Estate Planning Basics for Retirees
Beneficiary designations · Step-up in basis · Revocable trusts · TOD/POD · Probate avoidance · Inherited IRAs · Gift strategies
Estate planning isn't just for the ultra-wealthy. Every retiree with an IRA, 401(k), or home needs a plan for how assets pass at death. Small mistakes — like not naming a beneficiary, or leaving an IRA to your estate — can cost heirs tens of thousands of dollars in unnecessary taxes or legal fees. This guide covers the essentials.
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CriticalBeneficiary Designations
Beneficiary designations on retirement accounts, life insurance, and annuities override your will entirely. This is the most important and most commonly neglected estate planning task.
- Always name both a primary AND contingent beneficiary. If your primary beneficiary predeceases you with no contingent named, the asset goes to your estate — triggering probate and potentially accelerated tax distributions.
- Review after every major life event: divorce, marriage, birth of child or grandchild, death of a named beneficiary.
- Don't name a minor child directly. A court-appointed guardian will control the account until the child reaches majority. Use a custodial account (UGMA/UTMA) or trust instead.
- Naming your estate is almost always wrong for IRAs — it loses the ability to stretch distributions and forces a 5-year or immediate distribution rule.
- Consider per-stirpes designation (passes to your beneficiary's descendants if they die before you) vs. per-capita (share splits among survivors only).
TaxStep-Up in Basis
When you die, most assets (stocks, real estate, taxable brokerage accounts) receive a “step-up” in cost basis to the fair market value on your date of death. This means your heirs can sell immediately with zero capital gains tax.
| Asset | Your cost basis | Value at death | Heir's basis | Heir's taxable gain if sold immediately |
|---|---|---|---|---|
| Taxable brokerage stocks | $100,000 | $400,000 | $400,000 (stepped up) | $0 |
| Primary home | $200,000 | $700,000 | $700,000 (stepped up) | $0 |
| Traditional IRA | Deducted / N/A | $600,000 | $600,000 (all ordinary income) | $600,000 income |
| Roth IRA | After-tax | $200,000 | $200,000 (all tax-free) | $0 |
ProbateAvoiding Probate
Probate is the court-supervised process of distributing your estate. It can take months to years and costs 3–7% of estate value in fees in some states. These assets avoid probate automatically:
- Assets with named beneficiaries (IRAs, 401(k)s, life insurance, annuities)
- Accounts with TOD (Transfer on Death) or POD (Payable on Death) designations
- Jointly held property with right of survivorship (JTWROS)
- Assets held in a revocable living trust
Assets that typically do go through probate: solely-owned real estate, bank accounts without POD, personal property.
TrustRevocable Living Trusts
A revocable living trust (RLT) holds your assets during your lifetime and distributes them according to your instructions at death, bypassing probate entirely.
| Will | Revocable Living Trust | |
|---|---|---|
| Probate | All assets go through probate | Trust assets bypass probate |
| Privacy | Probate is public record | Fully private distribution |
| Cost to create | $300–$1,000 | $1,500–$4,000+ |
| Funding required | No — will controls alone | Yes — must retitle assets INTO the trust |
| Estate taxes | No reduction | No reduction (unless combined with A/B trust) |
| Disability planning | No | Yes — successor trustee takes over if incapacitated |
SECURE ActInherited IRAs: The 10-Year Rule
The SECURE Act (2019) and SECURE 2.0 (2022) fundamentally changed inherited IRA rules. Most non-spouse beneficiaries must now withdraw the entire inherited IRA within 10 years of the original owner's death.
| Beneficiary type | Distribution rule |
|---|---|
| Spouse | Can treat as own IRA or use own RMD schedule — most flexible |
| Eligible Designated Beneficiary (EDB) Minor child, chronically ill, disabled, or within 10 years of age | Can “stretch” distributions over their life expectancy |
| Non-EDB (most adult children, siblings, friends) | Must empty account within 10 years of death |
| Estate as beneficiary | Must comply with 5-year rule or old RMD schedule (complex, often worse) |
Tax implication: If a child inherits a $700,000 traditional IRA at peak earning years, forcing 10-year distribution can mean $70,000/year of taxable income on top of their salary — potentially in the 32–37% bracket. Roth IRAs inherited under the same 10-year rule produce zero additional income tax.
Roth LegacyRoth IRA as the Ideal Legacy Asset
- Roth IRAs have no RMDs for the original owner — they compound tax-free indefinitely during your lifetime.
- Inherited Roth IRAs are also subject to the 10-year rule for non-EDB beneficiaries — but withdrawals are tax-free, so it doesn't push heirs into higher brackets.
- If you expect to leave a meaningful inheritance, prioritize Roth conversions during the retirement gap years even at the 22% bracket — the long-term tax-free benefit to heirs can easily exceed the conversion cost.
- A high-income adult child inheriting a $500,000 Roth IRA over 10 years receives $50,000/year tax-free vs. $50,000/year of ordinary income from a traditional IRA.
GiftingGifting Strategies
| Strategy | Current Limit | Notes |
|---|---|---|
| Annual gift exclusion | $19,000 per recipient | No gift tax; no need to file Form 709. Couples can give 2× this amount per recipient. |
| Lifetime exemption | $15,000,000 per person (2026) | The 2025 One Big Beautiful Bill Act made the higher exemption permanent and raised it to $15M per person for 2026 (up from $13.99M in 2025), indexed for inflation thereafter. |
| Direct tuition/medical payments | Unlimited | Pay school or hospital directly — entirely exempt, no annual limit. |
| 529 superfunding | $19,000 × 5 per recipient (5-yr election) | Front-load 5 years of annual exclusions at once. No gift tax if no additional gifts for 5 years. |
ChecklistRetiree Estate Planning Checklist
- ☐ Review and update all beneficiary designations (IRA, 401k, insurance, annuity)
- ☐ Add TOD to brokerage accounts; POD to bank accounts
- ☐ Confirm primary AND contingent beneficiaries are named
- ☐ Execute a will (even with a trust, you need a “pour-over” will)
- ☐ Execute durable power of attorney (financial) and healthcare proxy
- ☐ Execute advance healthcare directive (living will)
- ☐ Consider revocable living trust if you own real estate in multiple states or have a complex family situation
- ☐ Document account locations and passwords for your executor/trustee
- ☐ Review after every major life event
- ☐ If estate may exceed ~$15,000,000, consult estate attorney now