The Perils of Online Estate Planning

The rise of online estate planning has lead to a rise in problems attorneys discover after the fact, many of which an estate planning attorney could avoid.

While the attraction of simplicity and low cost is appealing, the results are all too often disastrous, affirms Insurance News in the article “Mind Your Mouse Clicks: DIY Estate Planning War Stories.” The increasing number of glitches that estate planning attorneys are seeing in online estate planning after the fact has increased, as much as 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, and very difficult to fix in estate administrations.

A few clumsy mouse clicks can derail an online 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, this will is 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.

Jeff put his name in the space designated for the POA. 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 click on the space where the executor is named. The website address for the website company is the default information in the form, which is what was created when she completed the will. 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. It will 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 created online wills, when the estate tax exclusion was $2 million. They created a credit shelter, or 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 wife.

Online estate planning is dangerous because there is no opportunity to receive legal advice on how to meet your goals in your estate plan.  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.  This post will help you get started.  https://galligan-law.com/how-to-begin-the-estate-planning-process/

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

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The Importance of Business Succession Planning

Business succession planning is a critical part of estate planning, especially when you plan to use the value of your business to fund your retirement

Business succession planning prepares for a business owner’s retirement or untimely disability or death. Research shows that 78% of small business owners responded that they plan to use the sale of their business to fund their retirement. However, just 25% of private business owners say they have a succession plan in place.

The Houston Business Journal’s recent article, “Three tips to employing establishing a strong succession plan,” takes up this matter for discussion.

Applying proactive business succession planning may help your business successfully move to new leadership and keep operations running smoothly. Here are a few tips for establishing your succession plan.  You can also see here for more information.  https://galligan-law.com/practice-areas/business-succession-planning/

Regardless of whether you’re going with a family member to succeed you or bringing in someone from the outside to take over, it’s important that the plan is communicated beforehand. You don’t want workers speculating or feeling blindsided by the decision.

Be sure that you have legal documents in place and clear expectations, guidelines, and rules, so there aren’t any gray areas when the time of transition comes.  This is essential in business succession planning.  This may come in many forms from traditional estate planning such as Wills or Trusts, and business specific documents such as Buy-Sell Agreements, the documents governing business operation and more.

If you are appointing a family member, set out details on how other family members will contribute to the company if they are interested. You could have more than one family member run the company, but it may be best to have one clear decision maker.  Part of business succession planning is establishing the plan before you stop operating the business yourself.  So, if you are appointing a family member who isn’t currently involved in the business, bring them in early to teach them and familiarize them with the company and its employees and vendors.

If you want to have an outside party come in to run the company or have a longtime employee assume leadership, be open to ideas. Don’t overlook someone who may be a good leader and a good fit for the position. As business climates shift, technologies advance and workplace skills change, make a selection of a leader who can adapt to those changes.  Remember to pick someone who will be in the best position to keep your business profitable, especially if the business will help fund your retirement.

As you work on business succession planning, leverage a team of experts, such as an estate planning lawyer, business lawyer and an accountant. You should also work with a business broker who can provide a realistic valuation of your company.

Reference: Houston Business Journal (September 3, 2019) “Three tips to employing establishing a strong succession plan”

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Power of Attorney: Planning for Incapacity

Powers of attorney let you plan for your incapacity.
A power of attorney names a person to make decisions for you under rules that you establish, and ensures someone can handle your affairs if you cannot.

Without a durable power of attorney, helping a family member or loved one who cannot act on their own becomes far more difficult and stressful. Powers of attorney, also known as POAs, typically give the agent specific powers to conduct the principal’s (person creating the power of attorney) financial business, explains the Aiken Standard in the article “The durable power of attorney.”

For financial powers of attorney, there are different types, including non-durable, springing and durable. A non-durable POA is time limited.  It either expires at the end of a set amount of time or upon the death or incapacity of the principal.  Non-durable powers of attorney are typically used for specific circumstances, such as real estate closings or for transferring car titles.

The durable power of attorney is in effect from the moment it is executed. It is not revoked if the person becomes incapacitated (hence the term “durable”), nor by the passage of time. The person can alter or terminate a durable POA at any time before he or she lacks capacity, however, and it does end when the person dies.

Springing powers of attorney become effective at a future date. They “spring” into power, according to the terms of the document. That may be the occurrence of a particular event, like the person becoming incapacitated or disabled. They can be problematic, as there will be a need to prove that the person has become incapacitated and/or disabled.

The advantage of the durable power of attorney is that it remains in effect even after the person has become impaired. You can choose to let your agent act right away or make it springing as described above.  It is often prudent to make them effective immediately so that if time is of the essence (i.e., there is an emergency that requires quick action), there is no need to prove incapacity or that a condition has occurred.

In addition to a financial POAs, there’s also a healthcare power of attorney, which is a separate document that gives the named person the authority to make medical decisions when the principal is not able to do so.  There are also several other documents which plan for incapacity, such as living wills and HIPAA releases, which should be considered as well.

In Texas, powers of attorney rules are strict, so how they are drafted is very specific.  They provide for many powers or restrictions to the agent which the principal should consider when preparing a power of attorney, such as whether his or her agent should be compensated, whether the agent can make gifts and naming successor agents if the first cannot serve.

Power of attorney documents should be created and executed, along with a complete estate plan, long before an individual begins having problems in aspects of their lives.  These documents are essential as part of planning for incapacity.  See my past article for more detailed information.  https://galligan-law.com/estate-planning-when-faced-with-a-serious-illness/

When they are signed, it is necessary for the person to have mental capacity. They have to be able to be “of sound mind.” If they have been diagnosed with dementia or Alzheimer’s, it is necessary that all these documents be prepared as soon as possible.

Without a durable power of attorney, family and friends won’t be able to make important financial decisions, pay bills, make healthcare decisions and engage in any kind of Medicaid planning. If a person does not create a power of attorney and then suffers a health problem which makes them unable to handle their own affairs, anyone who wanted to take on any of these responsibilities would have to go to court and be appointed the person’s guardian. It’s much easier to tackle these tasks in advance, so that the family can act on their loved one’s behalf in a timely and effective manner.

Reference: Aiken Standard (August 24, 2019) “The durable power of attorney”

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