Estate Planning Basics for Investors

Estate planning sounds like something for the wealthy, but if you own a brokerage account, a retirement account, a home, or life insurance, you need an estate plan. Without one, the state decides who gets your assets, the process is slow and expensive, and your family may face unnecessary taxes and legal battles during the worst time of their lives. A basic estate plan takes a few hours to set up and can save your heirs tens of thousands of dollars and months of stress.

The Essential Documents

Will

A will specifies who gets what when you die. Without one, your state's "intestacy" laws determine the distribution — and those laws may not match your wishes. A will lets you name guardians for minor children, specify who inherits your property, and designate an executor to manage the process.

Important: A will does not avoid probate. Assets distributed through a will must go through probate court — a public, time-consuming, and potentially expensive legal process. For simple estates, probate can take 6-12 months and cost 3-7% of the estate's value.

Revocable Living Trust

A trust is a legal entity that holds your assets. You transfer ownership of your accounts, real estate, and other property to the trust while you're alive. You remain the trustee (controller) during your lifetime. When you die, the trust distributes assets to your beneficiaries according to the trust document — without going through probate.

Advantages: Avoids probate, remains private (wills are public), provides for incapacity (if you become unable to manage your affairs, the successor trustee takes over), and can provide ongoing management for heirs who aren't ready to manage large sums.

Costs: Setting up a trust with an estate attorney typically costs $1,500-$3,000. For estates above $500,000, the probate savings alone usually justify the cost.

Beneficiary Designations

This is the most commonly overlooked part of estate planning. Beneficiary designations on retirement accounts and life insurance override your will. If your 401(k) beneficiary form names your ex-spouse from a decade ago, they get the money — even if your will says otherwise.

Review and update beneficiary designations on all: 401(k)s, IRAs, Roth IRAs, life insurance policies, HSAs, 529 plans, and any Transfer on Death (TOD) accounts.

Name both primary and contingent (backup) beneficiaries. Review after any major life event — marriage, divorce, birth of a child, death of a beneficiary.

Power of Attorney and Healthcare Directive

A financial power of attorney designates someone to manage your finances if you become incapacitated. Without one, your family may need to go to court to gain access to your accounts.

A healthcare directive (or living will) specifies your wishes for medical treatment if you can't communicate them yourself. A healthcare power of attorney designates someone to make medical decisions on your behalf.

Tax Strategies Your Heirs Need to Know

Step-Up in Cost Basis

When you die, your taxable investment accounts receive a "stepped-up" cost basis — the cost basis resets to the market value at the date of death. If you bought a stock for $10,000 and it's worth $100,000 when you die, your heirs inherit it at a $100,000 basis. If they sell immediately, they owe zero capital gains tax. The $90,000 in gains is completely erased.

This is one of the most powerful tax provisions in the code. It's the reason many financial advisors suggest holding highly appreciated assets until death rather than selling and gifting the proceeds.

Roth IRA Inheritance

Roth IRAs are the most tax-efficient asset to leave to heirs. Your heirs must withdraw the balance within 10 years (under the SECURE Act), but all withdrawals are tax-free. A $500,000 inherited Roth is worth $500,000. A $500,000 inherited traditional IRA might only be worth $350,000-$400,000 after taxes.

Estate Tax Exemption

For 2025, the federal estate tax exemption is approximately $13.6 million per person ($27.2 million per married couple). Estates below this threshold owe no federal estate tax. Only about 0.1% of estates are large enough to trigger the tax.

However, this exemption is scheduled to drop by roughly half in 2026 (when the Tax Cuts and Jobs Act provisions expire). For very large estates, planning now is critical.

Some states also have their own estate or inheritance taxes with much lower thresholds — as low as $1 million in some states.

Action Steps

1. Create or update your will. If you have children, this is non-negotiable. Name guardians and an executor.
2. Consider a living trust if your estate exceeds $500,000 or you want to avoid probate.
3. Review all beneficiary designations today. Check every retirement account and insurance policy.
4. Set up power of attorney and healthcare directives. Both financial and medical.
5. Hold highly appreciated assets. The step-up in basis at death eliminates capital gains for your heirs.
6. Prioritize Roth conversions if leaving money to heirs — inherited Roth money is tax-free.