As a fictitious example, Mitchell, a wealthy entrepreneur living in California, thought he'd save money by cobbling together a will using a form he copied from a library book.
He left his $22.4 million estate to his wife. There was no estate tax due because assets left to a citizen spouse generally aren't subject to estate tax. However, everything she left to the children upon her death would be taxable, less her exemption amount.
To remedy the problem after her husband's death, the wife hired an attorney to disclaim her exemption amount, to the tune of $11.2 million, allowing it to pass under state law tax-free to her sons.
Had the attorney been consulted prior to Mitchell's passing, he would have recommended that the couple set up a family trust that could be funded up to the tax-free amount (i.e., $22.4M) when the first spouse dies. This could have been a more flexible way to apply the exemption. His wife could have received income or principal from the trust if need be, but whatever remained upon her death would bypass her estate.
Mitchell's heirs learned the costly way that a DIY approach to estate planning is a very bad idea.
Estate Planning is a Complex Mix of Laws
One of the biggest DIY pitfalls for spirited entrepreneurs is the complex mix of laws that applies to estate planning. Federal, State, and hundreds of years of inheritance law – sometimes wildly arcane rules you'd have no inkling existed without a professional estate planner – combined with the tax implications create a messy morass of legal and financial implications.
Estate Planning Considerations are Constantly Changing
Not only are the laws and tax considerations that govern estates extremely complex, with different and sometimes conflicting rules in given scenarios, they also change constantly. Estate taxes, for example, have varied dramatically in the past several years. In 2010, for one year, the estate tax was eliminated altogether.
With changes to inheritance laws and estate taxes on a virtually annual basis, it's simply impossible to stay on top of all of the changes as a DIYer. Many online resources aren't updated; you could be reading laws and tax rates from years ago and not even know it. Even dated information is suspect. For all you know, it was written by a content marketing firm with no personal knowledge of the topic, based on information that's years out of date.
When DIY is a Bad Idea
An entrepreneur or small business owner might want to manage his or her estate planning in-house to save money, but DIY isn't always a good idea. In fact, it often leads to disasters.
Think of it this way: If you took a DIY approach to your health, playing doctor based on online diagnostic tools, then you wouldn't be doing yourself a service. Even if you had an idea of what was affecting your health, you'd lack the equipment to effectively treat a medical problem and the knowledge base to check for medications that conflict with your treatment. You could misdiagnose a problem and take a treatment that could kill, instead of heal, you.
Estate planning is the same thing, but for your wealth instead of your health. Sure, you could read a few things online and put together some documentation that looks like an estate plan, but without the right training, you'd have no idea if you missed something important, or if your information is accurate and complete. This could potentially cost you a lot of money or cause your family to lose their assets after your death.
Be a smart entrepreneur. Hire a professional estate planner who can save you and your heirs time and money over the long run by developing a complete and up-to-date estate plan. Give yourself and your family the peace of mind of knowing that something this important has been done right.
If you would like to talk more about how this could be applied to you, then please give me a call at (858) 792-3444.