Estate Planning Basics: Protecting Your Family and Assets

Why Estate Planning Matters for Everyone

Estate planning isn't just for the wealthy. Without a plan:

• State intestacy laws decide who gets your assets (may not match your wishes)
• Courts appoint a guardian for your minor children (may not be who you'd choose)
• Your estate may go through probate (public, slow, expensive)
• Your family may fight over assets
• You lose control of medical decisions if incapacitated

Even if you have minimal assets, you need documents that specify your healthcare wishes and who cares for your children.

The Four Core Estate Planning Documents

1. Last Will and Testament

What it does:

• Names who receives your assets
• Names a guardian for minor children (critically important)
• Names an executor to administer your estate
• Can create testamentary trusts for children

What it doesn't do:

• Doesn't avoid probate (assets still go through court)
• Doesn't control assets with beneficiary designations (IRAs, life insurance, 401k)
• Doesn't help if you're incapacitated (only works at death)

Cost to create: $300-1,500 with an attorney; $100-500 with online services for simple situations

2. Revocable Living Trust

What it does:

• Holds your assets during life; transfers automatically at death
• Avoids probate (assets transfer privately without court)
• Allows management of assets if you become incapacitated
• Can contain detailed instructions for distribution

What it requires:

• "Funding" the trust: retitling assets in trust's name
• More upfront work than a will
• Pour-over will still needed for assets not in trust

Cost: $1,500-5,000+ for an attorney-drafted trust

Who needs it:

• Those with real estate in multiple states
• Those who want privacy (probate is public)
• Those with blended families or complex distribution wishes
• Those with minor children or beneficiaries with special needs

Who may not need it:

• Simple situations: married couple, all assets jointly owned
• Small estates (many states have simplified probate for estates under $50k-$150k)

3. Durable Power of Attorney (Financial)

What it does: Appoints someone (your "agent") to manage financial affairs if you're incapacitated

Types:

• Durable: Remains effective if you become incapacitated (what you want)
• Springing: Only takes effect if/when you become incapacitated (harder to activate)

Powers typically granted:

• Manage bank accounts
• Pay bills
• File taxes
• Manage investments
• Sell real estate

Without this: Family must go through court (guardianship/conservatorship) to manage your affairs. This is expensive, time-consuming, and public.

4. Healthcare Directive Package

Healthcare Proxy / Medical Power of Attorney: Names someone to make medical decisions if you can't

Living Will / Advance Directive: States your wishes for end-of-life treatment

• Do you want life support if in permanent vegetative state?
• Do you want aggressive treatment at all costs?
• Do you want to die at home if possible?
• Do you want organ donation?

HIPAA Authorization: Allows your agents to access your medical information

Beneficiary Designations: The Most Overlooked Estate Planning Tool

Critical fact: Beneficiary designations on life insurance, 401k, IRA, and other accounts OVERRIDE your will completely.

Common disasters from outdated beneficiaries:

1. Ex-spouse still listed as beneficiary after divorce
2. Deceased person listed as primary beneficiary
3. Minor child listed (court must manage until 18)
4. Estate listed as beneficiary (forces probate, kills stretch IRA)
5. No contingent beneficiary (if primary dies first, money may go to estate)

Best practices:

• Review beneficiary designations every 2-3 years
• Update after marriage, divorce, birth, death
• Always name contingent beneficiaries
• For minor children, name a trust (not the child) as beneficiary
• For IRA/401k: understand SECURE Act rules for non-spouse beneficiaries

The Step-Up in Basis at Death

One of the most valuable estate planning tools you may not know about.

What it is: When you inherit assets, your cost basis is "stepped up" to the fair market value on the date of death.

Example:

• Grandma bought Apple stock in 1990 for $5,000
• It's now worth $400,000
• She sells it: $395,000 capital gain, ~$80,000+ in taxes
• She leaves it to you: You inherit at $400,000 basis
• You sell it: $0 in capital gains taxes

Assets that get step-up: Stocks, real estate, business interests Assets that do NOT: IRAs, 401ks (pre-tax dollars), gifts made during lifetime

Planning implication: Think twice before selling appreciated assets to give as gifts. It may be better to hold them for a step-up at death.

Estate Tax Considerations

Federal estate tax:

• 2025 exemption: ~$13.99 million per person (~$27.98 million per married couple)
• Rate: 40% on amounts above exemption
• Important: Exemption is scheduled to sunset in 2026, potentially cutting in half

If your estate could exceed the 2026 exemption (~$7 million?):

• Consider gifting strategies now
• Irrevocable life insurance trusts (ILIT)
• Charitable giving strategies
• GRATs and other advanced techniques

State estate taxes: 17 states + DC have state estate taxes, some with exemptions as low as $1 million

The SECURE Act and Inherited IRAs

Pre-2020: Non-spouse beneficiaries could "stretch" inherited IRA distributions over their lifetime.

Post-2020 (SECURE Act): Most non-spouse beneficiaries must empty the inherited IRA within 10 years. This creates significant tax planning considerations:

• Each year's distribution is ordinary income
• Large accounts could push beneficiaries into high tax brackets
• Strategy: spread distributions evenly; consider conversion to Roth first

Getting Started

Minimum everyone should have:

1. Will naming guardian for minor children
2. Healthcare directive / living will
3. Healthcare proxy (medical POA)
4. Durable financial power of attorney
5. Updated beneficiary designations on all accounts

Cost: $1,500-3,500 for complete package from an estate planning attorney

DIY options: LegalZoom, Trust & Will, Fabric (for basic needs). Simple situations may be fine; complex situations warrant professional help.

Review triggers: Marriage, divorce, birth of child, death of named person, major financial change, moving to a new state, every 3-5 years