Estate Planning is not just for married individuals. In fact, more and more estates are those of single people. A single person has estate planning considerations different from those of a married couple and actually might require more planning. Because the unique estate planning concerns of singles rarely are discussed, singles often make key mistakes in their estate plans.
A single person, of course, has no marital deduction. A married person always can avoid estate taxes by leaving everything to the spouse and letting the spouse worry about estate planning. A single person also is limited to the $10,000 annual gift tax exclusion. There is no $20,000 exclusion for joint gifts made with a spouse. In addition, there is only one lifetime estate and gift tax exclusion to work with instead of two.
These disadvantages make lifetime gifts more important. Single persons need to identify the objects of their affections early and make the maximum annual gifts they can afford. Otherwise, the property will remain in their estates and be depleted by taxes.
That’s one reason single people might make more use of trusts than married couples. By giving early and not being able to use a marital deduction, the single person often has to give money to younger people before they are ready to handle the responsibility. That means using trustees to manage the property until the beneficiaries are ready.
Single people also should consider using their lifetime estate and gift tax exemption early. If you can afford to give more than the annual tax-free gift amount, then give it. The lifetime exemption will shelter the first $650,000 from taxes (rising to $1 million in 2006). The property and its future income or appreciation will be out of your estate and ultimately will cut the total tax burden on your estate.
Life insurance can be more important to a single person. Many people believe that life insurance generally is for married people, especially those with young children. But if your goal is to pass the maximum amount of your estate tax free to loved ones and you cannot use a marital deduction or joint gifts, then life insurance is one of the better options available. You put the life insurance in an irrevocable trust, Then the insurance benefits can be the inheritance, or the life insurance can be used to pay estate taxes, debt, and other expenses.
Having the essential estate planning documents is more important for a single person. If a married person dies without a will, in most states the surviving spouse and children share the estate. But a single person might have distribution goals that differ from what state law provides. This is especially true if you intend for one or more charities or nonfamily members to get a large portion of your estate.
A durable power of attorney and either a living will or a health care power of attorney are vital for a single person. When a married person is incapacitated, a court often will appoint the spouse to make decisions regarding management of property and health care. But the choice isn’t always clear with a single person. It might be the oldest adult child, or the relative who lives nearest.
You want these documents prepared so they control who will make decisions for you. Then give that person specific instructions regarding management of property or administration of medical care. Otherwise, there could be a battle over who should make decisions, and the winner might not be the person you want. A single parent with minor children also needs to make clear who will be guardian of the children.
Single people often find it advantageous to incorporate more charitable giving strategies in their estate planning. That is because a number of charitable giving strategies ? charitable remainder trusts, charitable lead trust, gift annuities, and charitable remainders ? can provide income or property to you and your heirs while also benefiting the charity and cutting estate taxes. A charitable deduction during your lifetime or against your estate can be a good substitute for the marital deduction. For details on some of these strategies, see the November 1998 issue.
Single people often make two mistakes that cost their loved ones money.
One mistake is joint ownership of property. Many people think joint ownership of property with children or other loved ones is a substitute for the marital deduction because the joint owner takes full title on the death of the first owner. That is a good way to avoid the expense and delay of probate. But it won’t reduce estate taxes and might even increase them. It also takes away the flexibility to change the beneficiary (co-owner) and can make it more difficult to sell the property.
IRAs and other retirement accounts also are a hidden problem. When an IRA owner dies, the IRA is included in his or her estate. That’s bad enough. But unlike with other assets, the inheritors of an IRA do not get to increase the tax basis of the IRA. Instead, they pay income taxes as they withdraw money from the IRA the same way the original owner would, and distributions might be required in five years or less after the owner’s death. That means after estate and income taxes your beneficiaries won’t end up with much of the IRA.
Married people can minimize these problems by naming the spouse as IRA beneficiary. One option for single people is to make their charitable gifts by naming a charity as beneficiary of the IRA and letting loved ones inherit the other assets. That way nobody pays taxes on the income and gains that accumulated in the IRA during your lifetime.
The other option is to name a younger person as beneficiary before you begin required annual distributions after age 70½. That lets the next generation stretch out the IRA payments for decades after your death. More details are in my report, Retirement Tax Guide (call 800-552-1152 for details).