Fundamental Questions About Estate Planning

According to a recent survey, 67% of Americans do not have an estate plan. The reason why? 40% of respondents said they just haven’t gotten around to it.

Thoughtful estate planning allows individuals to organize their assets and interests to pass to the next generation efficiently. Estate planning takes into consideration several important areas, including tax planning, asset protection, wealth preservation, and the specific directions that individuals have for their estates.

To help set you on the right path toward successfully transitioning your wealth, we offer answers to the most common questions in estate planning.

What is estate planning?

Estate planning is the process of preparing and arranging for the management of assets during your lifetime and distribution of your assets after your death while minimizing gift, estate, generation-skipping, and income taxes. An estate plan consists of several elements, and a will is just one of them. Depending on the complexity of your situation, an estate planner may use other tools like trusts, pass-through entities, and life insurance to achieve your specific estate planning goals.

Along with the minimization of potential taxes, estate planning serves several crucial purposes, such as:

Ensuring property goes to intended beneficiaries at the right time.
Easing the burdens of uncertainty and complexity on surviving family members.
Protecting estate assets from unintended recipients (such as creditors and unintended recipients).
Nomination of a guardian and conservator who will raise your minor or disabled children and will assist in managing their financial affairs.

How will my property be transferred following my death?

Property transfers at death can occur in several ways:

Wills: This legal document expresses an individual's wishes regarding the distribution of their property following their death and designates a personal representative (in some states known as an executor) to manage the estate through its final distribution.
Trusts: A fiduciary relationship where assets are held by a trustee for the benefit of one or more beneficiaries during life or following the decedent’s death. A trust is often created by a legal document known as a trust agreement.
Beneficiary Designations and Contracts: Examples include life insurance policies, retirement plan death benefits, and beneficiary designations for IRAs and 401(k)s. Gifting promises and obligations can also be contained in prenuptial and postnuptial agreements.
Co-Ownership of Property: Property may transfer through legally recognized co-ownership arrangements. For instance, joint tenancy with rights of survivorship is a form of co-ownership. When a joint tenant passes away, the property automatically transfers to the surviving joint tenant(s) by operation of law.
Intestacy under State Law: This typically comes into play when a person dies without a will, trust, or other mechanism for the disposition of assets. In such circumstances, state statutes generally determine how such assets will be divided among surviving descendants, parents, and extended family members.

How can I begin discussions on estate planning?

Discussing estate planning can be difficult. There may be reluctance to discuss our own mortality and the risk of family strain, which can sometimes arise in estate planning decisions. However, open and ongoing communication with estate planning and financial professionals can lead to better outcomes.

An effective estate plan can reduce misunderstandings, de-escalate conflicts, unite family members, and pass down family values for generations.

How should I prepare for a consultation with an estate planning advisor?

Estate planning professionals can help ensure your plan is robust and your wishes are implemented. Preparing for a meeting with an estate planning advisor is crucial to ensure a productive and comprehensive discussion.

Before your first meeting, you will want to take time to reflect on your goals and wishes. Generally speaking, this should include when, how, and to whom you would like your assets distributed. You will also want to consider your estate planning priorities, such as wealth preservation, minimizing taxes, ensuring family security, or charitable giving. Coming to the meeting with a clear understanding of what you want to achieve will help your advisory team to create a tailored plan to accomplish those goals.

It may also be helpful to compile a list of your financial information, such as any real estate, investments, retirement accounts, and insurance policies, so that your advisor has a clear and comprehensive picture of your financial situation.

Can you explain the gift tax and its filing requirements?

In general, individual U.S. taxpayers must file a gift tax return (Form 709) for gifts made over the annual exclusion amount (in 2024, the annual exclusion amount is $18,000). However, filing a gift tax return doesn't necessarily mean you will owe gift tax. Many U.S. taxpayers have a sufficient amount of their lifetime exclusion available (currently set at $13,610,000 in 2024), and U.S. taxpayers are generally only subject to gift taxes if they have completely exhausted their lifetime exclusion amount.

Gifting can be a powerful way to reduce the tax burden for wealthier families, but it may be less advantageous for those with modest estates. Gifts should be carefully planned to avoid unexpected tax consequences, which can impact capital gains tax liabilities through failure to achieve a “basis step-up” for gifted assets. Assets included in a decedent’s estate generally get a stepped-up basis, allowing the inheritor to increase the basis in the inherited property to the fair market value at the date of the decedent’s death.

For example, John Doe purchased farmland 30 years ago for $5,000. The land’s fair market value has increased to $500,000.

If John gifts the land to his son Mike during John’s life, and Mike sells it for $500,000 later, Mike will owe capital gains tax on the profit of $495,000 ($500,000 minus $5,000). Mike’s tax liability, which may include net investment income tax, could amount to as much as $117,810 (calculated at a 23.8% tax rate).

If John states in his will that Mike will inherit the land upon his death and the land passes to Mike through John’s estate, the land's tax basis is adjusted to its current market value when John passes away. If Mike subsequently sells the land for $500,000, Mike won't owe any capital gains tax, as there's no gain to be recognized ($500,000 sale price minus $500,000 tax basis).

Can you explain the “Double Exemption” for estate and gift taxes?

Under the 2017 Tax Cuts and Jobs Act (“TCJA”), the estate, gift and generation-skipping tax exemptions increased significantly for U.S. taxpayers. The exemption amount doubled in 2018 from approximately $5.5 million to $11 million per person and has been increasing each year since the enactment of the TCJA with annual inflation adjustments. In 2024, the estate and gift exemption increased another $690,000 due to inflation, bringing the total to $13.61 million per person.

This “Double Exemption” amount has allowed many individuals and families flexibility with their estate planning in recent years due to their estates being under the estate tax filing threshold.

However, unless additional action is taken by Congress, the Double Exemption provisions of the TCJA are going to “sunset” on December 31, 2025, and the estate and gift tax exemption will essentially be cut in half, resulting in an exemption for 2026 somewhere between $7 million and $7.25 million, depending on inflation.

We dive into further detail about what this means for estate planning here.

What is the significance of using trusts in estate planning?

A trust is a legal relationship where a third party, called a trustee, holds and manages assets on behalf of beneficiaries. Certain trusts can serve as versatile tools that can help minimize estate taxes, but they offer numerous other benefits, including:

Avoiding Probate: Assets titled in trusts usually bypass probate, which can be beneficial in some states due to probate fees.
Confidentiality: Trust details remain private, except for beneficiaries (who are generally entitled to a copy of the trust agreement and are entitled to an annual “Trustee Report” of trust assets, income, expenses, and disbursements).
Protecting and Preserving Assets: Assets in an irrevocable trust for a child may be shielded from their creditors if set up correctly.
Safeguarding Assets from Spendthrift Behavior: Limiting when and how trust assets are distributed can protect them from a beneficiary's impulsive spending, addiction, or other challenging circumstances.

What are some considerations for selecting a personal representative?

A personal representative — sometimes known as an executor — is responsible for handling the duties associated with an estate, overseeing the decedent’s assets through the probate process, and managing the distribution of assets in accordance with the decedent’s will following their passing.

When choosing a personal representative for your estate, consider the following:

Can you trust this individual to handle your affairs with transparency and fairness?
Have you shared your goals and wishes with this individual?
Is this individual geographically accessible and available to fulfill their responsibilities?
Will this individual be able to effectively collaborate with family members, beneficiaries, and professionals?
Is this individual willing to and capable of taking on the responsibilities in administering your estate?

If your estate plan is complex, you may also consider appointing a professional fiduciary (such as a trust company or fiduciary service provider), to assist in the process.

Create a Holistic Plan to Transition Your Wealth

The effort you've invested in building your wealth deserves a thoughtful strategy for its transition. Working with estate planning professionals can help ensure your goals and wishes are met in the most tax-efficient way possible.