January 29, 2024 | 4 MIN READ

Estate Planning:
Beyond a Will

To many, estate planning means getting a will or a living trust. To others, it may also mean reducing estate taxes. While it’s true that everybody should have a will or a living trust, it’s important to consult a qualified estate planning attorney or tax specialist, because federal and/or state estate taxes can really pack a punch.

But the reality is, what could happen to many of your assets might not hinge on what your will or trust says. Meanwhile, most die with estates having a net worth less than $13.61 million, which is below the 2024 threshold for federal estate taxes. Some of these estates, however, may be taxable at the state level.

Also, while the federal estate tax exemption is at an all-time high, it is set to expire and return to earlier levels at the end of 2025. It could change sooner if repealed or amended. Depending on the tax code at the time of death, there may be a federal estate tax, and in some states there also may be a state estate tax, and in others an inheritance tax. In a few, all of them may apply.

So, what should you worry about? Here are a few things to keep in mind next time you meet with your estate planning attorney.

Fleeing fees

Even back in 2017 when the federal estate tax exemption was at $5.49 million for individuals and $10.98 million for couples, many families did not face federal estate taxes (although estate taxes at the state level could have been an issue).

Instead, for most, the biggest expense associated with settling their estate was most likely legal costs. To handle an estate, an attorney might have quoted an hourly fee or charged between 2% and 5% of the gross estate value. Either way, the total fee would be driven largely by the difficulty of settling the estate.

That, in turn, could hinge partly on your state’s probate process. Probate is the legal process used when a person has a will or dies intestate (without a will). It can be remarkably easy in some states and painfully complicated in others. Probate is also a matter of public record. The total legal tab, however, will also depend on how well organized your estate is. If your affairs are in a state of disorder, or your heirs end up contesting your will, the bill could be larger.

Sounds grim? Some people try sidestepping the issue by not drawing up a will. But that can be worse. If you die “intestate” — which means state law determines how your assets are divided — your wealth may not pass to your intended heirs in the manner you would have wanted.

Probate fees are different in each state and vary based upon an estate’s size, disputes among inheritors, existence of a valid will or trust, fee schedule in the state probate code, and the complexity.

Titling assets and beneficiary designations

Clearly, having a will or a living trust at a minimum is important. Yet your will only governs assets that pass through probate, and your living trust is administered outside of probate, but the trust only governs the assets it owns. There are assets that pass outside the probate process.

For instance, if you and your spouse own a home as joint tenants with right of survivorship, or as community property with right of survivorship (in those states that have community property), the house will go directly to the surviving spouse on the first death. Similarly, assets with a beneficiary designation form (your retirement accounts, life insurance, annuities) will pass directly to the named beneficiaries.

Keep in mind that avoiding probate doesn’t mean you avoid estate taxes. Nonetheless, given that probate is costly, public, and cumbersome in some states, your lawyer might suggest transferring the ownership of certain assets into a living trust, thus bypassing the probate process. However, keep in mind that there can be costs and expenses associated with setting up trusts.

Using a living trust may be useful if you want to avoid probate fees, retain privacy on what assets are in your estate, and such matters as incapacity and conservatorship as well as addressing access to your digital assets (e.g., cryptocurrency, passwords to Facebook, Instagram, TikTok, Twitter, online bill pay). If you also have property in another state and want to avoid the costs and delay of an ancillary probate in that estate, a living trust can be beneficial.

As you get your affairs in order, consider drawing up a letter of instruction that describes the funeral you want, offers an overview of your assets, tells where key documents are located, and details who should get your personal effects. Often, the biggest family fights aren’t over the most valuable assets, but over those with the greatest sentimental value. One warning: A letter of instruction is not a substitute for a will or trust.

You might also consider including a copy of your most current financial plan. Financial plans generally list your assets (e.g., investment accounts, retirement accounts, primary residence, investment property, business interests, insurance) and may help your executor or trustee better manage and settle your estate.

Also consider drawing up a living will, a durable power of attorney, and a healthcare power of attorney, also called an advanced health care directive. In the event of an incapacity, a healthcare power of attorney is where you have, in advance, named someone to make medical decisions on your behalf. A durable power of attorney is when you have appointed someone, in advance, to make financial decisions for you should you become incapacitated.

Making Gifts to Others

Regardless of how you may view your level of wealth, you may have family members, friends, or charities you would like to help. To that end, consider making gifts during your lifetime. This is possibly the easiest, most tax efficient, and most often overlooked estate-planning wealth transfer technique. You will want to discuss with your tax adviser and wealth/financial advisor various tax efficient ways to make lifetime gifts.

In 2024, you are allowed to give annually up to $18,000 per person. You may make this gift to as many people as you would like. This is referred to as the annual exclusion gift amount. This gift is not taxable to the recipient and is not deductible by the person giving the gift. This annual gift exclusion amount also does not affect or reduce the Federal Applicable Exclusion Amount/Federal Exemption ($13.61 million per person in 2024). It is important to remember that when making a gift during your lifetime, in addition to the fair market value of the gift being calculated for gift transfer tax purposes, you are also gifting the price you paid for that gift (tax cost basis) to the person receiving the gift as well. If you would have to pay capital gains tax on the sale of the asset before you made the gift, the person receiving the gift will have the same tax implication you would have had. This is why giving gifts of cash or assets with very little or no appreciation are more tax efficient lifetime gifts. Giving lifetime gifts of appreciated assets may be of benefit in reducing the estate if the gift recipient is at a lower tax bracket than you when they sell the assets or if the gift recipient is planning on holding the appreciated asset for an extended period of time and will not sell until sometime in the future.

To be sure, you should not give away that sort of sum if you think you will need the money for your own lifestyle. But if you can afford to make annual gifts, you will reduce your estate, which may help you if your estate turns out to be taxable. By making gifts while you are alive, you will also get to see your kids (or heirs) enjoy the money. Meanwhile, if you give assets to charity, you may be able to utilize the charitable gift tax deduction.

Enriching heirs

If you are retired and still have a life insurance policy, you could consider keeping the policy in effect and naming your heirs as beneficiaries. Keeping it in place might be a way to leave more of a legacy to family or charity, equalize the gifts to your heirs, or help offset any final taxes or expenses that might be due.

Life-insurance proceeds payable to a named beneficiary are usually exempt from income taxes. Be careful to review the ownership of the life insurance policy. Ownership effects whether it will be included in the value of the decedent’s estate or not.

Also, if your regular taxable account includes stocks or mutual funds with substantial unrealized capital gains, you might also consider holding on to these investments and leave them to your heirs at death. At your passing, the tax cost basis of these stocks and stock funds may be stepped up to the date of death current fair market value, thus eliminating the embedded capital gains. Speak with your estate planning attorney and tax professional about the risks involved.