Mind Your Mouse Clicks: DIY Estate-Planning War Stories
By David Szeremet
Do-it-yourself estate planning is officially a thing. Thanks to the internet, everyone has the ability to draft wills, trusts and a variety of other legal documents. Many documents can be produced for less than $100, requiring only a few mouse clicks and filled-in blanks. The lure of simplicity, speed and affordability is appealing.
It’s no wonder LegalZoom, the largest online legal document provider, was valued at $2 billion in 2018, according to Bloomberg. That growth has been nothing short of amazing when you consider Forbes reported LegalZoom launched in 1999 with a $1 million initial capital investment — not bad for a self-service business model.
As an advanced-planning attorney, I review legal documents in conjunction with a client’s consultation with a financial professional concerning the potential uses of life insurance. Over the past decade, I have reviewed more than 2,000 estate-planning legal documents, and I can report that the
DIY revolution is in full swing. I have seen a significant increase in DIY estate-planning documents crossing my desk. It has easily been a five-fold increase. I have also seen an increase in estate-planning glitches.
When it comes to DIY estate planning, I have two words of wisdom: User beware. A few clumsy mouse clicks can derail an otherwise sound estate plan and adversely affect life insurance planning. Don’t believe me? Read on to see five real DIY examples from 2018 and 2019 (with names changed to protect the clumsy).
One: “I love me.” This mistake is one of the greatest hits of DIY planning. It goes hand-in-hand with simple wills — where both spouses want to leave everything to each other. It goes like this:
John’s will: I leave everything to my wife, Jane.
Jane’s will: I leave everything to my wife, Jane.
This appears to be a cut-and-paste job gone wrong — unless Jane subsequently marries someone named Jane. A simple will is supposed to be simple. Needless time, trouble and money will be expended to fix an apparent scrivener’s error like this.
Two: “If it’s free, it’s for me.” Bert personally owns a life insurance policy and had been using its cash value as a rainy day fund. As part of his estate plan, he 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 Bert’s estate without exposure to the pesky estate tax three-year rule, and the stock would receive a stepped-up basis at death — creating tax savings on both sides of the swap.
Bert recently had a stroke and is incapacitated. But he planned ahead. Two years ago, he downloaded a free durable power of attorney form from a nonprofit organization that focuses on assisting the elderly. The POA specifically includes the power to change ownership of his life insurance.
Because it is durable, his attorney-in-fact (the power holder) could have completed the swap. Unfortunately, Bert entered his name in the blank space designated for the attorney-in-fact. As a result, the insurance company cannot honor the form, and the swap may not take place.
Three: “Failure to click.” I see this one several times a year. Marta created a will leaving her entire probate estate to her husband. It took her only 20 minutes, and the cost was a mere $79. But Marta forgot to click on the blank space for her executor. Naming an executor is kind of a big deal because the executor is the personal representative responsible for handling Marta’s final affairs and distributing her probate assets. In Marta’s case, the website address is the default space holder printed in her will. I have yet to see a probate court approve a website as an executor. Her heirs are now stuck with hoping the court will fix things. Hope is not a plan.
Four: “The default setting.” Angie, a single parent, has a 6-year-old boy, Lucas. Her will includes a standard trust for minors. It provides income and principal to Lucas until he reaches age 21, at which time the remaining trust assets will be distributed to him.
Angie recently met with her life insurance advisor and applied for a $1 million, convertible 20-year term life insurance policy. It will be payable to the trust. Lucas, who has autism, is an individual with special needs who may need lifetime support that could include government benefits programs.
Angie’s documents, which are like some generic online forms, do not include any “special needs” provisions, so Lucas may be at risk of losing (or never qualifying for) valuable support.
Five: “Set it and (don’t) forget it.” Cyrus and Trisha created their wills and trusts when the estate tax exclusion amount was $2 million. They learned how a credit shelter (bypass) trust could reduce estate taxes by allowing each of them to use their estate tax exclusion amount. This would allow them to “double dip” on estate tax savings. At the time, they correctly clicked the option to fund the bypass trust up to the federal estate tax-free amount and then pass the rest to the marital trust. They properly executed the documents and then stored the documents in a safe place. Fast forward to 2019 when the federal estate tax exclusion amount is $11.4 million per person, $22.8 million for a married couple.
A recent examination of Cyrus’s probate estate revealed that he has $4 million in separate assets and a $2 million life insurance policy payable to his children from a previous marriage. At death, under current tax laws, all of his separate assets would pass into the bypass trust, and the life insurance would pay to his children. In other words, all of it would bypass Trisha — in essence, disinheriting her. This is not what Cyrus intended.
This mistake would likely force Trisha to lawyer up and make a trip to probate court in order to try to fix things. Lesson: Don’t expect a DIY drafting program or website to update documents or schedule checkup meetings. Cyrus and Trisha are on their own.
These examples are not intended to dissuade the use of online drafting services. DIY estate planning is not going away, nor should it. But clients must understand that words have meaning and mouse clicks matter. These drafting mistakes and missteps could be avoided if clients involve their own attorneys in the process. Please be careful in cyberspace!
David Szeremet, JD, CLU, ChFC, is second vice president, advanced marketing, at Ohio National Financial Services, Cincinnati, Ohio. David may be contacted at [email protected].