• Home
  • Stock News
  • Tax Guy: Didn’t win the Mega Millions jackpot? You still need an estate plan — here’s what to do

Post: Tax Guy: Didn’t win the Mega Millions jackpot? You still need an estate plan — here’s what to do

Whoever won that ginormous Mega Millions $1.337 billion jackpot needs some serious estate planning advice. 

Sadly, you were not the winner, and neither was I. Even so, I need an estate plan, and you probably do too. Here’s why.

Don’t fixate on the whopping big federal estate tax exemption

The vast majority of folks are not currently exposed to the federal estate tax, thanks to today’s ultra-generous $12.06 million exemption for singles — or effectively $24.12 million for married couples. That’s good, but being exempt from the federal estate tax is not the end of the story. If you have minor children and some assets (maybe just a car or two and some nice furniture), you probably need an estate plan regardless of your exposure, if any, to the federal estate tax.

Epic celebrity fails 

Even some famous rich folks inexplicably pass away without having taken steps to express and fulfill their post-demise wishes. Strange but true.

According to reports, Aretha Franklin (estimated net worth $80 million) died without a will, even though she was in poor health and had a special-needs son. Prince (estimated net worth $200 million) also died without a will. Ditto for author Stieg Larsson, who wrote “The Girl with the Dragon Tattoo,” Tupac Shakur, Amy Winehouse, and Sonny Bono — remember him? 

But back to the real world.   

Celebrity or not, you probably need a will and a living trust, too

If you die intestate (without a will), the laws of your state determine the fate of your minor children and your assets. Yikes. So, unless you have an inordinate amount of faith in the output of your beloved state legislature, you need a written will to make your wishes known. 

Why you need a will

The main purposes of a will are to name a guardian for your minor children (if any), name an executor for your estate, and specify which beneficiaries (including charities) should get which assets. 

The guardian’s job is to take care of your kids until they reach adulthood (age 18 or 21 in most states).

The executor’s job is to pay your estate’s bills, pay any taxes due, and deliver what’s left to your intended heirs and charitable beneficiaries.  

For wills, good do-it-yourself software is readily available online. 

Why you should consider a living trust 

If you have significant assets, you should probably also set up a living trust to avoid probate. Probate is a sometimes-painful court-supervised legal process intended to make sure a deceased person’s assets are properly distributed. However, going through probate typically means red tape, legal fees, and your financial affairs becoming public information. These are things to be avoided when possible. That’s where the living trust comes in. Here’s how it works.  

You establish the living trust and transfer legal ownership of assets for which you wish to avoid probate (such as your main home, your vacation property, investment accounts, your cars, your antique furniture, and your valuable baseball card collection) to the trust.  

In the trust document, you name a trustee to be in charge of the trust’s assets after you die, and you specify which beneficiaries will get which assets from the trust. 

You can function as the trustee or you can designate your attorney, CPA, adult child, faithful friend, or financial institution. Whatever works for you. 

Because a living trust is revocable, you can change its terms at any time, or even unwind it completely, as long as you’re alive and legally competent. That’s why it’s called a living trust. 

For federal income tax purposes, the existence of the living trust is completely ignored while you’re alive. As far as the IRS is concerned, you still personally own the assets that are now in the trust. So you continue to report on your Form 1040 any income generated by trust assets and any deductions related to those assets (such as mortgage interest on your home). 

For state-law purposes, however, the living trust is not ignored. Done properly it avoids probate. And that’s the goal.   

When you die, the assets in the living trust are included in your estate for federal estate tax purposes. However, assets that go to your surviving spouse are not included in your estate, assuming your spouse is a U.S. citizen — thanks to the unlimited marital deduction privilege. As I said at the beginning of this column, you probably don’t have to worry about any federal estate tax hit with today’s huge exemption. But the exemption is scheduled to go down drastically in 2026. I’ll remind you about that issue and what can be done about it as the time approaches.  

I think you should hire an attorney to draft a living trust document. It might cost a few thousand bucks. Money well-spent.  

Note: Living trusts may also be called family trusts or revocable trusts.      

Wills and living trusts are not cure-alls      

The benefits of wills and living trusts are obvious. However, you won’t get the expected advantages without minding the details. 

* If you’re married, you and your spouse should have separate, but coordinated, wills and/or living trusts. That’s because you never know for sure who will die first.   

* Your will and/or living trust should be consistent with your beneficiary designations and the manner in which your assets are legally owned. For example, when you fill out forms to designate beneficiaries for your life insurance policies, retirement accounts, and brokerage firm accounts, the named beneficiaries will automatically cash in upon your death without going through probate. The same is true for bank accounts if you name payable-on-death (POD) beneficiaries. It makes no difference if your will or living trust document specifies to the contrary. So keep your beneficiary designations current to make sure the money goes to the right places.  

* When you co-own real estate jointly with right of survivorship, the other co-owner(s) will automatically inherit your share upon your death. It makes no difference if your will or living trust document says otherwise.  

* If you set up a living trust, you must transfer legal ownership of assets for which you wish to avoid probate to the trust for the trust to perform its probate-avoidance magic. Many people set up living trusts and then fail to follow through by actually transferring ownership. If so, the probate-avoidance advantage is lost.   

* In and of themselves, wills and living trusts do nothing to avoid or minimize the federal estate tax or state death taxes. If you have enough wealth to be exposed to these taxes, additional planning is required to reduce or eliminate that exposure. Note that some states have death tax exemptions that are far below the ultra-generous $12.06 million federal estate tax exemption. So, you could be exposed to state death taxes even though you’re blissfully exempt from the federal estate tax. In that circumstance, you should seek advice from a good estate tax planning pro.        

Final thought: estate plans are moving targets

Things change. You may acquire new assets, win the lottery (just not the most recent one), lose relatives to death, disown relatives, take them back, and gain children or grandchildren. Any of these events, and more, could require changes in your estate plan. In addition, the federal and state estate and death tax rules have proven to be unpredictable. For all these reasons, you should review your estate plan at least annually and update it as needed. Now is a good time to review your existing plan or set one up if you don’t yet have one. Don’t wait until it’s too late. If you know what I mean.

Add Your Heading Text Here

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.

Market Insiders