Estate Planning Basics: Wills, Trusts, Beneficiaries and Taxes

State law and a probate court make the decisions you did not. Accounts with named beneficiaries still pass directly, but everything in your name alone goes through probate, and if you lose capacity without powers of attorney, your family may need a court to let them pay your bills.

A complete estate plan typically includes these five core documents. Think of them as a protection package for your family.

This is one of the most common questions in estate planning. Here's a clear comparison:

These accounts pass directly to named beneficiaries (outside of probate):

In two steps: almost everything goes to the surviving spouse at the first death, and the real distribution, and most of the tax planning, happens at the second. Richard, 76, and Anne, 73, are a hypothetical married couple in a common-law state with two adult children and four grandchildren. They own about $3.4 million:

Richard dies at 79

• Nothing goes through probate. The house and bank accounts pass to Anne by survivorship, the IRAs by beneficiary form, and the brokerage account stays in the trust with Anne as sole trustee. Richard's will has almost nothing to do.
• No federal estate tax. Everything left to a U.S.-citizen spouse qualifies for the unlimited marital deduction, whatever the amount.
• Anne treats Richard's IRA as her own. A surviving spouse can roll an inherited IRA into her own name, so required distributions follow her age and her life expectancy rather than an inherited-IRA schedule. The Roth becomes hers too, with no required distributions.
• Half the basis steps up. Richard's half of the house and of the brokerage account takes a new basis equal to its value at his death. If the account is still worth $550,000, its basis rises from $250,000 to $400,000 (Anne's original $125,000 plus Richard's half at $275,000). In the nine community-property states both halves step up at the first death.
• Anne decides on portability. Filing a federal estate tax return (Form 706) for Richard would preserve his unused federal exemption for her. At $3.4 million it looks unnecessary, but the exemption has changed many times, and the IRS allows a simplified late election for up to five years after death.

Anne dies at 88

By then her IRAs total about $1.6 million after years of required distributions, the Roth is worth $260,000, and the house and brokerage account, both retitled into the trust after Richard's death, are worth $1.6 million. The trust divides that $1.6 million between the two children, with a share held in trust for the grandchildren as described below. The house and brokerage account step up in full to their value on her death, so the children can sell them with little or no capital-gains tax.

The IRAs are the part that needs planning. Each child inherits about $800,000 of pre-tax money and, as a non-spouse beneficiary, must empty it by the end of the tenth year after Anne's death. Because Anne had already reached her required beginning date, they must also take an annual distribution in years one through nine. If both children are still working, those withdrawals land on top of their salaries, often in the 24% or 32% bracket. The Roth, by contrast, must also be emptied within ten years but comes out tax-free. That is the estate-planning case for Roth conversions before RMDs, and the inherited IRA 10-year rule covers the heirs' side in detail. The inherited IRA RMD calculator shows what your heirs will have to withdraw each year.

Three situations need more than the standard plan: a second marriage with children from the first (blended family estate planning), a partner you are not married to (estate planning for unmarried couples), and an heir who relies on SSI or Medicaid (special needs trusts and ABLE accounts).

At about $3.5 million, Anne's estate owes no federal estate tax. Whether it owes state tax depends entirely on where she lived, which is the subject of the next section.

Federal estate tax almost certainly not: the 2026 exemption is $15 million per person, and a married couple can shelter $30 million with portability. State tax is the real risk, because 12 states and the District of Columbia have their own estate tax, most with far lower thresholds, and five states tax inheritances. The federal exemption rose to $15,000,000 for 2026 and will be indexed for inflation from 2027; the top rate above it is 40% (IRS, 2026). Our estate and gift tax calculator shows how far your estate is from the line, with and without portability.

An estate tax is charged on the whole estate before it is distributed. An inheritance tax is charged on what each heir receives, at a rate set by the heir's relationship to you, so it rarely touches a spouse or children. Iowa repealed its inheritance tax for deaths on or after January 1, 2025 (Iowa DOR), and New Jersey's estate tax ended in 2018, leaving these five:

Three consequences for planning. First, state tax follows your domicile, and real estate is generally taxed by the state where it sits, so a Florida retiree who keeps a house in Massachusetts can still owe Massachusetts estate tax on it. Second, most state exemptions cannot be passed to a surviving spouse the way the federal exemption can; Hawaii and Maryland are the main exceptions. In a state like Massachusetts, a couple with $3.4 million who leave everything to each other use one $2 million exemption instead of two. A credit shelter (bypass) trust, funded at the first death up to the state exemption, is the standard fix. Third, the New York cliff means an estate a little above the line can owe tax on the whole amount, so estates near $7.35 million there need specific planning. The rates and rules change often; check the state's own page before relying on any figure.

The ones that send money to the wrong person, through probate, or out of a tax-deferred account years earlier than necessary. In most retirement estates the beneficiary forms control more money than the will, and they are the documents least often reviewed.

1. 1

   An ex-spouse still named on a 401(k) or pension.

   Federal law (ERISA) generally requires a workplace plan to pay the beneficiary named in the plan documents, even when a state law would revoke a gift to an ex-spouse after divorce; the Supreme Court held as much in Egelhoff v. Egelhoff (2001). Most 401(k) plans also require a married participant’s spouse to consent in writing, before a notary or plan representative, to any other beneficiary. Update the form yourself after a divorce or remarriage.

2. 2

   No contingent beneficiary.

   If the primary beneficiary dies first and no contingent is named, the account usually defaults to your estate under the plan document, which brings it into probate.

3. 3

   Naming "my estate".

   It sends the account through probate and, for an IRA, usually shortens the payout: if the owner dies before the required beginning date and the estate is the beneficiary, the account must be emptied within five years, and heirs lose the option to spread withdrawals over ten.

4. 4

   Naming a minor grandchild directly.

   A minor cannot control the account, so a court may need to appoint a guardian or conservator of the property, and the money is typically handed over outright at the age of majority. Name a trust or a custodian under your state’s Uniform Transfers to Minors Act instead.

5. 5

   Leaving a disabled heir money outright.

   An inheritance can disqualify someone who relies on means-tested benefits such as SSI or Medicaid. A supplemental needs trust, drafted by an attorney, can hold the money for them without that effect.

6. 6

   Splitting assets without adjusting for tax.

   Leaving the $800,000 IRA to one child and the $800,000 stepped-up brokerage account to the other is not an equal split: the IRA carries an income tax bill and the brokerage account largely does not. Divide each account by percentage instead.

7. 7

   Not choosing per stirpes.

   If a child dies before you, many forms by default divide that child’s share among the surviving named beneficiaries, cutting out the grandchildren. Selecting "per stirpes", where the form allows it, passes the share to that child’s descendants.

8. 8

   Assuming the old form survived a merger.

   After a plan changes custodian or a bank is acquired, confirm your beneficiaries in writing on the new firm’s form.

For most families, a trust that holds the money until the grandchild is old enough, with an education fund on the side. Money left outright to a grandchild under 18 has to be managed by someone the court approves, and it arrives in full at an age many grandparents consider too young.

Gifts and bequests that skip a generation can be subject to a separate generation-skipping transfer tax, but each person has a GST exemption equal to the estate exemption, $15,000,000 in 2026 (IRS Rev. Proc. 2025-32). For almost every family the practical point is to have the trust's drafter and the tax preparer allocate that exemption properly, not to worry about paying the tax.

The trust in Richard and Anne's plan holds 10% of the residue for the grandchildren, pays for education and health until the youngest is 25, and then divides what is left equally. It costs little to add to a living trust that is being drafted anyway. Gifting to children and grandchildren covers giving during your lifetime, which has the advantage that you see the money used.

Mostly paperwork: secure the assets, get legal authority, notify the government and the institutions, and establish what everything was worth on the date of death. Knowing the sequence in advance is one of the kindest things you can leave the person you name. The order below is typical; your state's probate rules, and whether assets are in a trust, change the details.

Later deadlines follow: the decedent's final Form 1040 is due on the usual April date the year after death, and a federal estate tax return, where one is required or wanted for portability, is due nine months after death, with a six-month extension available. A successor trustee of a living trust does much the same work without the court filings.

Don't let perfectionism stop you. An imperfect estate plan is infinitely better than none. Here's how to start: