The Danger of Do-It-Yourself Wills and Living Trusts

From the Desk of Carmel Valley (San Diego) Trust Attorney, Kristina Hess

Here is what you need to know if you have been tempted or, if like me (before my current profession) have attempted to prepare your own will, trust, or other estate planning documents.

Buyer Beware — you get what you pay for.

There are many potential problems with on-line wills and trusts, but I am only going to discuss the top 3…

  1. In California, having just a will guarantees your loved ones go through probate!  Many people are shocked to discover that having a will guarantees their loved ones must go through the court process known as “probate.”  Yet, it’s true, if all you have is a will and you die, your loved ones will need “to prove” your will is valid and then the long, drawn out, expensive probate process begins… Some people think, if I just do a will, saying who gets what when I die, I am covered.  If you own any assets over $100,000 your loved ones will be in Probate Court for sure, and paying thousands of dollars in fees and costs and your estate will be tied up for 12-24 months (or longer!).
  2.  Your Living Trust Is Not Fully Funded.  A fully funded living trust is the only way to avoid probate.  But, chances are your on-line kit probably did not tell you that and you may have no idea how to fund your living trust, so it remains unfunded and won’t work!  I know, I’ve been there.  When we had bought our first home, I had a new baby, a full-time job, a husband in medical school and I learned about the importance of having a trust to avoid probate and other problems.  So, I used an on-line trust kit thinking I would just take care of this myself.  The problem, of course, was not only was the trust sorely lacking, even though I knew we needed to transfer title of our home to our trust, I never did.  We were so busy, trying to get through those crazy days.  I didn’t know where to begin.  How did I prepare the deed and where did I send it and how much would it cost?  I didn’t have a clue.  So, we put it off.  The problem is that if your living trust is not funded (e.g. your house is not owned by the trust and your other significant assets are not owned by the trust), then, guess what?  Your trust won’t work and your loved ones will be back in the probate court process.  So, you were basically throwing your money away.  Nobody likes to do that.
  3. If Your Trust Is Not Set Up Properly — You Could Owe The Government Hundreds of Thousands of Dollars in Taxes!  This one really surprises people because they just do not know any better.  This is a situation where ignorance is not bliss.  Right now, if you die and your trust is not set up properly in 2010 and you have assets that have experience significant appreciation, your loved ones could be paying capital gains tax!  This tax is only 15-20% —  nothing compared to the whopping 55% estate tax that is scheduled to come back next year; yet, it’s not insignificant!

In addition, next year if the estate tax exemption amount goes back down to $1 million dollars and your trust is not set up properly, your children could be paying 55% — that is over half of every dollar over $1 million.  Now, you might be saying, who cares?  We don’t have over a million dollars!  Or, you may be saying, holy moly, we have over a million dollars!  If you have minor children, own your own home, and have life insurance to provide for your children in the event something happens to you, then, chances are your estate is over one million dollars.  Yet, if your trust is set up right, you and your spouse can preserve your $1 million exemption, and you can pass $2million estate tax free to your children if you were both to die.

I hate to say it, but yesterday I was reviewing a trust that a Carmel Valley couple prepared themselves using one of those on-line do-it-yourself services, and their trust did not preserve the estate tax exemption.  What?  Each U.S. citizen can pass on money to heirs up to a certain amount tax free (in 2011 that amount will be $1 million).

With this Carmel Valley couple’s trust, if they were to die next year or any year that the exemption is low (e.g. one million dollars), their children would be paying a quarter of a million dollars to the federal government in taxes!  Not a happy thought.   All because their living trust — they created using an on-line service, was not set up properly and they did not even know it!  They spent over $500 and thought their trust and plan was “good to go.”  Boy were they wrong!

When they die, depending on what the estate tax exemption amount is, their loved ones could pay hundreds of  thousands of dollars in estate taxes!  How many years of college would that pay for instead?  What else could your loved ones use that money for?

The thing is, these taxes are often voluntary.  With a little proper planning you can avoid paying them.  Unfortunately, the on-line do-it-yourself solutions do not provide the answer.  Sometimes, penny wise and pound foolish applies.

Estate planning is one area where you really do want to make sure you seek the help of good attorney that focuses exclusively on trusts and estates.  You want to make sure that your trust is fully funded, and your trust is set up properly to preserve your exemptions and help eliminate taxes.  It is not difficult for a good lawyer to do, but you need to work with a lawyer that focuses their work in this area.

If you are in San Diego area, I’d love to be your family’s personal trust and estate lawyer.  Check out my website and give us a call.  I can help you avoid the common pitfalls and make sure your plan will work for your loved ones when they will need it.  The reason we plan is because it will make things so much easier for our loved ones and it is so much easier for us to take care of it now then for them to suffer the consequences later.

Responsible families, we are here to help you get your legal documents in order!

Do not put it off, no one is promised tomorrow.

To your family’s health, wealth and legacy,

Kristina Hess

San Diego Trust and Estate Attorney

Del Mar, Rancho Santa Fe, Carlsbad, Solana Beach, Del Mar, Fairbanks Ranch, Carmel Valley, San Diego Living Trusts and Comprehensive Estate Plans

p.s.  We are having a Mother’s Day — May Special.  Mothers (and fathers) who come in for a complimentary Family Wealth Planning Session (normally $750) will be able to nominate guardians for their children for absolutely free!  Make sure your children never end up in the arms of strangers.  Just call our office at 858-461-6844 and ask for Sarah, my client services director or go on-line and fill-out the contact form and Sarah will email you or call to schedule your appointment.  It’s that easy.  Offer ends May 30, 2010, and is limited to the first 5 families only!

P.P.S.  Ask me about our comprehensive child guardianship planning services