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Estate Planning Isn’t Just for the Wealthy

Thanks to today’s favorable federal gift and estate tax rules, most people haven’t amassed enough wealth to worry about federal estate taxes. However, even if you haven’t had the good fortune to win the lotto or inherit millions from a wealthy relative, you still need an estate plan to protect your assets and your loved ones. Here are some critical estate planning issues to consider.


There are several reasons why you should put together a written will:

  1. To name a guardian for any minor children,
  2. To name an executor for your estate, and
  3. To specify which beneficiaries (including charities) should get which assets.

The guardian’s job is to take care of your kids until they reach adulthood (age 18 or 21 in most states). The executor’s job is to pay your estate’s bills, pay any taxes due, and deliver what’s left to your intended heirs and charitable beneficiaries.

Living Trusts

If you have significant assets, you should probably set up a living trust to avoid probate. Probate is a court-supervised legal process intended to make sure a deceased person’s assets are properly distributed. However, going through probate typically involves administrative red tape and legal fees – plus your financial affairs will become public information.

If you establish a living trust, you can transfer legal ownership of designated assets to the trust. The transferred assets won’t go through the probate process. Examples of assets you might want to consider transferring to a living trust include:

  • Your primary residence,
  • Vacation properties,
  • Vehicles, and
  • Antique furniture, artwork, and other collectibles.

The trust documents name a trustee to be in charge of the trust’s assets after you die and specify which beneficiaries will get which assets from the trust. While you’re alive, you can function as the trustee – or you can designate your attorney, CPA, financial institution, or a loved one to be the trustee. After you die, the trustee that you’ve named in the trust documents will take over.

Because a living trust is revocable, you can change its terms at any time or even unwind it while you’re alive and legally competent. It’s called a living trust because it’s effectively “alive” as long as you are. Other common names for living trusts are family trusts, grantor trusts, and revocable trusts.

Living Trust Taxes While You’re Alive

For federal income tax purposes, your living trust is a “revocable grantor trust,” so it’s ignored while you’re alive. As such, you’re still considered to personally own the assets that are in the trust as far as the IRS is concerned. That means you’ll continue reporting on your federal tax return income generated by trust assets and deductions related to those assets, such as mortgage interest on your home.

For state-law purposes, the living trust is not ignored. Done properly, it achieves the estate planning goal of avoiding probate.

Living Trusts Taxes After You Die

When you die, the assets in the living trust are included in your estate for federal estate tax purposes. However, assets that go to your surviving spouse aren’t included in your estate for tax purposes – assuming your spouse is a U.S. citizen – thanks to the unlimited marital deduction privilege.

If you’re married, your living trust can cover both you and your spouse. Typically, the trust will maintain grantor trust status while your spouse remains alive. Your surviving spouse will be considered to personally own the assets that are in the trust as far as the IRS is concerned. So, your spouse will report on his or her tax return income generated by trust assets and deductions related to those assets.

The trust becomes irrevocable after the grantor dies (or both spouses die if both spouses are the grantors). At that point, it falls under the trust income tax rules, and the trustee will need to do some planning to get the best tax result.s Usually that will involve distributing trust income and gains to the trust beneficiaries and winding up the trust by distributing its assets to the beneficiaries.

Reality Check

Wills and living trusts offer meaningful benefits, but you should mind the details to achieve the expected advantages. Consider the following tips:

  • If you’re married, you and your spouse should have separate, but coordinated wills. You never know who will die first.
  • Wills and living trusts should be consistent with beneficiary designations and the manner in which assets are legally owned. For example, when you fill out forms to designate beneficiaries for life insurance policies, retirement accounts, and brokerage firm accounts, the named beneficiaries will automatically cash in upon your death without going through probate. The same is true for bank accounts if you name payable-on-death beneficiaries. It makes no difference if your will or living trust document specifies something different. So, keep your beneficiary designations current to make sure the money will go where you intend.
  • If you own real estate jointly with the right of survivorship, the other co-owner(s) will automatically inherit your share upon your death. It makes no difference if your will or living trust documents say otherwise.
  • If you set up a living trust, you must transfer legal ownership of assets for which you wish you avoid probate to the trust. Many people fail to follow through by transferring ownership to their living trusts, causing them to lose out on the probate-avoidance advantage.
  • Wills and living trusts don’t avoid or minimize the federal estate tax or state death taxes. If you have enough wealth to be exposed to these taxes, additional planning is required to reduce or eliminate that exposure.

Important: Some states have death tax exemptions that are far below the $12.92 million federal estate tax exemption. So, you could be exposed to state death taxes even though you’re fully exempt from the federal estate tax.

Moving Target

Federal and state estate and death tax rules have proven to be unpredictable. Plus, personal circumstances may change. You might acquire new assets, win the lottery, lose relatives to death, disown relatives (or take them back), and gain children or grandchildren. Any of these events – and changes to tax laws – could require estate plan revisions. So, it’s important to review your estate plan at least annually and update it as needed. Contact your estate planning advisor for assistance.