Making Sure Your Money Goes Where You Want

This chapter is education, not legal advice. Estate planning is the practice of law and the rules are state-specific — your attorney drafts the documents. But the most expensive estate failures are not drafting failures. They are gaps between what a document says and how the assets are titled.

A plan does three things: it moves assets to the people you intend, it names who decides when you cannot, and it handles the incapacity that may precede death. Most people plan for the first and skip the third, which is backwards.

Plans fail on the first job because your assets do not all transfer by the same mechanism: some pass under your will, some by contract, some by operation of law based on title, and some under an operating agreement you signed years ago. Add retirement accounts, life insurance, and a business interest, and your will may govern a minority of what you own.

• Will. Directs assets with no other transfer mechanism, names your executor, and names guardians for minor children — often the most important sentence in the plan. It does nothing for assets that pass by contract or by title.
• Revocable living trust. Holds title during your life so assets pass at death without probate, and provides for management during incapacity. It governs only what has been retitled into it — an unfunded trust accomplishes nothing.
• Durable power of attorney. Lets someone you name act on your financial affairs if you cannot — most likely to be needed, least likely to be reviewed. A narrow one may not let the agent deal with a business interest, fund a trust, or handle real estate.
• Healthcare directive and healthcare proxy. Names who makes medical decisions and records your wishes about treatment — partly legal, and partly to spare a family a decision it would otherwise have to guess at.
• Beneficiary designations. The forms on file with custodians and insurers controlling retirement accounts, annuities, life insurance, and transfer-on-death registrations. These are contracts, they pass outside probate, and they override your will.

This is the most expensive mistake in estate planning. A beneficiary designation is a contract: the institution pays whoever is named on the form — it does not read your will, and probate law does not reach the asset. An ex-spouse named on a 401(k) form in 2009 inherits that account regardless of a will drafted in 2020 or a divorce decree that said otherwise.

A blank designation generally sends the account to your estate, which drags it into probate and can compress the distribution period a named individual would have had. A blank contingent line strands the account when a beneficiary predeceases you, and a minor named directly puts a court in charge of the money. A trust named as beneficiary can produce a poor tax outcome unless it was drafted to receive retirement assets — ask the drafting attorney before you submit the form.

What I would do: pull every beneficiary designation you have — every retirement account, every old employer plan, every policy and annuity — and read them against your current documents and intentions. People who do this find something wrong more often than not, and it requires no attorney and no permission.

Probate is not a catastrophe — cost and delay vary a great deal by state — but it is public and it takes time.

How an asset is titled determines who can act on it, whether it passes through probate, whether a creditor can reach it, and — for married couples in community property states — how it is treated for basis purposes at the first death. Adding an adult child to the deed of a house to "keep it simple" can create a taxable gift, expose the property to that child’s creditors and divorce, and forfeit part of the basis adjustment the family expected.

When you sell an appreciated capital asset during your life, you pay tax on the gain. When you die holding it, its basis is generally adjusted to its value at death — so a lifetime of appreciation can pass to your heirs without income tax on that gain. For a low-basis asset held a long time, holding until death is sometimes the entire strategy.

1031 exchanges matter here: an exchange defers the gain and carries the old basis forward, and each subsequent exchange defers it again. Held to death, a chain of deferrals can meet the basis adjustment and resolve without income tax on the accumulated appreciation — deliberate, and fragile, because it depends on the asset being held until death.

Lifetime gifting removes an asset and its future appreciation from your estate — exactly what you want if you expect a taxable estate. But the recipient generally takes your basis rather than a stepped-up one, so the built-in gain becomes theirs to pay. Which trade is correct depends on whether you are likely to have a taxable estate at all, how much appreciation is embedded, the recipient’s tax position, and how long the asset is held after the transfer.

The dividing line moves whenever the exemption changes. For a family well below any estate tax threshold, gifting a low-basis asset can hand the next generation a tax bill in exchange for an estate tax benefit they were never going to need; above it, the arithmetic runs the other way. Charitable structures are a third position, because giving an appreciated asset to charity can avoid the gain without requiring anyone to die.

Business interests are most likely to be governed by an agreement that overrides both the will and the trust, and most likely to have a contested valuation. Continuity planning covers what has to be in place before an owner’s death becomes an estate problem and a company problem at once.

The federal estate and gift tax exemption is a unified amount — gifts made during life draw against the same figure that shelters the estate at death — and it is indexed, has changed repeatedly, and has been subject to scheduled statutory changes more than once. I am deliberately not printing a number — a plan built around a specific exemption figure has an expiration date. Re-check the current amount with your attorney. Several states impose their own estate or inheritance tax with their own thresholds, frequently lower than the federal one — which is why a move across a state line is an estate planning event.

A surviving spouse can generally claim the unused portion of the first spouse’s exemption, but that requires filing an estate tax return at the first death — the return nobody wants to file, because no tax is due. Families skip it, the unused exemption disappears, and the consequence surfaces at the second death. Ask the attorney and the CPA about portability before deciding not to file.

An estate plan is not a one-time project — the documents have to keep matching the balance sheet. The review triggers and the annual cadence that keep the two aligned are in working with your CPA and attorney.