Interested in trying to prepare your own estate plan? There are resources available to assist you, such as online services, computer software and how-to books. Do-it-yourself (DIY) estate planning may save you hundreds or even thousands of dollars up front.
If your estate is modest in size, your assets are solely in your name, and you intend to leave them to your spouse or other closest surviving family member, an online service may be a cost-effective option. However, in all but the simplest cases, the risk of unintended results or costly disputes often outweighs any initial savings.
Part of the problem is that online services can help you create individual documents. The good ones can even help you comply with applicable laws, such as ensuring the right number of witnesses to your will. However, they can’t help you create an estate plan. Putting together a plan means determining your objectives and coordinating a collection of carefully drafted documents designed to achieve those objectives. And in most cases, that requires professional guidance.
For example, let’s suppose John’s estate consists of a home valued at $750,000 and a mutual fund with a $750,000 balance. He uses a DIY tool to draft a will, leaving the home to his daughter and the mutual fund to his son. This arrangement appears fair. But suppose that, by the time John passes away, he has sold the home and reinvested the proceeds in his mutual fund. Unless he amended his will, his daughter would end up with nothing, effectively disinheriting her. An experienced estate planning advisor would have anticipated such contingencies and ensured that John’s plan treated both children fairly, regardless of the specific assets in his estate.
DIY tools tend to fall short when a decision demands a professional’s experience rather than mere technical expertise. For example, an online service might make it easy to name a guardian for your minor children, but it can’t help you evaluate the many characteristics and factors that go into selecting the best candidate.
The Overlooked Risk of Residuary Estates
Another common red flag in DIY estate planning is the mishandling of residuary estates. Even with a comprehensive estate plan, it’s likely you’ll have some assets in a residuary estate—the portion of your estate that remains after specific bequests, debts, taxes, and expenses have been paid. DIY tools may not adequately address how to distribute these residual assets.
How is a residuary estate created?
A residuary estate may be created intentionally or unintentionally. Why would someone do so intentionally? Most people accumulate a lot of assets, both large and small. Providing for the distribution of every asset — including all household furnishings, vehicles, electronics, clothing, and jewelry — may not be desirable. You may want to make specific bequests of certain valuable heirlooms, such as leaving a diamond necklace to your daughter. But it isn’t necessary — or even possible in many cases — to specify a recipient for all your “stuff.”
Some assets may unintentionally end up in your residuary estate. This can happen if you inadvertently leave an asset out of your will or trust. Failure to name a beneficiary for assets such as life insurance policies or payable-on-death bank accounts can cause those assets to end up in your residuary estate. Another possibility is that the beneficiary of an asset dies before you and you neglect to name a contingent beneficiary.
In fact, assets in your residuary estate can be highly valuable — sometimes even more valuable than the other parts of the estate.
If your will doesn’t designate one or more beneficiaries for your residuary estate, that portion of your estate will likely go through probate. In this case, the probate court will determine how those assets should be distributed according to your state’s intestate succession laws. In other words, those assets will be distributed as if you died without a will. (See “Understanding the laws of intestate succession” below.)
Understanding the laws of intestate succession
If you fail to leave instructions for the disposition of your residuary estate, those assets will likely be distributed according to your state’s laws of intestate succession. Every state has intestacy laws that determine who’ll inherit your property if you die without a will, trust or other legally binding document that provides for the distribution of your assets.
These laws vary from state to state, but generally they establish the order of priority under which assets will be transferred if you don’t have a will or trust or if your estate plan fails to provide for those assets. A typical sequence is your:
- Surviving spouse,
- Biological and/or adopted children,
- Grandchildren,
- Surviving parents,
- Siblings,
- Siblings’ descendants (nieces and nephews), and
- Grandparents’ descendants (aunts and uncles).
If none of these heirs exist, your assets may be transferred to the state.
Keep in mind that “nonprobate” assets generally don’t pass via intestate succession. This includes property held in a trust as well as life insurance policies, payable-on-death bank accounts and retirement accounts that go to a named beneficiary.
How should your residuary estate be managed?
To avoid unintended consequences and ensure that your assets are distributed according to your wishes, consider including a residuary clause in your will. This clause provides for your estate’s residue to be distributed to one or more beneficiaries, which may include family members or other loved ones, or even charitable organizations.
The residuary clause should be designed carefully to avoid unintended consequences or conflicts among your heirs. The size of the residuary estate may vary widely and its value may fluctuate dramatically over time.
Suppose you name one of your children as beneficiary of your residuary estate.If that portion of your estate grows unexpectedly large, that child may end up with a larger share of your estate than his or her siblings. A better approach may be to allocate a specific percentage of the residue to each beneficiary.
Another option, if you have a trust, is to create a pour-over will. A pour-over will ensures that your trust is properly “funded” by providing that any leftover or overlooked assets are automatically poured (transferred) into the trust when you die. This ensures that all your assets are distributed according to the terms of your trust and that nothing is left to the devices of the probate court or the laws of intestate succession.
Conclusion
While DIY estate planning might seem like a cost-effective and convenient option, the complexities involved—such as managing residuary estates—often require the expertise of a professional. Overlooking crucial elements can lead to unintended consequences, financial disputes, and emotional strain for your loved ones. Working with a THK estate planning attorney ensures that every aspect of your estate is meticulously planned and tailored to your unique situation, providing peace of mind that your legacy is protected and your wishes are honored.
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