Key takeaways
- The core estate plan is five documents: a will, beneficiary designations, a durable power of attorney, a health care directive and, for some families, a living trust.
- The federal estate and gift tax exemption is $15 million per person in 2026 ($30 million for a married couple), under the One Big Beautiful Bill Act.
- The annual gift tax exclusion is $19,000 per recipient in 2026, or $38,000 for a married couple who split gifts.
- Thanks to the step-up in basis, an heir who sells inherited stock can owe tax on $10,000 of gain instead of $310,000 in our example.
Estate planning is deciding, in writing, who gets your money and property when you die and who can make financial and medical decisions if you can’t. For most families, that means a will, up-to-date beneficiary designations, a durable power of attorney and a health care directive. A trust can be added if you want to avoid probate or control how heirs receive money.
Very few households will ever owe federal estate tax: the exemption is $15 million per person in 2026. But nearly every adult needs the basic documents. Without them, state law decides who inherits your assets, a court may name a guardian for your children, and your family may need to go to court just to pay your bills if you’re incapacitated.
The five core estate planning documents
| Document | What it does | Who needs it |
|---|---|---|
| Will | Names who inherits probate assets, an executor and a guardian for minor children | Every adult, especially parents |
| Beneficiary designations | Pass retirement accounts, life insurance and TOD/POD accounts directly to named people | Anyone with a 401(k), IRA, life policy or bank account |
| Revocable living trust | Holds assets during your life and passes them to heirs without probate | Homeowners, people with property in several states, blended families |
| Durable financial power of attorney | Lets a trusted agent handle your money if you can’t | Every adult |
| Health care directive | States your medical wishes and names someone to make health decisions | Every adult 18 and older |
1. A will
A will names who gets the assets that pass through probate, the court process that settles an estate. It also names an executor to handle that process and, for parents, a guardian for minor children. Without a will, you die “intestate,” and your state’s law decides who inherits. That may not match your wishes, especially for unmarried partners, stepchildren or close friends.
Wills must meet your state’s signing rules, which usually include witnesses. Online will services can work for simple situations. If you own a business, have a blended family or have a child with special needs, an estate attorney is worth the cost.
2. Beneficiary designations
Many of your biggest assets never go through your will. 401(k)s, IRAs, life insurance, annuities, and bank or brokerage accounts with payable-on-death (POD) or transfer-on-death (TOD) designations go straight to the people named on the account’s form.
That form overrides your will. If your ex-spouse is still listed on an old 401(k), they may receive it even if your will says otherwise. Review every designation after a marriage, divorce, birth or death, and always name a contingent (backup) beneficiary.
Tip: Most non-spouse beneficiaries who inherit an IRA or 401(k) must empty it within 10 years. Leaving retirement accounts to a spouse, or to younger heirs in a lower tax bracket, can reduce the total tax bill. Our 401(k) vs. Roth IRA guide explains how each is taxed.
3. Trusts
A trust is a legal arrangement in which a trustee holds assets for beneficiaries. The most common type for families is a revocable living trust. You stay in control as trustee while you’re alive, you can change it at any time, and when you die a successor trustee distributes the assets without probate.
A trust only works if it’s funded, meaning you retitle your home and accounts into the trust’s name. An unfunded trust doesn’t avoid probate. A revocable trust also doesn’t reduce estate tax or protect assets from your creditors. Irrevocable trusts, which you generally can’t change, are used for those goals, and they’re mainly relevant for large estates or special situations.
A trust can make sense if you own real estate in more than one state, want to avoid probate in a state where it’s slow or expensive, want to control when young heirs get money, or want privacy (wills become public records in probate; trusts generally don’t).
4. Durable power of attorney
A durable financial power of attorney names an agent who can pay bills, manage accounts and file taxes for you if you become incapacitated. “Durable” means it stays in effect after you lose capacity. Without one, your family may need to ask a court to appoint a guardian or conservator, which takes time and money.
Choose your agent carefully. Financial exploitation by trusted people is a real risk, especially for older adults. Our guide to avoiding financial scams covers warning signs.
If you’re the one stepping in for a mom or dad, our caring for aging parents money checklist covers getting these documents signed while they can still do it, plus bills, benefits and care costs.
5. Health care directive
A health care directive, sometimes called an advance directive, usually has two parts: a living will that describes the treatment you want or don’t want at the end of life, and a health care power of attorney (or health care proxy) that names someone to make medical decisions when you can’t. Many people also sign a HIPAA authorization so family members can talk with doctors. Every state has its own forms, and many are free through state health departments or hospitals.
Federal estate and gift tax in 2026
The One Big Beautiful Bill Act, signed in July 2025, set the federal estate, gift and generation-skipping transfer tax exemption at $15 million per person for 2026, up from $13.99 million in 2025. The law made the higher exemption permanent, with inflation adjustments in later years, so the drop that had been scheduled for 2026 won’t happen.
- Married couples: Each spouse has a $15 million exemption, so a couple can pass up to $30 million free of federal estate tax. A surviving spouse can use the deceased spouse’s unused exemption (“portability”), but only if the executor files an estate tax return (Form 706) to elect it.
- Tax rate: Amounts above the exemption are taxed at up to 40%.
- State taxes: Several states and the District of Columbia charge their own estate or inheritance taxes, often with much lower thresholds than the federal one. Check your state’s rules.
Annual gift tax exclusion
In 2026, you can give up to $19,000 to any number of people without filing a gift tax return. A married couple who split gifts can give $38,000 per recipient. For example, a couple with three children can give each child $38,000 this year, or $114,000 in total, with no gift tax return required for those gifts. Gifts to a spouse who isn’t a U.S. citizen are excluded up to $194,000 in 2026.
Giving more than the annual exclusion doesn’t mean you owe tax. You file Form 709, and the excess reduces your $15 million lifetime exemption.
The step-up in basis: a worked example
When you inherit assets such as stock or a home, the tax cost basis generally “steps up” to its market value on the date of the original owner’s death. That can wipe out years of capital gains for your heirs.
Say a parent bought stock for $100,000. It’s worth $400,000 when the parent dies, and the heir later sells it for $410,000. Here’s how the tax compares with receiving the same stock as a gift during the parent’s life (where the heir keeps the parent’s original basis):
| Inherited at death | Gifted during life | |
|---|---|---|
| Heir’s cost basis | $400,000 | $100,000 |
| Sale price | $410,000 | $410,000 |
| Taxable gain | $10,000 | $310,000 |
| Federal tax at 15% long-term rate | $1,500 | $46,500 |
The example ignores state taxes and the 3.8% net investment income tax, which can apply to higher earners. The takeaway: giving away highly appreciated assets during your life can cost heirs more than leaving them at death. Assets in retirement accounts like traditional IRAs don’t get a step-up; heirs pay ordinary income tax on withdrawals.
Tip: Keep records of what you paid for investments and home improvements. Heirs will need date-of-death values, and the executor will need your records for anything that doesn’t qualify for a step-up.
Estate planning checklist
- List your assets and debts with our net worth calculator, and note how each account is titled.
- Check and update the beneficiaries on every retirement account, life insurance policy and bank account.
- Write or update your will, and name a guardian for minor children.
- Decide whether a revocable living trust makes sense, and fund it if you create one.
- Sign a durable financial power of attorney and a health care directive.
- Review your life insurance. Our guide to term vs. whole life insurance can help you choose.
- Make a list of accounts, passwords and where documents are stored, and tell your executor where to find it.
- Review everything every three to five years, or after a major life event.
Estate planning is the last step in a complete personal financial plan. It also connects to your insurance coverage; see our checklist of the types of insurance you need.
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Frequently asked questions
What is the federal estate tax exemption for 2026?
$15 million per person, or $30 million for a married couple using portability. The One Big Beautiful Bill Act made the higher amount permanent and indexed it to inflation in future years.
How much can I gift in 2026 without paying tax?
Up to $19,000 per recipient without filing a gift tax return, or $38,000 if you and your spouse split gifts. Larger gifts require Form 709 but usually just reduce your lifetime exemption.
Does a beneficiary designation override a will?
Yes. Retirement accounts, life insurance and TOD/POD accounts go to the people named on the account, regardless of what your will says.
Do I need a trust or is a will enough?
A will is enough for many people, especially if most assets have beneficiary designations. A living trust can help if you own real estate in several states, want to avoid probate, or want to control how heirs receive money.
What is a step-up in basis?
When you inherit most assets, your tax basis resets to the asset’s value on the date of death. You only owe capital gains tax on growth after that date.
Sources: IRS 2026 inflation adjustments for the estate and gift tax exemption and annual exclusion (Oct. 2025), as summarized by Morgan Lewis (Oct. 2025); One Big Beautiful Bill Act (Pub. L. 119-21, July 2025); IRS Publication 551, Basis of Assets; IRS Forms 706 and 709 instructions. Calculations by FinInfoBlog. This article is for educational purposes and isn’t financial, tax or legal advice. Estate laws vary by state; consult an estate attorney for your situation.
Written by Chanchala
Founder & Lead Writer · B.Sc. Mathematics (Honors) · 9 years in banking & lending
Chanchala is the founder and lead writer of FinInfoBlog. She holds a B.Sc. in Mathematics (Honors) and has 9 years of experience in banking and lending. She writes plain-English guides on savings, CDs, loans, credit and personal finance for U.S. readers, and makes sure every example shows the math behind the money decision. How we research and fact-check.