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Everyone needs an Estate Plan, and most of the people I’ve met prefer the idea of being remembered in a positive light – especially in the eyes of those they care most about. What people do not want are heirs remembering a total mess.

The Estate Tax & The Marital Deduction

As of 2022, every United States citizen receives an Estate Tax deduction of 12.06 million dollars usable over their lifetime. This credit is used to offset any estate tax or gift tax that might be incurred. Generally speaking, and with some exceptions, all your assets and taxable gifts need to be close to $12.06 million dollars over your lifetime before any significant estate planning tax liabilities arise. Furthermore, married individuals can probably coordinate estate tax deductions between spouses utilizing the unlimited marital deduction. This combines the total deduction for the two estates and ensures no waste of the combined $24.12 million estate tax exclusion.
As the laws sit currently, if you do not have or expect to have at mortality close to these amounts in total assets, many more advanced estate planning techniques may be extraneous. Additionally, the estate tax has an adjustment for inflation, which means that in tomorrow’s dollars, the actual deduction at mortality is likely to be much higher. Or laws may change.

Recommendation: Pros & Cons of Becoming a Real Estate Tycoon

Those who have enough to cover income needs and have taxable accounts outside of retirement accounts that are not expected to be used may be able to enjoy tax deferral on those assets as they appreciate in value. Furthermore, heirs may benefit from a ‘stepped up’ basis at the decadent’s mortality.

The Federal Estate Tax is a tax on your ‘stuff’ upon your death. It generally consists of everything you own or have interests in at the time of death. The ‘fair market value’ of your property is typically used and not necessarily your ‘basis’ or what you paid for the asset or the value when the property was acquired. The total of all these items is your ‘Gross Estate’ calculated om IRS form 706. Includable property might be cash, real estate, investment securities, insurance, annuities, or business interests among other assets. Most notably, the top estate tax rate is 40%.

Using the ‘Step-Up’ as a Planning Technique

step-up” in basis to the fair market value on real property at the time of death, in my experience, is by far the most dynamic and inexpensive estate planning technique available to individuals below the $12.06M individual and $24.12M combined exclusion. The “step-up” is one of the very few cases in the IRS code where gains on real property are essentially wiped away.
There is an absolute art to organizing and fully utilizing potential “step-up” assets while retired. “step-up” assets get the best of both worlds – the ability to be used and then subsequently pass along property in a tax-efficient way. A “step-up” in basis can benefit larger estates as well.

Those that have enough to cover income needs and additionally have taxable accounts outside of their retirement accounts that they don’t expect to use, get to enjoy the deferral of tax on those assets as they appreciate. Furthermore, their heirs may enjoy a ‘stepped up’ basis at the time of death wiping away all those gains. Not a bad deal!

Non-traditional Family Arrangements

Nowadays, the American family gets to enjoy quite a bit of diversity. Divorce and remarriage are commonplace. The blending of children into new families, adoption, domestic partnerships, and same-sex marriage arrangements all offer unique estate planning considerations. Marriages among non-U.S. citizens offer their own unique challenges when it comes to estate taxes and techniques mentioned above.

An unmarried partner is typically not recognized as a family member under state law. So if you are in an unmarried spousal living arrangement, I strongly suggest you put that arrangement down on paper as a cohabitation agreement. The purpose is to make your living arrangement crystal clear should the property owner suddenly pass away or be incapacitated. Your rights as a partner are not nearly as strong as the rights of a spouse, and this can create many unexpected complications when it comes to living situations and often more notably in regards to health care decisions.

Partners should implement durable powers of attorney for health care (DPOHC), allowing the other partner to make important decisions on their behalf should they become incapacitated. Additionally domestic partners should consider implementing a ‘cohabitation agreement’ to address their estate planning discrepancies.

Preparing for Medical and End-of-Life Care

Traditionally a living will and the durable power of attorney for health care (DPOAHC) seek to solve for situations where the individual is unable to provide consent regarding certain medical decisions. The intention of these documents is to provide a clear statement of what procedures an individual consents to under specific medical circumstances. The selected surrogate is a key piece to the success of these documents.

In my home state of California, The Advance Health Care Directive has been replaced with the Durable Power of Attorney for Health Care as the legally recognized document for appointing a health care agent. The argument is that the AHCD offers more flexibility than the standard DPAHC. A chief advantage the AHCD has over the DPOAHC is that it does not expire.

When To Just Do Something

Sometimes all that’s necessary is clarity in where the money should go. And in the age of subscriptions and auto-drafts, it can be quite inconvenient to switch bank accounts or transfer highly appreciated securities into a trust account to avoid probate. Alternative beneficiary designations can help get the job done today. This would include Transfer on Death (T.O.D), Payable on Death (P.O.D.), and Transfer on Death of Real Property. It’s not always clean, available in every state, and I must hedge and warn you about potential limitations or the proven ability of some alternative beneficiary designations.

401Ks, IRAs, Roth IRAs and similar types of accounts allow for and should include “direct beneficiaries” named as your “primary beneficiaries.” When this is the case, then those assets do not need to and should not be in the name of a trust. Beneficiary forms on retirement accounts are iron clad and you should assume whoever is listed on that beneficiary is getting the money. Period.


My official answer is that working with a qualified estate planning attorney in your unique situation and paying for a revocable living trust is always ultimately going to be the correct answer to avoiding mistakes and circumventing unforeseen quarks. But for the most part, I have found alternative beneficiary designations to be entirely satisfactory, free, and I have to admit sometimes it’s just about getting something done.

Editor’s note: This blog offers informal investment and financial planning advice. If appropriate, seek the counsel of experienced, ideally objective, financial, tax, or estate planning professionals. Past performance is not indicative of future performance.