Essential Estate Planning Considerations

One of the services we provide as a comprehensive financial planning firm is periodic review and guidance on estate planning matters. It’s one of those “hidden” values of financial planning that is often overlooked. Especially by those who haven’t worked with a planner before.   

In a previous blog post, Why do I Need Estate Planning, we highlighted some important benefits of estate planning. While we routinely review estate planning documents and provide guidance, we’re not attorneys. This means we can’t draft or execute any legal documents for you.

Luckily for you, we've built relationships with some brilliant attorneys whom we trust to take great care of our clients. Before you meet with an estate planning attorney, here are some essential estate planning considerations that you should know to make the process smoother and more productive.

Beneficiary Designations

Most financial accounts allow you to appoint beneficiaries to directly inherit your assets upon your passing. For non-retirement accounts, these are typically referred to as transfer-on-death (TOD) or pay-on-death (POD) designations. 

Whenever possible, we generally recommend that you always have at least one primary and one contingent beneficiary listed on each account (unless it’s a trust account, but more on that later). Especially if the primary beneficiary is your spouse or significant other. 

The primary advantage of these designations is that your assets will transfer by operation of law at your passing, which means they typically bypass the probate process. That makes it easier, faster, and less expensive for your loved ones to access funds. However, assets in these accounts will still be included in your gross estate for estate tax purposes.

If a minor is listed as a beneficiary, they generally can't receive the assets until they reach the age of majority (usually 18 or 21). Unless otherwise directed, the court will determine how to manage those assets. To avoid that uncertainty, it’s recommended to appoint a guardian or trustee and establish a testamentary trust (a trust created through a will) to provide support and oversight for minor children.

If no beneficiaries are listed, or all beneficiaries predecease you, these assets will go through probate. If there’s no will or trust in place, the state will determine how to distribute your assets via their intestacy laws, which likely won’t align with your wishes. 

That's why it’s so important to review these designations regularly. They should be reviewed every few years, and after major life events like marriage, divorce, birth of a child, or a child obtaining the age of majority.

Quick Beneficiary Definitions

• Primary – First in line to inherit assets
• Contingent – Next in line if primary predeceases you or passes away simultaneously
• Tertiary – Third in line
• Standard Designation – All beneficiaries inherit their allocated percentage. If one predeceases you, their share gets reallocated among the surviving beneficiaries.
• Per-stirpes – If a beneficiary predeceases you, their share gets distributed evenly among their descendants.
• Per-capita - If a beneficiary predeceases you, their share gets distributed evenly among all living beneficiaries.

Probate

Probate is the court-supervised process of validating your will (if one exists), paying off debts, and determining how to distribute remaining assets. This process can take months or even years depending on complexity. This process is generally public record.

Anything that doesn’t transfer directly through legal means (beneficiary designations, joint ownership, or trust) will have to go through probate. This includes personal property like furniture, any cash in your mattress, or any assets titled solely in your name (such as vehicles).

Probate costs are generally based on the value of your probate assets. Since this process can be costly and time-consuming, it’s generally best to keep probate assets at a minimum through proper estate planning. 

Trusts

There are different types of trusts, each serving a specific purpose. Without getting into all the technical stuff that’s best left for the attorneys, here are some basic essentials.

Trusts generally fall into two broad categories, revocable and irrevocable. With a revocable trust, you maintain at least a considerable amount of control of the assets in the trust. With an irrevocable trust, once it’s established and funded, the assets are outside of your control.

Trusts can help provide privacy, control, and efficiency by allowing assets to transfer outside of probate. They can also ensure that your wishes are followed precisely, especially when you want to control how and when heirs receive assets.

However, a trust only works if it’s properly funding, meaning assets are titled in the name of your trust, so don’t forget this step. Lean on your attorney and financial planner for guidance and help with retitling your assets. 

Trusts are also a great tool to help reduce or eliminate estate or transfer taxes when structured correctly. These are separate legal entities and can be powerful tools for tax and legacy planning.

Business Considerations

If you’re a business owner, then you have some additional considerations. Is your business a separate legal entity (such as an LLC, corporation, or partnership), or are you a sole proprietor? Separate entities often have their own continuity provisions, but you’ll still want a broader estate plan in place to protect your family and your legacy. 

Regardless, estate planning should be part of your succession plan. This can help outline how ownership transfers, provide key-employee provisions, and protect and provide for your loved ones. 

In many cases, it’s wise to bring your spouse or business partner(s) into your estate planning discussions. This will help ensure that everyone is on the same page and understands and supports your intentions.

Taxes

Now for everyone’s favorite topic, taxes! 

Generally speaking, the value of your assets on your date of death becomes the new cost basis for those assets. This “step-up” (though they could “step-down”) helps alleviate the tax burden if your estate needs to liquidate assets to pay off debts, and benefits heirs that want to cash out their inherited assets.

Regardless of holding period, inherited assets are generally treated as being held long-term, meaning any gain or loss is typically a long-term capital gain or loss, which receives favorable tax rates. Also, inheritance itself is generally not taxable to the beneficiary. They’ll only (potentially) owe taxes once the inherited assets are sold.

However, there are federal estate taxes that apply to estates exceeding the unified credit amount (currently $13.99 million per individual and indexed for inflation). Many states have some version of an estate or inheritance tax, though generally at lower thresholds. Estate taxes are assessed on the net value of all the assets you held at the time of your death.

The unified credit provides for a lifetime estate/gift tax exclusion on up to $13.99 million (2025). This means that your estate won’t owe federal taxes if your net assets are below this amount. If you’ve made taxable gifts in the past, your unified credit amount is reduced by the cumulative amount of taxable gifts above the annual exclusion amount ($19,000 in 2025).

Federal estate tax rates are substantially higher than individual tax rates. These rates are tiered (like income tax rates) but the max rate is 40% and is reached at only $1 million. Luckily, there are ways to reduce this.

The annual gift exclusion allows for tax-free gifting during your lifetime, and can help reduce the size of your taxable estate. If you’re married, you and your spouse can each gift up to the annual exclusion amount without incurring any gift tax.

The marital deduction allows unlimited tax-free transfers to a U.S. citizen spouse. This doesn’t eliminate the estate tax issue, but it does postpone it until your spouse passes away. Additional strategies, such as trusts or the portability election, can help reduce these taxes. 

Be aware that life insurance proceeds, though income-tax free to beneficiaries, are included in your gross estate if you own the policy. This is often overlooked since insurance is generally marketed as tax-free proceeds. 

Business ownership interests are also often overlooked. If you’re a business owner, your business should be properly valued and planned for, as this can have a huge impact on your estate taxes. Though there are some good tax provisions for certain business types. 

Finally, it’s important to know that your account characteristics will carry over to your beneficiaries.

• Roth accounts retain their tax-free nature (if qualified).
• Traditional Pre-tax accounts are fully taxable when withdrawn.
• Taxable accounts continue to produce taxable income, and capital gains/losses when assets are sold.

Retirement accounts inherited by a non-spouse will generally need to be depleted within 10 years. There are special rules for spouses and individuals with disabilities who inherit retirement accounts, which can provide more favorable treatment.

Final Thoughts

Many people delay estate planning because it feels overwhelming or morbid, or they just assume it’s as simple as deciding who gets what. In reality, it’s much deeper than that, and can be a very strategic piece to your financial plan. 

Proper estate planning can provide continuing protection and support for your loved ones, help minimize taxes, and help ensure your legacy lives on as you intended. 

Remember, laws are constantly changing. Your estate plan shouldn’t be a one-time project. It should be reviewed regularly and updated as needed, especially after major life changes or legislative updates.

A well-crafted estate plan doesn’t just distribute what you’ve built, it preserves the impact of your life’s work for those who matter most.