The DIY Risks of Estate Planning

The risks of DIY estate planning

With online solutions popping up and promising to crank out an estate plan in under 30 minutes, you may be tempted to set up a do-it-yourself (DIY) estate plan. Afterall, you will be avoiding all the costs that come with professional assistance, right? Well, going the DIY route might cost you more than you think.

Many people mistakenly view estate planning as being confined to the wealthy. In reality it is important for everyone, and essential to ensure that your loved ones are looked after and that your estate is transferred without unintended consequences. And estate planning is not a “one size fits all” exercise – there are various risks involved, especially should you attempt to do it yourself. I’ve outlined some of these risks below.

Not following the correct legal requirements when drafting and executing your will
For a will to be valid, the testator must be over the age of 16 years, the will must be in writing (typed or handwritten) and each page, including the last page, must be signed by the testator and two competent witnesses 14 years of age or older. It is also important to note that any person who signs a will as a witness (and the spouse of any witness) will be disqualified from inheriting under that will.

Ambiguous terms in your will leading to unintended consequences
The importance of having a valid, executable will cannot be over-emphasised. We have all heard stories of people who have drafted their own wills but, in the process, caused a lot of unintended harm and hardship. A badly drafted will could have unintended consequences if the wording used is unclear or ambiguous, often leading to disputes, court actions, unnecessary delays, and additional costs to the estate. This can easily be avoided if you enlist the help of a professional to draft your will, ensuring that the language used clearly expresses your wishes, and the formalities are strictly adhered to.

Failure to understand tax laws and implications
Estate planning is becoming more complex, with many clients externalizing assets due to our volatile economic and political environment, making DIY estate planning even more risky.

When you undertake estate planning, you should consider who your beneficiaries are and what their needs may be as well as the overall liquidity of your estate. One should also not only focus on South African assets as assets held in foreign jurisdictions can have various tax and other cost implications that need to be catered for.

If you, for example, hold assets in the UK or the US, these assets are subject to inheritance tax and/or Federal Estate Tax (FET) under the legal concept of situs. In the UK this results in tax at a rate of 40% for assets over the value of £325 000 and in the US tax at a rate of up to 40% for assets in excess of $60 000.

Should your US situs assets amount to more than $60 000, there will be an obligation to report the assets to the Internal Revenue Service (IRS). The cost of making the necessary filings through a US lawyer is approximately $5 000.

South Africa has signed double taxation agreements with various countries including the UK and US. These are complex treaties and understanding the practical tax administration practices can be daunting. The help of a tax professional in such cases is most certainly recommended.

Failure to understand the laws of various jurisdictions
It is often believed that having a single world-wide will is sufficient to deal with South African as well as offshore assets. This is not always the case, as much is dependent on the location of these assets as well as their type and value. If a single will was drafted to cater for one’s assets the administration of the foreign and South African deceased estate would not be able to run simultaneously. Probate also needs to be considered as there are certain offshore jurisdictions which do not allow disbursement of inherited funds based purely on a Letter of Executorship issued by the Master in South Africa. In South Africa we also have freedom of testation which means you can bequeath your assets to whoever you want. This is not the case for all countries however. In countries where the principle of forced heirship rules applies for example, careful consideration needs to be given to the severe restriction such legislation places on testamentary freedom.

Failure to consider special needs of children and maintenance obligations
Consideration should be given to the maintenance of your spouse, adequately providing for your children as well as the overall liquidity of your estate to ensure that your wishes can be carried out as intended. If you have minor children, it is important to protect their inheritance to avoid it being held by the Guardian’s Fund until the child reaches the age of majority. It is also important to appoint a guardian and, if use is made of a testamentary trust, careful consideration should be given to who you appoint as trustees of the trust as they will ultimately be the people that will manage your children’s inheritance until they reach majority (or the age you select for the trust to come to an end).

Given the risks involved in DIY estate planning and the potentially tragic impact it can have on the people you love, it is best to consult a professional. A qualified financial planner, with the support of a fiduciary expert where appropriate, will help you avoid the pitfalls of unintended consequences and can help you create a comprehensive estate plan that addresses all the important elements providing you with peace of mind.