mental or physical ailment that makes them legally unable to deal with their financial affairs). Also, unlike an irrevocable trust, a revocable trust itself provides no specific tax or creditor protection features; however, if properly created and funded, it can avoid the need for an expensive and time consuming probate proceeding with the courts.

This “probate avoidance” feature is why a revocable trust has become the new centerpiece of most individuals estate plans in place of a traditional Last Will and Testament (because of the limitations of a Last Will and Testament discussed below).

Last Will & Testament

While most people generally understand the necessity of having a “Will”, most do not understand the a Will’s limitations, and/or steps that will be required to ensure that the wishes of a “Testator” (the creator of a will) are followed.

As discussed above, a Last Will & Testament only deals with assets that are owned in a person’s individual name (i.e. a bank account owned only by John Doe) - it does not deal with jointly owned property, or property that has a beneficiary designation. Further, even if a deceased person has a Last Will and Testament, a probate proceeding in the probate court (and the attendant arcane procedures, significant expense (which is typically greater than the cost of a well created estate plan with a revocable trust), and time consuming efforts) to transfer the deceased person’s assets to their chosen beneficiaries.

However, when a person creates a Revocable Living Trust, a Last Will and Testament is also created, with the distinction (from a plan that contains only a Last Will and Testament) that any property that was not legally transferred and funded to a Revocable Living Trust should be transferred to the Trustee to distribute pursuant to the terms of the trust. If assets are not funded to the trust during the deceased person’s life, a probate proceeding will be required to ensure that your assets will be distributed pursuant to the terms of your trust.

It should also be noted that a Will is typically where families with minor children make choices regarding who will be the Guardians and caretakers of their minor children if both parents are deceased.

Note: this document is different than a “Living Will”, which is discussed further below.

Durable Power of Attorney

A Durable Power of Attorney is a legal document that allows an “agent” to deal with your financial affairs while you are unable to do so, specifically when you are incapacitated or unable to communicate your wishes. With a Durable Power of Attorney your agent can continue to pay your bills, deal with investments and the like to ensure that your financial affairs are taken care of while you are unable to do so.

A Durable Power of Attorney is “durable” because it continues through any loss of capacity (whether a physical injury or disability or a mental disease, such as dementia).

One distinction that is poorly understood is that a Durable Power of Attorney ceases at the moment of the “principal’s death. Thus, while an agent may have had power of attorney during a person’s life, this power is extinguished at the moment of the principal’s death. After a death, an executor (known in Arizona as a “Personal Representative”) or Trustee will step into the shoes of the deceased person to deal with their financial affairs.

Another issue to be aware of is that many financial institutions are skeptical of Durable Powers of Attorney and may require further bank specific documentation before they will honor a Durable Power of Attorney.

Advanced Health Care Directive

While most Arizona attorney’s choose to create separate “Health Care Powers of Attorneys” and “Living Wills”, we prefer a form called an “Advanced Health Care Directive” that deals with all issues related to a person’s health care situation — from being alive and healthy, through sickness and final illness, along with wishes regarding the disposition of deceased person’s remains.

Like a Durable Power of Attorney, an Advanced Directive allows an agent to make both physical and mental health care decisions on your behalf when you are unable to do so yourself. An advanced directive also addresses your wishes regarding how you wish to be treated when you have a terminal or irreversible disease (typically known as a “Living Will”)

While this is necessarily the “scariest” document in an estate plan since it requires you to contemplate your own demise, it is a fundamental document in a well rounded estate plan because it allows a person to make their express wishes known to their family or other decision makers.

In a Nutshell

One of the most common refrains that estate planners hear from the public and our clients is that they do not want to discuss planning because it requires the contemplation of their own death - a “morbid subject”.

The bottom line is that while thinking about death is certainly a grim topic, the truth is that we all will eventually die, and engaging in estate planning allows you to get your affairs in order and spare your family the added grief of determining what you may have wanted rather than empowering them to follow your guidance about what you actually want. The reality is that without an estate plan, people knowingly or unknowingly place the significant burden of dealing with a person’s affairs squarely on their relatives or loved ones, which compounds the difficulty and grief surrounding a person’s death.

In other words, estate planning is a gift of LOVE to your family — not a boring, unnecessary or morbid exercise.

These thoughts are particularly true during this period we are currently experiencing with COVID-19 which spares no age group, gender, ethnicity, class of wealth, or otherwise.

Like the theme of the novel, this period intrinsically makes us take account of our life, and our preparedness for the unknown.