Estate Planning Basics: Wills, Trusts, Step-Up & Probate

Estate planning sits at the intersection of tax law, property law, and family planning. Done well, it ensures assets pass to intended beneficiaries efficiently - minimizing taxes, avoiding probate, and protecting against incapacity. Done poorly or not at all, it hands control to state intestacy laws, probate courts, and the IRS. With the estate tax exemption now at $15 million per person under OBBBA, federal estate tax is not a primary concern for most Americans - but income tax planning at death, beneficiary designations, and avoiding probate remain critical for everyone.

The Step-Up in Basis: IRC §1014 - The Most Undervalued Planning Tool

When a person dies, assets in their taxable estate receive a new cost basis equal to the fair market value on the date of death (or alternate valuation date). This is the "step-up in basis" - and it permanently eliminates the capital gains tax on all unrealized appreciation that accumulated during the decedent's lifetime. The heir who inherits a stock bought for $10,000 now worth $500,000 owes zero capital gains tax on the $490,000 of appreciation - the basis resets to $500,000 and only future appreciation above that will ever be taxed.

Wills: The Foundation Document

A will (technically a "last will and testament") is the basic document that specifies how probate assets should be distributed at death. It names an executor (personal representative) to administer the estate and, critically, names a guardian for minor children. Without a will, state intestacy laws determine who receives assets - which may not match the decedent's wishes.

Wills have several limitations. They only control "probate assets" - assets that do not pass by other means (beneficiary designation, joint tenancy, or trust). Retirement accounts, life insurance, and jointly-held property all pass outside the will regardless of what the will says. Wills are also public documents - they are filed with the probate court and become part of the public record.

Revocable Living Trusts: Probate Avoidance

A revocable living trust (RLT) is a trust created during the grantor's lifetime that can be modified or revoked at any time. The grantor transfers assets into the trust, typically serves as the trustee during their lifetime, and names a successor trustee to take over at incapacity or death. At death, assets in the trust pass to beneficiaries according to the trust document - without going through probate.

The primary benefit of an RLT is probate avoidance. Probate is the court-supervised process of validating a will and distributing assets - it is public, slow (often 12-24 months), and expensive (attorney fees often 1-4% of estate value in some states). An RLT bypasses probate entirely for assets held in the trust.

An RLT provides no estate tax benefit during the grantor's lifetime - assets in a revocable trust are still included in the grantor's estate. The estate tax benefit comes from irrevocable trusts (SLATs, IDGTs, etc.) that remove assets from the taxable estate.

Beneficiary Designations: The Most Important Documents You Never Read

Retirement accounts (IRAs, 401(k)s, 403(b)s), life insurance policies, annuities, and many bank and brokerage accounts pass at death by beneficiary designation - completely outside the will and outside any trust, unless the trust is named as beneficiary. The beneficiary designation form controls, period.

Common beneficiary designation errors that create tax and distribution disasters:

• No designation on file. Assets pass to the estate, go through probate, and lose the ability to stretch distributions over the beneficiary's life expectancy.
• Former spouse still named. Divorce does not automatically remove a beneficiary designation in most states for federal retirement accounts governed by ERISA.
• Minor child named directly. Minors cannot receive large asset distributions without a court-appointed guardian - costly and slow.
• Estate named as beneficiary of IRA. Eliminates inherited IRA treatment - loses the 10-year distribution window and forces accelerated income recognition.
• Outdated designations after births, deaths, and divorces. Most people never update designations after life events.

Powers of Attorney: Planning for Incapacity

A durable financial power of attorney authorizes a named agent to manage financial affairs if the principal becomes incapacitated. "Durable" means the document remains effective even if the principal loses mental capacity. Without a DPOA, a court-supervised guardianship or conservatorship proceeding is required to manage an incapacitated person's assets - expensive, public, and slow.

A healthcare power of attorney (healthcare proxy) designates someone to make medical decisions when the principal cannot. A living will (advance directive) specifies the principal's wishes regarding life-sustaining treatment. Both should be part of every estate plan, regardless of age or wealth.

Portability: Preserving the Deceased Spouse's Exemption

IRC §2010(c) allows a surviving spouse to use the deceased spouse's unused estate tax exemption (DSUE) in addition to their own. If a spouse dies in 2026 with a $15M exemption and a $5M estate, the unused $10M DSUE is available to the surviving spouse - giving them a combined exemption of up to $25M.

Portability requires a timely filed estate tax return (Form 706) for the deceased spouse's estate - even if no estate tax is owed. The return must be filed within 9 months of death (or 15 months with extension). Missing the deadline forfeits portability. Rev. Proc. 2022-32 provides a simplified late portability election procedure for up to 5 years after death.