If you have a particularly large estate, the need for some type of estate planning may be obvious.

But it may also be a necessary step even if you aren’t “wealthy.”

Since so many people have accumulated substantial real estate equity and large retirement account balances, the need for estate planning is growing even among the middle class.

Read this guide thoroughly if you don’t think you need estate planning.

By the time you’re done, you may be convinced otherwise. Estate planning is really for everyone.

What is Estate Planning?

happy older couple sitting and planning estate with young lawyer man

Estate planning is the process of making arrangements and deciding who will receive the wealth and assets of a person after death. Estate planning also helps to minimize the tax liability for your heirs and beneficiaries.

And while we normally think of estates as relating to the wealthy, nearly everyone has assets of some type to pass on.

Put another way, nearly everyone will have an estate.

What Assets Are Considered Part of an Estate?

The various types of estate assets include:

  • Cash
  • Bank accounts
  • Investment accounts
  • Proceeds of life insurance policies
  • Some annuities
  • Your primary residence
  • Any other real estate you own
  • Business interests
  • Intellectual property
  • Personal property (jewelry, furniture, entertainment equipment, collectibles, artwork, etc.)
  • Deferred compensation and stock options
  • Retirement accounts, including pensions, 401(k) plans, and individual retirement accounts
  • Money owed to you (notes, mortgages, etc.)
  • Automobiles, recreational vehicles, and equipment

More broadly, your estate includes any asset that can be sold or liquidated for cash.

Further, the estate is reduced by any outstanding liabilities at the time of your death.

This can include bank loans, mortgages, personal loans, and open tax liabilities.

Many people are unaware of how large their estates are. This is often because they’re not fully aware of the full value of their financial assets, the equity in any real estate they own, or the many non-financial assets that are legally part of an estate.

Why You Need Estate Planning – Even if You’re Not Wealthy

When the value of all the assets listed above is properly determined and totaled, you may realize that you need some sort of estate planning. At a minimum, you’ll need to clearly determine the distribution of assets to your heirs.

But, in some situations, you may also need to provide direct care for dependent heirs, protect your estate from potential heirs you specifically want excluded, or arrange the transition of ownership of a business.

Estate planning can also be necessary if you need to make special provisions for one or more heirs. For example, if you have a special needs child who will need financial support for life, an estate plan can help you arrange that.

You may also decide you want a substantial portion of your assets going to certain charities. This can also be spelled out in your estate plan.

If you have a particularly large estate, you may also need to use estate planning to minimize estate taxes. That’s a topic we’ll discuss in more detail in the next section.

Avoid Probate

One of the biggest reasons for estate planning is avoiding probate. Probate is a legal process that can happen following your death.

It can happen anytime there’s a question involving the assets in your estate. That can include properly valuing the estate assets, paying certain debts and taxes, as well as distributing assets.

Probate can take place even if you have a will. The will may list specific assets as well as distributions to your heirs.

But, if there any questions – or challenges to the distribution formula – your estate can end up in probate.

The major downsides of probate include:

  • Delays the distribution of your estate, sometimes for years, and
  • Reduces your estate value through the payment of legal fees.

It’s best avoided at all costs, and the best way to do that is through estate planning.

Transfer Business Ownership

If you’re a business owner, estate planning is absolutely essential.

At a minimum, you may need to establish a business succession plan to arrange a smooth transfer of ownership of the operation to your intended successor.

This is a specialized area of estate planning all its own.

Preparing for Estate Taxes

For most people, estate taxes won’t be a problem, at least not at the federal level. That’s because the federal taxable threshold on estates is $11.4 million for 2019.

Beyond the estate limit, a graduated tax rate of 18% to 40% applies, with the 40% rate beginning at $1 million in excess (or in other words, on an estate of $12.4 million – the first $11.4 million being untaxed).

Relatively speaking, only a small sliver of people will be affected by the federal estate tax, given that there are relatively few worth at least $11.4 million.

One other important point regarding estate taxes: they don’t apply to assets passed from one spouse to another upon the death of one.

They only apply on estates passed to children and other beneficiaries.

However, the more pressing issue may be at the state level.

States with Lower Estate Tax Thresholds

While most states tie their estate tax thresholds to the federal limit, several impose taxes on much smaller estates.

States & Tax Thresholds(for 2019):

  • Connecticut, $3.6 million
  • The District of Columbia, $5,681,760
  • Hawaii, $5.49 million
  • Illinois, $4 million
  • Maine, $5.7 million
  • Maryland, $5 million
  • Massachusetts, $1 million
  • Minnesota, $2.7 million
  • New York, $5.74 million
  • Oregon, $1 million
  • Rhode Island, $1,561,719
  • Vermont, $2.75 million
  • Washington. $2,193,000

In total 12 states, plus the District of Columbia, impose estate taxes on much lower estate values than the IRS.

As you can see, Massachusetts and Oregon impose the tax on estates as low as $1 million.

That’s no small issue, given that there are an estimated 11.5 million millionaire households in the U.S.

Moral of the story: while federal estate taxes may not be an issue for you, there’s more than a slight chance you’ll have a state estate tax liability, at least if you live in one of the 12 states with a lower estate threshold.

Estate Planning: Will & Testament vs. Trust

Will & Testament

A will is the most common document used to handle an estate. It’s a standard document that outlines specific provisions following your death.

This can include not only listing your assets and the heirs to whom they’ll be distributed, but it can also establish guardianship over any dependent children, as well as make other provisions.

Another important function of a will is appointing an executor. This is a person, usually, a beneficiary named in the will, who will handle the management, liquidation, and distribution of your estate upon your death. You can appoint more than one executor.

One of the limitations of a will is the potential for probate. For example, if you attempt to disinherit a child or a spouse, it could be subject to a legal challenge.

There may also be issues if you’ve been divorced and you have children from multiple marriages.


For greater legal protection, a trust is often established. It’s a legal arrangement in which you give authority to another party to handle your estate.

The major benefit is that the estate will not be subject to probate. The assets pass directly to the named beneficiaries, according to the distribution formula indicated in the trust. In effect, a trust becomes a legal entity unto itself.

Living Trusts

A trust can be funded while you are still alive, which is referred to as a living trust.

If it’s set up as a revocable trust, you can fund the trust but retain control over the assets. Upon your death, the terms of the trust will be carried out by the trustee.

Another variation of a living trust is an irrevocable trust. This works similar to a revocable trust, in that you fund the trust and establish the terms under which assets will be distributed upon your death.

However, with an irrevocable trust, you give up control of the assets within the trust. This also serves to protect the assets in the trust from liens and creditors.

Testamentary Trusts

The second type of trust is a testamentary trust. This is a trust that’s created upon your death. The creation of the trust is typically spelled out in your will.

Upon your death, all assets will be moved into the trust. Even if you don’t have any financial assets, you can use the proceeds of a life insurance policy to establish a testamentary trust.

The trust document itself will be prepared while you’re still alive. But, it will not take effect until your death, when the trust is funded and the terms of the trust are carried out.

How to Create an Estate Plan

Follow these steps to begin the estate planning process:

Assemble an Estate Planning Team

A competent estate planning attorney will be the first, most important person on your team. However, depending on the size of your estate, you may need other experts as well.

If you have a large estate and you want to set up a living trust, you may need the services of a CPA. He or she can help determine the tax consequences of creating the trust, as well as file any necessary tax returns, particularly once the trust is established.

You may also need to engage the services of an investment broker to transfer ownership of financial assets into the trust.

A life insurance agent will be a necessary party to your estate plan. Life insurance proceeds will eventually become part of your estate, and may even represent most of the trust assets if you are creating a testamentary trust and don’t have substantial assets.

Life insurance may also need to be included in the trust to cover any estate taxes, or to make special provisions in the trust. These can include providing extended care for one or more beneficiaries or creating a business succession plan.

You’ll also need to designate a trustee. This can be anyone you have a high degree of trust in, including a family member or close friend. If you have no one in your personal circle, you can also designate an attorney, a financial planner, or another financial professional.

Set Up a Trust

Once you have designated your estate planning team, the first step is to inventory and value all the assets you own. Depending on the type and number of assets, this can be an involved process. But, it will help you determine which type of trust you need to set up.

Generally speaking, a living trust will be more appropriate for those with larger estates. Testamentary trusts will work better for smaller estates, since they don’t involve the costs and potential tax liabilities generated by living trusts.

Since a trust is a legal arrangement, you’ll almost certainly need to have it prepared by an attorney who specializes in trusts and estate planning.

This is especially important since the laws are somewhat different in each state, as well as the fact that every person’s financial situation and distribution requirements will be different.

A competent attorney will not only know the standard provisions in a trust, but will also know the questions to ask to determine any special circumstances.

He or she can also help you choose the best type of trust to create, and can advise you of any unexpected implications.

For example, if you create a living trust, taxes may need to be paid on the income generated by the assets within the trust.

You’ll also need help in determining if a revocable or irrevocable trust will be in your best interest, since the latter effectively involves giving up control over your assets.

Funding Your Trust

You’ll need to set up a tax-friendly plan to fund your trust, if it’s a living trust. When you transfer assets into a trust, the transfers are subject to the federal gift tax.

Under current tax law, you can gift up to $15,000 per year to the trust without incurring the tax (or $30,000 from both you and your spouse).

Any amount in excess of $15,000 will require filing IRS Form 709 – United States Gift Tax Return. By filing the form, you’ll be able to claim a credit against your lifetime estate exemption of $11.4 million, thus avoiding the gift tax.

If you’re going to create a testamentary trust, you’ll need to have an attorney prepare your will in such a way that will make it happen.

That will include the transfer of your assets to the trust upon your death, or as noted above, to establish a life insurance policy that will fund it if you have little or no financial assets.

It will also declare a trustee and any other instructions for managing and distributing the funds in the trust.

How Life Insurance Can Help You with Estate Planning

If you’re considering estate planning, especially the creation of a testamentary trust, we’re here to help.

We can work with you to set up the most cost-effective life insurance, either to fund your trust upon your death or to cover special expenses within your trust.

This may also include providing for the care of certain beneficiaries, covering taxes, or providing the funds necessary for an effective business succession plan.

Working to set up estate plans is part of what we do. We specialize in providing affordable life insurance for people with pre-existing health conditions.

If you’re moving toward estate planning, or establishing a trust, put us on your team. We’re here to work for you, not the insurance companies!