A perusal of Estate Planning literature gives the impression that every senior in America is part of a married couple with two or more kids. We know that is not true, and those who do not fit the profile need estate planning guidance at least as much as the stereotypical couple does.
Unmarried estate planning candidates fall into three categories: Those who have kids; those who never had kids; and those who are part of a couple but won’t be getting married. The categories can overlap, but each category has some unique challenges.
As with a married person, a single person who passes away without a will has the disposition of the property determined by state law. If there are kids, in most states the property will be divided among the children. If there are no children, the disposition can be very unexpected, depending on the state and which relatives are alive. The property could go to half-siblings, cousins, or nieces and nephews.
With the stereotypical couple the solution is to draft a will, but that is not always a solution for someone without a spouse or children. The probate process in the state might require notice to everyone who would have been eligible to inherit if there had not been a will. That can mean constructing a family tree and proving the demise or divorce of extended family members.
A better solution in a state without a streamlined probate process for singles is a revocable living trust. Property in the trust avoids probate, and the terms of the trust determine what is done with the property. A will still is needed because it might not be possible to transfer all property to the trust.
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 issue is the choice of a successor trustee 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.
Unmarried people also should put a priority on the traditional estate planning documents of health care proxy, living will, and power of attorney. Without these documents there might not be someone whose authority will be readily recognized to make decisions. The key with the health care proxy and living will is to designate someone who will follow the patient’s wishes, not just someone who is personally close.
In addition, there might need to be a document naming those who are allowed to visit in case of a hospital or nursing home stay. Under some conditions at some facilities, only family members might be permitted to visit without a clear directive from the patient.
Also, long-term care insurance might be more important for an unmarried person than for a married couple. Medicaid will pay nursing home care while allowing the retention of some assets, but a greater amount of assets often can be retained by a married couple than a single person. A single person will be able to shelter fewer assets, and the assets of any partner of the person might be endangered especially if they are joint owners of valuable assets such as a home.
Beneficiaries for assets that avoid probate and won’t be controlled by a living trust need to be named. Such assets include IRAs, retirement plans, annuities, and life insurance. As we have discussed in the past, failing to name a beneficiary or naming the estate often is not a good idea from a tax standpoint. Singles need to complete their beneficiary designation forms, keep copies of the forms, and update the documents when appropriate.
Taxes are an interesting planning issue. The income tax law can be more generous for unmarrieds, but the estate tax is less generous to singles than married couples.
Often a married couple pays higher income taxes than two single people with the same income. Partly for that reason, some seniors choose to live together without getting married. Staying unmarried allows them to file separate returns, and an aggressive couple can shift deductions to the one in the higher tax bracket.
Under the estate and gift taxes, singles do not have the advantage of the marital deduction against either the estate or gift tax. An unmarried person still can use the annual gift tax exclusion, make unlimited gifts for education and medical expenses, and use the $1 million lifetime gift tax exemption. Also available is the estate tax exemption equivalent, which currently is $2 million minus any lifetime gift tax exemption used. The lack of a marital deduction might matter 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 can be used to benefit anyone. Those without children often use it to benefit nieces, nephews, and other relatives.
Care must be taken when using the lifetime gift tax exemption amount. It often is better to make gifts early as long as sufficient assets are retained to support the standard of living. The objects of affection might change over time, especially when one is unmarried, so if the exemption is used early 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 it is for marrieds. Their estate plans might contain more charitable gifts than others do. In addition, they can make lifetime use of strategies such as charitable trusts to generate tax savings and income during their lifetimes, reduce the size of their estates, and leave charitable gifts.
Social Security and pensions leave few options. Social Security does not allow designation of a beneficiary other than the spouse, and a number of employer pension plans have the same restriction. The only option to replace this income for a surviving loved one is to buy life insurance or have other assets to leave the person. A possible strategy is to place assets in a charitable remainder trust that pays income to a beneficiary for life or a period of years, then the remaining assets go to charity.
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. If there are no children, the legacy the person wants to leave through charitable bequests or other means might change. Changes in estate and gift tax laws also might be more important to those who cannot use the marital deduction than to married people.
The unmarried population is increasing, and it faces unique estate planning challenges. These individuals should be sure to work with an estate planning exper who understands their special situations.