In last week’s edition of Retirement Watch Weekly, I presented Estate Planning for “Modern Families.”
There’s a lot more ground to cover, so let’s dive right back in – starting with estate tax implications for single people.
Under the estate and gift tax, singles do not have the advantage of the marital deduction.
An unmarried person still can use the annual gift tax exclusion, make unlimited gifts for education and medical expenses, and use the $5.34 million lifetime estate and gift tax exemption.
The lack of a marital deduction now matters only to fairly wealthy unmarried seniors, but for them it does limit the after-tax amount that can be left to noncharitable beneficiaries.
For them, life insurance might be more attractive than it is for married couples.
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.
Yet, the objects of affection might change over time, especially in nontraditional families.
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, especially those without children, a legacy of charitable giving is more important than it is for marrieds.
The singles’ estate plans might contain more charitable gifts than others.
In addition, they might make more use of lifetime strategies, such as charitable trusts, to generate current income tax savings and income during their lifetimes, reduce the size of their taxable 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 who is not a spouse 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, and then the remaining assets go to charity.
The unmarried population is increasing, and it faces unique estate planning challenges. These individuals should be sure to work with an estate planner who understands their special situations.
Another type of nontraditional family often is called a “patchwork family.” These are families in which at least one spouse is in a second or later marriage and there are children from one or more of the marriages or other relationships.
The spouses usually want to provide for each other. But they might have different objectives beyond that.
A common situation is that a spouse wants his or her assets to provide for the surviving spouse during his or her lifetime, but wants any remaining assets eventually go to his or her biological children.
There might be a concern that if property is left outright to the surviving spouse, the assets ultimately might not be distributed among the children as desired.
Now, let’s look at different situations single persons might face.
Some people want to provide for stepchildren, while others don’t.
For patchwork families, trusts are the usual way to resolve these issues.
The primary goal of the trusts isn’t tax reduction.
Instead the trusts are used to control how the property is managed and distributed over time.
The terms and number of the trusts vary based on the family situation.
There might be one family trust or separate trusts that filter down to different members or branches of the family.
The estate owner needs to determine his or her goals and have the estate planner write a plan that best meets those goals.
The downside to using trusts is that you probably can’t make full use of both spouse’s life- time estate and gift tax exemptions.
That’s not an issue for most families, because of the $11.4 million individual exemption, but can result in trade offs for wealthier families.
Patchwork families also seem to have more will contests and other disputes than do traditional families.
This risk can be reduced if the spouses sign a premarital or postmarital agreement.
Otherwise, if you have only a will, it is easier for your spouse or even your spouse’s children to challenge the terms.
Also, let your children know generally how you intend to distribute the assets between the families.
If you state this at the outset, it becomes much more difficult for one of them to challenge the plan.
When it’s a second or later marriage, the spouses almost certainly should have separate attorneys for their estate plans.
There are just too many potential conflicts for one attorney to serve the two spouses.
Finally, to avoid potential conflicts and suspicions, many estate planners recommend that you give your durable power of attorney, health care proxy, or living will to one or more adult children or other people instead of your spouse.
P.S. I’ve been at this for over 30 years, and in all this time… I’ve never gotten as many questions about IRAs as I am now. Questions like these…
“When do you think the government will take away tax-exempt status on Roth IRAs and 401(k)s?”
“Is the traditional rule we’ve always been told about IRAs and other tax-deferred vehicles still the right rule to follow? (To defer taxes on them as long as possible).
“How do I figure out if I should do an IRA conversion?” and “So what happens to people who leave their IRA “as is?”
That’s why I put together this Emergency Podcast , to answer these and other questions — and set the record straight on your IRAs (including steps you can still take to keep your IRAs from any new stealth taxation).
Watch the podcast here, and I encourage you to send the podcast link to your friends and family who hold any IRAs or 401(k)s.