Estate planning is easy to put off because it forces you to think about your own mortality, but avoiding the conversation doesn’t make the need go away. As of 2014, Rocket Lawyer found that roughly half of Americans ages 55 to 64 had no estate plan at all, not even a basic will. If you die without one, state law decides who gets your assets through a probate process the legal system calls “intestate,” and that can leave your heirs with legal bills and delays they didn’t need to have.
Part of our guide: Crypto Estate Planning.
Why it matters more once you have real assets
For higher-net-worth individuals, the stakes go up because there’s simply more to pass on, and often more complexity: a business you want your children to inherit, charitable commitments you want to continue, or a spouse and grandchildren you want protected without handing a large, avoidable tax bill to the government. A workable estate plan gets your wealth to the people and causes you care about efficiently, keeps your wishes intact if you become incapacitated (especially with a living trust, living will, or power of attorney in place), gives your heirs enough liquid cash to cover taxes and expenses without being forced to sell illiquid assets like a business or real estate at a bad time, and reduces the chance of disputes among heirs who are unclear on who gets what.
The cost of skipping this planning shows up in real cases. Actor Heath Ledger died in 2008 with a will that hadn’t been updated since 2003, so neither his partner nor their daughter were named in it; everything went to his parents and sisters instead. Former Miami Dolphins owner Joe Robbie set up a trust intended to keep majority ownership of the team in his family, but the structure left his heirs facing an estimated $47 million estate tax bill, forcing them to sell a stake in the team and in Joe Robbie Stadium to cover it. Musician Prince died in 2016 without a will, which put his financial affairs into the public record and left extended family members disputing the estate. In each case, the lack of an updated plan undid what the person actually wanted.
The core documents
A last will and testament is the must-have piece: it names who inherits your assets, designates guardians for minor children, and appoints an executor to carry out your wishes and file final tax returns. A living will covers end-of-life care decisions, such as whether you want to be resuscitated, if you become incapacitated and can’t speak for yourself. A revocable (living) trust lets you assign assets to people or nonprofits, and can help those assets pass outside of probate while you keep control during your lifetime, though it does not by itself provide the creditor protection an irrevocable trust does. A power of attorney names someone to make decisions on your behalf: a durable POA covers financial decisions like investments or real estate transactions, while a healthcare POA covers medical decisions, and neither can override the terms of your will or trust.
Federal and state estate tax basics
Federal estate tax exemption amounts change over time with legislation, so treat any specific dollar figure as a snapshot rather than a permanent rule and confirm the current threshold with your advisor. Historically, only a small percentage of estates have been large enough to owe federal estate tax, because the per-person exemption has generally run into the millions of dollars and married couples can combine their exemptions. Amounts above the exemption are taxed at graduated federal rates. On top of the federal rules, a number of states and the District of Columbia impose their own estate or inheritance taxes, with lower exemption thresholds and different rates, so your total exposure depends heavily on where you live. Even if you’re comfortably under the exemption and owe no estate tax, you still need a plan to determine how your assets get distributed.
Lifetime gifting
The IRS allows an annual per-recipient gift exclusion that lets you give money to as many people as you want each year, tax-free to both you and the recipient, without filing a gift tax return or touching your lifetime estate tax exemption. Married couples can each give the annual exclusion amount, doubling what a couple can transfer to one recipient each year. Gifts above that annual limit require filing a federal gift tax return (Form 709) and reduce your lifetime exemption, though you generally don’t owe actual gift tax until your cumulative gifts above the annual exclusion exceed your full exemption amount. Two useful exceptions: paying tuition or medical bills directly to the school or hospital, rather than to the individual, doesn’t count as a gift at all, regardless of the amount.
Gifting a business
Passing on a business is one of the most common ways parents transfer wealth to children, and because a meaningful ownership stake will almost always exceed the annual gift exclusion, valuation discounts become important. Two discounts typically apply when you gift a minority stake: a lack-of-control discount, since a small percentage stake carries no real authority over the business, and a lack-of-marketability discount, since there’s no ready market to sell a small stake in a private company. Applying these discounts reduces the taxable value of what you’re gifting relative to the business’s full value, which lets you transfer more ownership over time without eating into your exemption as quickly. Because valuation rules in this area have been the subject of proposed regulatory changes, this is an area to review with your advisor regularly rather than set once and forget.
Trusts built for larger estates
A grantor retained annuity trust (GRAT) lets you transfer growth-oriented assets, like stock in a closely held business, into an irrevocable trust in exchange for an annuity paid back to you over a set term. If structured so the annuity payments equal what you contributed plus an IRS-set interest rate, the trust can be “zeroed out” for gift tax purposes: any appreciation beyond that passes to your beneficiaries gift-tax free. The risk is timing, if you die before the trust term ends, the assets revert to your taxable estate and the beneficiaries get no tax benefit.
An intentionally defective grantor trust (IDGT) is similar but keeps you responsible for paying income tax on the trust’s earnings, which is deliberate: it lets the trust’s assets grow without being reduced by tax payments, and any appreciation passes to beneficiaries free of estate tax. It’s commonly used for illiquid, appreciating assets like shares in a private business.
An irrevocable life insurance trust (ILIT) owns your life insurance policy outside of your taxable estate. Without one, a large death benefit can push your total estate value over the exemption threshold and increase your estate tax bill, even though the benefit itself isn’t taxed as ordinary income to your beneficiary. Once the ILIT owns the policy, you can’t retain any control over it, doing so pulls the policy back into your taxable estate.
A family limited partnership (FLP) or LLC is often used to transfer a family business, real estate, or investments across generations, with general partners managing the assets while gradually gifting shares to limited partners, again with lack-of-control and lack-of-marketability discounts reducing the gift’s taxable value. A special needs trust protects a beneficiary who is mentally or physically disabled, letting them benefit from trust assets without disqualifying them from needs-based government assistance.
The bottom line
Estate planning is ultimately about making sure the people in your life are taken care of after you’re gone, and that your wishes are known and followed if you can’t speak for yourself. You don’t need to be an ultra-high-net-worth investor to benefit from gifting to your children while you’re alive to see it matter. Work with an attorney and financial advisor who specialize in estate planning to build a gifting and trust strategy that fits your actual numbers, and revisit it whenever the rules or your circumstances change.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
