Most of us know and understand the basics of how to write a will and testament (identifying beneficiaries, finding an executor, getting a notary, etc.), but what do high-net-worth individuals need to keep in mind when it comes to estate tax planning and will creation? Namely, how can you reduce the tax inheritance burden for your beneficiaries? We’ve gathered some important tax tips for writing your first will and testament, which can help give you some peace of mind.
1. Make sure your beneficiaries are ready for estate taxes.
Many beneficiaries don’t realize the various federal and state taxes they will need to pay after inheriting from a loved one. While grieving, one’s mind may not be fixated on phrases like “taxable estate,” so it’s often better to consider learning about and communicating these tax impacts while creating your will. For some, a large jump in income can lead to unexpected tax burdens that they haven’t as yet experienced.
Here are a few examples of the many forms of inheritance tax
- Federal estate tax – Federally, this tax is due from your estate nine months after your death, but typically only impacts estates valued at more than $13.6 million or more. In 2026, the exemption will return to about $5.49 million.
- State estate/inheritance taxes – Several states have an estate tax, and rules vary state to state.
- Generation-skipping transfer tax – If you plan to transfer to someone who is more than 37 and a half years younger than you, the recipient will need to pay a tax. (Spouses are exempt.)
- Income taxes – While your estate is being managed and before your assets are distributed, your estate is responsible for income taxes due on your estate income reported on an estate income tax return (Form 1041).
There are other considerations as well. For instance, if you gift real estate, your beneficiaries may not be used to paying state and local property taxes, even if there is no mortgage. Communicating this can help them get ready for the sudden expenses.
2. Understand debts and probate.
As a general rule, debts will get paid out of the estate after you die, such as outstanding federal taxes, outstanding medical debts, and various loans.
Only some forms of debt can get passed on, such as these examples:
- Co-signed loans (such as car loans, reverse mortgages, and private student loans)
- Joint accounts (for banks and credit cards)
- Medical debt (in some states/cases)
Scammers will sometimes target relatives of deceased persons to convince them to pay debts that they may not need to pay. Therefore, communicating what debts they will still be responsible for can be a helpful conversation for loved ones. In most cases, the executor of the will needs to handle your debts during the probate process.
Probate is a legal term that describes the process of legally recognizing a will, its executor, and the process of distributing assets. Usually, debts are handled as a part of this process before distribution.
Note that there are differences between probate vs non-probate assets. Certain assets do not need to be in the will, nor do they need to go through this process. For some examples, see the next section.
3. Remember that non-probate assets can be passed on regardless of the will.
Non-probate assets, or assets that are exempt from the legal probate process, include some of the following as long as certain conditions are met and the beneficiaries are clearly defined:
- Inherited IRAs
- Life Insurance Plans
- 401(k) retirement accounts
- Transfer on Death accounts
It’s important to note that in all of these above cases, if no beneficiary is designated, they will be considered probate assets.
How real estate is titled can also affect how it is passed down; certain states have laws regarding how a home must be titled in order to pass to the right person.
4. Consider living trusts as an alternative.
Estates, when not managed well, can lead to a massive amount of sudden and shocking tax burdens. There are dozens of kinds of tax planning strategies and estate plans to avoid them, but a popular strategy is to use living trusts. The basics of trusts is that a grantor will award a trustee assets without needing to go through probate. There are many kinds and types, so it’s best to discuss options with your accountant in coordination with an attorney.
When deciding between a living trust vs will, most individuals will have some combination of both. Trusts can be expensive to maintain and wills are legally binding documents; however, the trust is most useful for handling property, if you want to maintain privacy, and if you have significant assets.
5. Communicate and make sure your key people understand the “why.”
In terms of the basics of how to write a will, a will and testament must be signed and notarized in order to be deemed official. That being said, communication goes far beyond agreeing to the document itself. Consider asking yourself some questions, like the following:
- Can your executor accurately explain financial decisions to beneficiaries?
- Do the people in charge of your assets understand the why behind your estate and tax strategies?
- Are items outside of the will (like life insurance) being handled by someone else?
- If your death happens suddenly, can beneficiaries handle the tax burden they may be inheriting (especially with property)? Will they have resources/guidance?
Talking through these concerns with your executor, taking notes, and writing your thoughts down can be extremely helpful in smoothing over the process with your grieving loved ones when the time comes.
Key Takeaways
While it may seem like a daunting task, writing a will is a crucial step in securing the financial future of your loved ones. Often any will is better than none at all, but, from a tax perspective, it will help your family a great deal to think ahead with assets like property and trusts. Get in touch with a notary, attorney, and tax estate planning accountant today to get affairs in order!
About Tabitha Regan
Tabitha Regan is the Founder and CEO of LittleOwl CPA. She is a Certified Public Accountant, Certified Financial Planner™ and Personal Financial Specialist. In her 16+ year career span, she has developed an expertise in the specific needs of small businesses and busy professionals with accounting, tax and advisory services.
