Thoughts on Estate Planning

We aren’t estate attorneys, but we have decades of experience observing how clients and their heirs have handled estate matters. One aspect of our work is that there is almost always at least one client estate somewhere in the process of administration. With more than 350 clients we have seen a lot.

Rule number one is, “Choose your successor trustee (or executor) wisely.” As fiduciaries, they are required to follow the terms of trusts and wills and act in the best interest of beneficiaries, but they also have some latitude and differing degrees of supervision.

Executors obtain their authority from a probate court, and this implies some degree of court supervision. Most states, including Michigan, allow both supervised and unsupervised executorship. Under the supervised version, the executor must submit most actions for court approval. This takes time and costs the estate considerable fees, not just from the court but also from the executor who is typically permitted to charge reasonable and customary fees. The alternative is to allow an executor to operate free of court supervision; this is faster and cheaper, but it brings risks as well.

A simple estate distributed pretty evenly amongst heirs who get along might need less supervision than a complex estate or one where heirs are likely to fight. In those cases, it might be more appropriate to use a trust to administer the estate rather than just a will. Trusts are believed to be more difficult to contest than wills. For one thing, trusts are administered as private matters rather than in a public court for wills. Also, wills are written and put in a drawer for decades. Trusts, in contrast, are living entities whose documentation must be provided to others while monthly statements of trust assets remind owners of their existence. It is easier to contest a will stuck in a drawer for 20 years, while new family members come into existence and others become estranged, than it is to contest a trust that must, in theory, be reviewed from time to time.

The privacy of trusts puts the onus on beneficiaries to keep trustees honest. Trustees have significant latitude even though they are required to follow the terms of the trust and serve the interests of all beneficiaries. In reality, there is little enforcement to stop a rogue trustee. Agents working under the direction of trustees, like Provident and Schwab, are not required to verify the powers and actions of trustees under the laws of many states. Schwab won’t even allow us to file a full copy of a client’s trust document with them, presumably because they don’t want to be held accountable for the actions of a trustee.

What can a client do to reduce the odds of bad behavior by a successor trustee? It is said that “Sunshine is the best disinfectant.” Sharing estate plans with heirs is one way to reduce the potential that a wayward executor or successor trustee acts against your wishes. There can be such a thing as overcommunicating too, but having multiple copies of estate documents in the hands of trusted family members might be enough to deter bad behavior.

In cases of relatively simple estates with no anticipation of contested inheritances, a general power of attorney, medical power of attorney, Transfer on Death, and will may be sufficient to cover management of one’s affairs. “Transfer on Death” (also known as “Payable on Death”) involves naming account beneficiaries who will inherit the account upon the owner’s death. These beneficiaries can be changed by the owner as long as the owner remains competent, but they have no claim on the assets during the owner’s lifetime.

Gifting during one’s lifetime is also an important part of estate planning, as long as one doesn’t anticipate needing all their assets prior to death. Individuals may give up to $19,000 to anyone else in 2025, and this number rises in most years. A couple could give $76,000 to an adult child and their spouse combined this year. Gifts greater than the annual limit require payment of gift tax or the filing of IRS form 709 indicating that the excess gift is to be applied to the giver’s lifetime exemption from gift and estate taxes, currently about $14 million per person.

Beginning in 2024, the maximum charitable donation from IRAs started to rise each year along with inflation. In 2025, the limit is $108,000. Through these Qualified Charitable Distributions (QCDs), an IRA owner aged 70-1/2 or older can give up to $108,000 of their IRA to charity this year. While QCDs aren’t tax deductible, they are excluded from the donor’s income which has the same practical impact as deductibility. Unlike traditional charitable donations, they aren’t subject to limitations other than the $108,000 maximum. Another positive attribute of QCDs is that reducing one’s adjusted gross income (“AGI”) may prevent higher Medicare Part B premiums that are calculated based on income. These higher premiums are known as IRMAA (“Income-Related Monthly Adjustment Amount”).

Plan for your stock portfolio and other appreciated assets to benefit from a “step up” in cost basis. What this means is that heirs receive a cost basis on inherited assets that is re-set to the value on the day the account holder died. It wipes away the tax consequences of unrealized capital appreciation. The entire portfolio is stepped up for individual accounts. For joint accounts, half of each position is stepped up after the death of one account holder in most states. The entire portfolio is stepped up in the community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Stepped up basis also affects other assets such as one’s home, other real estate, and business interests.

One last item to discuss is the aforementioned $14 million lifetime exemption from gift and estate taxes. The exemption was $5 million a few years ago and will revert to an inflation-adjusted $7 million starting in 2026 if the 2017 tax law isn’t extended.

For a couple, the limit is currently a combined $28 million but there is a trick to it. To obtain the combined exemption, either $14 million in assets must be identified at the time the first spouse dies or a form must be filed with the IRS indicating that the couple elects “portability.” Under portability, any unused exemption “ports” over to the surviving spouse. If the first spouse to die has $10 million in assets that are moved into an irrevocable trust upon death, the surviving spouse has an additional $4 million in exemption to be used upon her/his death. An executor only has nine months to file Form 709 with the IRS to claim portability. An automatic six-month extension is available by filing a different form, and up to five years can be available under some circumstances.

We are well informed laymen on estate matters, but we aren’t experts. Many estate matters are subject to the laws of the state in which a client resides. We would be glad to refer you to a qualified estate attorney if you are a resident of southeastern Michigan. If you are not in our area, you might ask friends or your accountant for a referral.

Scott D. Horsburgh, CFA®