Estate planning is often seen as only needed if you’re wealthy or a senior.
However, the reality is that everyone–regardless of wealth or age–should have a plan in place so that our assets are easily and properly managed and distributed when we pass away. To help you get your estate in order, today I’ll explain what estate planning is, why it’s important, and how it intersects with your taxes.
What is estate planning?
Estate planning isn’t just about making a will and deciding who gets what. When people say “get your affairs in order,” that also means organizing your financial, property, medical, and personal records so that others can easily find and sort through your documents after you’re gone.
Once you have those documents in order, then you can begin to come up with a plan for how you would like your assets distributed. You can also include directions about your wishes pertaining to any medical treatment you may need in case you aren’t able to make those decisions for yourself.
To accomplish this, there are several different kinds of documents you may want to include in your estate plan:
- Will: This is what most people think of when they think of estate planning. This legal document outlines how your assets will be distributed after your death. It can also designate legal guardians for your minor children or pets.
- Trust: A trust is a legal arrangement that assigns a third party trustee to hold your assets and distribute them to your beneficiaries as you see fit. Trusts are typically designed to manage and protect your assets during your lifetime, and they can also help your loved ones avoid probate, which is the legal process that validates a will and asset distribution.
- Living Will: This document outlines your preferences for medical treatment if you are unable to communicate those preferences yourself.
- Power of Attorney: These documents grant someone the authority to make healthcare and financial decisions for you if you become incapacitated.
- Beneficiary Designation: This is not typically a separate document, but these selections are included in documents like life insurance policies or retirement accounts to allow you to designate your beneficiaries. It’s important to note that these designations can supersede the instructions in a will, so you should update them even if you have a will that lists other beneficiaries.
Do I need an estate plan?
Many of my clients often think that they don’t have enough wealth or assets to even waste their time on an estate plan. Others think that their loved ones will do the right thing anyway, so they don’t feel that making a will is necessary.
However, my advice is always to have an estate plan in place. I think we should really look at an estate plan as a way to relieve the burden on our loved ones. By making a plan and putting it in writing, we can make sure our family members won’t have to struggle with guessing what we would have wanted, and they won’t have to hassle with any legal loose ends that may be left behind.
If you’re putting off making an estate plan and want the benefits spelled out for you, consider these points:
- Controlling Asset Distribution: Without an estate plan, state law will determine how your assets are distributed, and this may not line up with what you want. Instead, the state’s probate court will decide how your property is divided.
- Protecting Loved Ones:
- Having an estate plan can provide financial well-being for your loved ones, especially if you have minor children or dependents. You can also designate guardians for those minors.
- If you have an estate plan, you can help your loved ones avoid burdensome legal proceedings and reduce the emotional stress that comes with managing any type of estate or assets after a loved one has passed. Remember that without a plan, your beneficiaries may find themselves in probate court, which is often a time-consuming, expensive, and public process.
- As I’ve discussed, estate planning isn’t just about death; it also involves planning for your loved ones to make decisions about your health and medical care if you’re incapacitated. Having your wishes in writing can relieve stress on your loved ones and help them find peace in knowing they followed your wishes.
- Providing Relief for You: Oftentimes, knowing that your estate is organized, your wishes are documented, and that your loved ones will be cared for when you’re gone can help you feel at ease and provide you with peace of mind that is well worth the relatively small amount of time it will require to complete the estate planning process.
How does estate planning affect my taxes?
When it comes to estate planning, there are two taxes and one tax-related concept that my clients often ask about, so that’s what I’ll focus on here.
The good news is, unless you’re very wealthy, these two taxes likely won’t apply to you:
- Estate Tax: The IRS only assesses an estate tax on estates valued over a certain threshold. For tax year 2025, the federal estate tax exemption is $12.92 million per person. Many states also have their own estate taxes, but they often have lower thresholds than the federal exemption.
- Gift Tax: Gift tax is paid by the giver, but only after exceeding the IRS lifetime limit. For tax year 2025, the lifetime threshold is $13.99 million, with an annual limit of $19,000 per recipient.
Step-Up in Basis
This concept benefits heirs because when they inherit property, its value is “stepped-up” to current market value. This means that when they sell it, they owe capital gains tax only on the difference between the new value and sale price.
Final Thoughts
Estate planning can protect your wealth and your loved ones in many ways. If you’re unsure how it affects your finances or taxes, contact an accountant for guidance before finalizing your plan.
