By YBB Personal Finance

We hear horror stories of celebrities & billionaires dying INTESTATE (notable examples include Prince, Howard Hughes, etc) & it’s not because they lack access to financial planning. When a person dies intestate, i.e. without a Will or Trust, his/her estate is the default beneficiary. There is also a default plan for distribution of assets to relatives. PROBATE COURT will appoint an EXECUTOR, if one isn’t named already in the Will or trust, for the resolution of debts, bills, last expenses, taxes & distribution of assets among the heirs. The affairs are settled publicly. After probate, all matters related to the deceased person are deemed settled & no further claims remain on the estate or the heirs.

States have SMALL ESTATE exemptions from probate. So, if most assets are transferred through joint accounts, POD/TOD (Totten trusts), living trusts, beneficiary designations (IRAs, 401k/403b, pensions, annuities, insurance), & the remaining assets are under state’s small estate limit, public probate is avoided. It’s important for people with LIVING TRUSTS to keep non-Trust assets (checking accounts, cars, household property) under the state’s small estate limit. These small estate limits vary a lot – CA $184.5K; IL $100K; VT only $10K. In many states, just owing car(s), household furnishings & having some money in checking/saving will make the estate probatable. Wills vs living trusts vs extensive use of joint accounts & POD/TOD is a popular topic of discussion. For estates of moderate complexity, living trust may be worth the headache & expense. If minors are involved, the trust can specify details such as guardian, provisions for educational & general expenses, arrangements for any disabilities, some life event triggers for release of funds, etc. Multistep succession plans can also be included. Be sure to fund the trust by retitling most assets.

People can give annual GIFTS up to the annual gift exclusion amount (in 2024: $18K for individuals, $36K for couples) to any person(s) without tax implications. For annual gifts in excess of the annual exclusion amounts, Form 709 must be filed. The state 529 annual contribution limits are the same as the annual federal gift exclusion limit, but 5-year pull-forward of these amounts is allowed for 529s. Form 709 filings are to keep track of excess gifts over lifetime that exceeded the annual exclusion amounts. While no taxes are due on these excess annual gifts, these excess gifts will cut into the lifetime UNIFIED/combined estate & gift EXEMPTION (in 2024: $13.61 million for individuals, $27.22 million for couples).

There is unlimited MARITAL EXEMPTION for the surviving spouse. PORTABILITY election for the unused estate & gift exemption for the deceased spouse can significantly increase the lifetime estate & gift exemption for the surviving spouse ($13.61-27.22 million in 2024 with portability election vs $13.61 million without). Years ago, when estate & gift exemptions were low, living trusts used BYPASS TRUSTS to fully utilize individual estate & gift exemptions, but those devices may be less useful now. Accounts such as state 529s & DAFs (donor advised funds) move assets out of the estate. Except for some short-term clawbacks that may be possible, these asset shifts are irreversible or have penalties & taxes for personal withdrawals. Charitable donations also reduce the estate, provide tax benefits, & the QCDs after 70 from Traditional IRAs reduce future RMDs.

MEDICAID eligible estate planning involves special trusts that are recognized by the Medicare as exempt from the Medicaid lookback period of 5 years. Medicaid eligibility requires drawdown of most financial assets but some assets are left for the subsistence of the other spouse. Federal ESTATE TAX rates are 18-40% on taxable gross estate beyond the lifetime estate & gift exemption; note the distinction between probatable estate vs taxable estate. Most states don’t have estate taxes, but 12 states & DC (CT, HI, IL, ME, MD, MA, MN, NY, OR, RI, VT & DC) have some state estate taxes (for IL, 0.08-16% over $4 million); six states have inheritance taxes (IA, KY, MD, NE, NJ, PA).

2017 Tax Cut & Jobs Act (TCJA) provisions are expiring in December 2025. A big change will be that the lifetime estate & gift exemption will be cut almost in half in 2026. The estate planning actions taken by 2025 wouldn’t be affected whether some provisions of TCJA are extended. Couples may do partial estate planning by completing the estate plan for one spouse now under the current TCJA & leaving the estate plan open/flexible for the other spouse to account for changes, if any, later. BENEFICIARIES come into picture only after the account holder is deceased (unlike joint- or co- owners). PRIMARY beneficiaries are the first in line, then the CONTINGENT beneficiaries. There can be named beneficiaries, defined beneficiary classes (e.g. all my children, or grandchildren), PER STIRPE specifications (by family branch). In annuities, the terms used may be 2nd ANNUITANT or SURVIVOR (that includes the annuity account holder). People & non-people (trusts, organizations, charities, pets) beneficiaries may have different options & restrictions. There are special considerations for beneficiaries for accounts such as workplace retirement plans (pensions, 401k, 403b), 529, 529-ABLE, UTMA, HSA, DAF.

For most accounts with named beneficiaries (IRA, 401k, 403b, insurance), financial institutions will require the copies of death certificates. But for some account actions, letters from executors & copies of the probate court orders may be required. Prompt notifications of death should also be made to employers, retirement plans/HR, insurance companies, Social Security, credit card companies, etc. It’s important to keep beneficiaries updated, otherwise, a significant amount of money may go unintentionally to a former spouse, or unintended heirs, creating troubles for the current spouse & beneficiaries. It’s best to specify beneficiaries where required, but use the other tools (Wills, trusts) for the rest. Estate planning is a complex topic that has many legal aspects. Laws & rules keep changing. There are complications for noncitizen spouses. Always consult estate lawyers or elder law specialists before taking major actions.

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