Estate planning discussions often give the impression that every senior in America is married with two or more kids. That’s not true, of course, and those who do not fit the profile need estate planning guidance at least as much as the stereotypical couple does.
Unmarried people should put a priority on developing the traditional estate planning documents that don’t pertain to disposition of property: the health care proxy (or advance medical directive or living will) and financial power of attorney. Without these documents, when the single person is unable to make medical decisions or take care of financial matters, there might not be someone to make decisions whose authority will be readily recognized.
In developing the financial power of attorney (POA), you need to identify one or more people who are able and willing to take care of financial matters if you aren’t able to. Then, you need to set up your financial affairs so the person can understand them and take over when necessary. Show the person how you set things up and how he or she can find whatever information might be needed. Of course, be sure the person has a copy of the POA and that your financial services firms will accept it.
The key with the health care documents is to designate one or more people who will know and follow your wishes.
In addition, you might need a document naming those who are allowed to visit you during a stay in a hospital or other facility. Otherwise, at some facilities only family members are permitted to visit.
Also, long-term care insurance, or a plan to receive and pay for long-term care, often should be a priority for an unmarried person. The sources of long-term financing are the same as for married people. But it’s more important for a single person to make long-term care plans, because there aren’t family members who can and will assist with care, navigate the long-term care options, or help make decisions.
As with a married person, when a single person passes away without a will the distribution of the property is determined by state law. If there are children, in most states the property will be divided among them.
When there are no children, the disposition can be very different from what most people expect and would want. The disposition often depends on the state of residence and which relatives are alive. The estate might be divided among parents, siblings, half-siblings, cousins, or nieces and nephews.
Having a will goes a long way toward solving the distribution problem. Yet, it often is best for a single person to have most assets in a revocable living trust.
One good reason for a revocable trust is that state probate law might require the estate executor to give notice to everyone who would have been eligible to inherit if there had not been a will. Before the estate can be processed, the executor might have to construct a family tree and prove the demise or divorce of extended family members.
A better solution in a state without a streamlined probate process for singles is the revocable living trust. Property in the trust avoids probate, and the terms of the trust determine what is done with the property. A will should be prepared for any assets that aren’t in the living trust and don’t avoid probate, but they should be a small portion of the estate.
If a revocable trust is used, it is important to transfer ownership of property to the trust. Too often people have trusts drafted then fail to transfer title of their homes, cars, financial accounts, and other property to the trust. They have “empty trusts.”
Another key estate planning issue for singles is the choice of a successor trustee for the revocable living trust when there is no spouse or adult child to take the role. There might be friends or family members who can assume the role. Otherwise, it might be best to select a trusted advisor such as an accountant or attorney and have the trust or estate incur the cost involved.
Likewise, a single person should carefully consider who should be executor of the estate and discuss that role with the person. Otherwise, you don’t know who might bring your estate to the probate court and who might be appointed executor.
Beneficiaries need to be named for assets that avoid probate and aren’t controlled by a living trust. Such assets include IRAs, retirement plans, annuities, and life insurance. Singles need to complete their beneficiary designation forms, keep copies of the forms, and update the documents when appropriate. It’s important to let the beneficiaries and estate executor know about these decisions and where the documents can be located.
Singles do not have the advantage of the marital deduction to reduce either the estate or gift tax. An unmarried person can avoid gift taxes on lifetime gifts to people by using the annual gift tax exclusion, the unlimited exclusions for gifts of education and medical expenses, and the individual lifetime estate and gift tax exemption.
The estate tax exemption is available to the extent it isn’t used on lifetime gifts. The lack of a marital deduction matters only to fairly-wealthy unmarried seniors, but for them it does limit the after-tax amount that can be left to noncharitable beneficiaries.
The annual gift tax exclusion, which is $15,000 in 2021, can be used to make gifts to anyone. Those without children often use it to benefit nieces, nephews, other relatives, and friends. The beneficiaries don’t have to be related for the gifts to qualify for the exclusion.
Care must be taken when making lifetime gifts. It often is better to make gifts early as long as sufficient assets are retained to support the standard of living. But the objects of affection might change over time, especially when one is unmarried, so if lifetime gifts are made be sure the recipients of the largess are likely to be permanent objects of affection.
For many single seniors a legacy of charitable giving is more important than for many marrieds. Single people without children often make charities significant primary or contingent beneficiaries of their estate. Otherwise, there are scenarios in which a lot of the estate could go to distant relatives.
In addition, singles can make use of lifetime charitable giving strategies to generate income tax savings and income during their lifetimes, reduce the size of their estates, and benefit charities. Charitable remainder trusts, charitable gift annuities, and similar strategies can be more important to singles than to others.
Social Security and pensions leave few options. Social Security does not allow designation of a beneficiary. Only a spouse, former spouse, and children can benefit from your earnings record. Many employer pension plan annuities have similar restrictions.
If the single person is contributing to someone’s support and wishes for that support to continue after death, the only options are to buy life insurance or have other assets to leave the person.
Unmarried seniors might have to update their estate plans more frequently than married counterparts, because their situations might change more frequently. It is especially important to maintain current beneficiary designations for IRAs and other financial accounts.
The unmarried population is increasing, and it faces unique estate planning challenges. These individuals should be sure to work with an estate planning expert who understands their special situations.