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Guide Main | VI. Incapacity & Estate Planning | Estate

Estate Planning

Ok, enough of incapacity planning, on to estate planning. And since we're friends, let's just call this what it is: death planning. Specifically, I'm going to review how to ensure that after your death, any remaining assets you own are transferred efficiently and effectively.

An elegant view of pencils on marble.


First, let's talk about your earthly remains.


Beyond your assets, you may want to write down and communicate to loved ones what else you'd like to happen after you pass. Do you want a funeral, a memorial service, a certain type of religious ceremony - no religious ceremony? Do you wish to be cremated, buried in a mausoleum or buried in a traditional grave? Just jot these ideas down and make sure you your loved ones know of the document.

If you're like me, you don't particularly care about the handling of your remains. And in that case, just write that down. Or just write down some instruction (even if you don't feel strongly about it) such that your loved ones have one less decision to make.

And while we're on this general subject, consider becoming an organ donor. Your decision will be included in any formal estate planning documents you create and this decision is also an important one to communicate with your family.


Ok, now let's talk about your financial assets.


What do you want to happen to your financial assets when you die? Your home, your investments, your cars. All your stuff. Whatever your wishes, we want them to be carried out effectively and efficiently.

Effectively and efficiently? What does that mean?


Effectively simply means we want to ensure that whatever you want to happen, actually does happen. In other words, that your assets are effectively transferred in accordance with your wishes.

And what does efficiently mean? Efficiently means the transfer is both done in a reasonable time period and that taxes and fees are managed efficiently.

If you want to see what the opposite of an effective and efficient estate administration looks like, the estate of Prince provides an excellent, if sad, example.

+ What taxes are we talking about?

There are three elements of tax to consider when transferring assets after death. There is the Federal Estate Tax, state death taxes and probate costs. Technically probate fees aren't a tax, but it's something you're paying a governmental entity, so... I mean that sounds pretty much like a tax.

Federal Estate Taxes

As far as the federal estate tax is concerned, most of us don't have to worry about it. Although the tax is assessed at an eye-popping 40% rate, the current estate tax exemption is $11.18 million per person (so double that for legally married couples). 

That means until you transfer more than $11.8 million in assets, your estate will pay zero in federal estate tax. That $11.8 million is set to decline to roughly $5 million ($10 million for married couples) in 2026, but still... that's a big chunk of change you can leave your loved ones without the Federal Estate Tax getting in the way.

There are some complications to consider, especially that the estate tax and gift tax are unified. But if you don't have over a total $5 million of assets that you want to give away, you don't have to worry. (Again, that figure is $10 million for legally married couples.)

Of course, that estate tax exemption will almost certainly change in the future as new tax legislation is approved, so you may want to keep your eye on it. Another reason to work with good financial planner and estate attorney. But honestly, most of us won't have to worry about it (unless tax laws radically change).

Bottom line: unless you are pushing $5 million ($10 million for legally married couples) in assets you want to transfer via gift or after death, not much to worry about here. 

But if you DO have that level of assets... I mean first, congrats. That's pretty sweet. And definitely consider working with an estate planning attorney to investigate your options (and there are many, although they are all complex).

State Death Taxes

A few states also assess death taxes that function similarly to the Federal Estate tax. They are usually at a lower rate (but with a lower exemption). If you want to check out what your state does, check out this handy State Death Tax Chart (what a catchy title) maintained by the American College of Trust and Estate Counsel.

Probate Costs

Probate is the legal process by which title to certain assets are transferred after death. Yes, I know that is a very legalese description. Probate is essentially a court process through which the provisions of a will are carried out. And if someone dies without a will, a probate court will determine who will receive those assets (without a will, the probate court will simply follow the default inheritance rules laid out in state law).

In some states (like California) probate costs are expensive, up to 4% of the value of the transferred assets. In other states (like Texas), probate costs are pretty low.

The good news? You can avoid probate. Maybe not entirely, but you can transfer most your assets outside of the probate process, which means those assets won't be assessed the probate fee. Keep reading below to find out how.

How to Transfer Assets after Death


Ok, so let's talk about the three primary mechanisms used to transfer assets after death. Technically there is a fourth method: how assets are titled. But it's not as frequently used and fairly confusing, so I'm going to leave that one to the attorneys (at least for now). 

The will might be the document you’re most familiar with. But in many cases a trust can be a better tool to use. And beneficiary designations are a great (and very easy) way to transfer assets that you might not have thought of.


Legal Mechanisms to Transfer Assets after Death

Click on the orange section headers to expand



+ Wills

A will is the document you're probably most familiar with. A will is the legal document that dictates what happens with your possessions after you die. It spells out who receives what.

One important thing to keep in mind about a will is that whatever that will says, the probate process administers the will. Why is that important? Because those assets then go through the probate process and are assessed the probate fee, which in some states is expensive (California's fees are up to 4%).

You'll need an attorney or legal service like LegalZoom to draft a will. I typically recommend using a real live attorney if you have a meaningful amount of assets you wish to transfer.

For more details about wills, check out this Investopedia article What Is a Will and Why Do I Need One Now?

+ Trusts

A trust is similar to a will in that it can facilitate the transfer of asset ownership. The big difference is that the trust itself is a separate legal entity that actually owns the property in question.

A will is the legal document that transfers property which you own as an individual. In contrast, a trust owns property itself and it has its own set of provisions which dictate how those assets will be transferred (and under what circumstances).

That description probably sounds pretty vague and confusing, so lemme give you my own personal example. I have most of my assets held in a revocable living trust. Let me explain what that is and why I put it in place.

My trust is a living trust, because the trust is for my benefit during the course of my lifetime (e.g while I am living). And as of the writing of this sentence, I continue to be alive. (Yay!) 

My trust is revocable, because I can do just that. I can tell the trust, PSYCH, just kidding, I'm taking all those assets back: I'm revoking the trust. 

There are also irrevocable trusts, which means you can't take the assets back: the trust owns whatever you've given it and that's the end of that. Like virtually every revocable living trust, my revocable trust become irrevocable when I die.

Three Trust Parties πŸŽ‰


If you want to nerd out on trust terminology for a bit, stick with me. There are always three different types of parties to a trust. There is a grantor, a trustee and a beneficiary. 

The grantor (sometimes called the settlor and some equivalent terms) is the person who gives the trusts its assets. 

The trustee is the person who manages the assets of the trust. When doing so, the trustee has to follow the rules that the trust itself spells out. 

Finally, the beneficiary of the trust is the person who benefits from the assets held in the trust.

In the case of my trust (as is the case in virtually all revocable living trusts), I act as all three parties. I funded the trust with my own assets, I'm the trustee who manages the assets of the trust, and I'm the sole beneficiary of the trust. 

In practice, this means that I can do whatever I want with the trust assets because I'm the beneficiary and I can decide what I want. In effect my current situation is no different than when I held all my assets directly myself: I can do whatever I want. Which begs the question: why go through all the trouble of setting up the trust in the first place?!

Why did I bother to put a trust in place at all?


Three primary reasons. First, I wanted to understand what the process was like as the client. If I'm going to advise some of my clients put trusts in place, I wanted to understand what that process felt and looked like, as well as what parts were unclear or confusing.

Second, I have mildly complex asset transfer wishes, including to some family members who are minors. I could have avoided probate with simple beneficiary designations (which I discuss below). But because of my wish to transfer assets to multiple parties, some of whom are minors, I wanted the trust in place to make that process smoother and more clearly articulated.

Third and finally, I wanted to avoid probate costs. I'm in California and probate here is expensive. 

Which brings up an important point about trusts: they are what are known as "will substitutes" and therefore avoid the probate process. As the title suggests, trusts are a tool used as a substitute for a will. A will, as we learned above, transfers assets using the judicial probate process. A trust, on the other hand, just transfers assets on its own terms, outside of the probate process.

Beware the Power of Will Substitutes


A critical (and interesting) point to understand about all "will substitutes," including trusts: they overrule whatever is stipulated in the will. 

Even if my will says I bequeath all my worldly possessions to my pet guinea pig, Lightning, unless my trust says the same thing, poor Lightning gets nothing. Why does this happen? Well, because the will dictates what happens to the assets I hold directly. But I don't hold the assets I've transferred to my revocable living trust - the trust holds them. So whatever my will says is irrelevant. The trust has its own terms which stipulate how much (if anything) Lightning receives.

Do you need a trust?


Naturally, it depends. If you have a lot of assets and are concerned about estate taxes, then probably a trust is a good idea. If you want to avoid probate costs, a trust might be a good option (although sometimes beneficiary designations get that job done). If you want to split your assets between a number of different people in a somewhat complex manner, a trust could help. 

Finally, in some cases a trust can facilitate someone stepping in to manage your affairs if you become incapacitated. Generally, it's easier to have a contingent trustee step in and manage the assets of the trust on your behalf, rather than have the same person manage assets you own personally through a power of attorney.

More Information

For more information, check out this Investopedia overview. Investopedia offers details on a lot of different kinds of trusts, but you can ignore most of them. Other than a revocable living trust (the kind I have), the other trusts are used to manage assets worth millions of dollars. One of the primary goals of such trusts is to minimize estate tax. If you have millions of dollars worth of possessions, those complex trusts may make sense. And it probably also makes sense to use a good estate planning attorney to figure all that out. It will be money well spent. And let's be honest, if you have millions, you can spare a few thousands to work with a good attorney. 🀩

+ Beneficiary Designations

Now that we've covered the more complex vehicles of wills and trusts, let's talk about the simplest way to transfer assets after you pass away: the beneficiary designation. 

This tool makes sense to use earlier in your life, before your financial life becomes complex. And this is exactly the tool I relied upon before I put in place my full estate plan, including my revocable living trust. And it worked perfectly great, until my life became just a little bit more complicated.

What is a beneficiary designation?


A beneficiary designation is simple: it designates who should get your account assets if you pass away. That person is the beneficiary of your account. Usually you can just fill out a form online through your financial institution. By doing so, you are creating a contractual agreement between you and your financial institution regarding what to do with your account after you die. 

How fancy you can get with stipulating contingent beneficiaries and dividing assets on a percentage basis between multiple recipients varies by institution, but it's generally pretty limited. That's the downside. But the upside is that these designations are far and away the easiest estate planning mechanism to implement.

What types of accounts can have a beneficiary designation?


Most bank accounts, investment accounts and retirement accounts support beneficiary designations. Checking accounts, savings accounts, money market accounts, brokerage accounts, IRAs and 401(k)s all likely will provide for beneficiaries. Sometimes they use similar provisions with different names, such as transfer on death (TOD) or payable upon death (POD).

And of course life insurance policies also have beneficiary designations. Beneficiary designations on all of these different account types all work in the way I've described above.

Periodically review & keep your designations up to date!!


Just like a trust, a beneficiary designation is a will substitute. Being a will substitute has two implications. First, beneficiary-designation-based transfers avoid probate and the associated probate costs. That's largely a good thing! But there is a potential downside...

That downside is found in the second implication of being a will substitute: beneficiary designations override the will. If you've named your ex-husband as the beneficiary of your $1 million SEP-IRA, it doesn't matter if your will says your current hubbie inherits all your assets. That's what the legal profession refers to as a "too bad, so sad" situation. If you don't change that beneficiary designation, hubbie number one gets the SEP-IRA no matter what the will says. And we all know he doesn't deserve that money, so be sure and periodically review your beneficiary designations! The ease with which you can put in place these designations belies how powerful and rigid they are once in place! So be cautious!

Need a break? Do it! πŸ§˜β€β™€οΈ

And if you're still raring to go... πŸš€

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Standard Not Advice Disclaimer


Just a friendly reminder that none of the information included anywhere in this guide is financial, legal or accounting advice. I don't know the specific financial circumstances of your life (or your private practice), so there's no way I can make blanket statements about what's right for you.

What I offer in this Guide is a suggestion on how you might think things through and then decide (for yourself) what's right. 


For some topics, I've also included what I've learned works well for most people. But you're not most people, you're you. You might be in that minority where the general suggestions are the wrong approach. 

Take everything said here (and anywhere else online) with a grain of salt, and seek out professional advice if you suspect you need it. Of course, I'm always happy to have a no cost introductory conversation with you to see if I can help.

I know this sounds like a legal CYA (that's cover your ass) statement. And yah, it is that. AND it's also an extension of loving kindness to you, the reader.

The way I cover my ass here is by making sure I don't encourage you to do anything that ends up causing you harm. I don't want that for you, and you don't want that for you. Take your time, think things through, be deliberate and seek out professional advice if you suspect you need it.