Estate Planning discussions often assume that a married couple is involved. We all know that frequently isn’t the case. People can be widowed, and the divorce rate among older Americans is rising. The Census Bureau reports a doubling since 1989 of the number of older couples living together without being married.
A single person, whether cohabiting with a significant other or not, needs an estate planning. In fact, the need for estate planning could be even greater for a single person.
The estate planning priority for a single person should be the powers of attorney. You will need one POA for financial matters and another for medical decisions. Without these documents, decisions probably will be delayed. A court will have to appoint someone to handle financial matters. That takes time, and the choice might not be the person you would prefer. Doctors will have to make decisions on their own, wait for a court appointment, or choose whose counsel they will take.
These documents are so important, that their creation should not be delayed. Though normally part of a complete estate plan, the rest of the plan should not delay creation of the POAs. Even if you aren’t clear about the details for your will and property distribution, go to an estate planning advisor and get these powers drafted. Details about the powers of attorney are in the Estate Watch and Health Watch sections of the Archive on the web site.
An alternative to the financial power of attorney is the revocable living trust. This trust can be preferable to a will in states with expensive or drawn-out probate processes, such as California and Florida. The trust provides for a substitute trustee who will manage the trust assets in case the incumbent trustee becomes incapacitated, as defined in the trust. A problem is that the living trust covers only assets that were transferred to the trust. A financial power of attorney should cover other assets.
The next step is to write a will stating how your assets will be distributed.
If you have adult children and no spouse, most state laws will distribute the assets equally among the children. But the law and its details vary from state to state. Also, when an adult child has passed away and left children, the handling of the share of the deceased adult child varies. Of course, state law will not give any assets to your favorite charities or other objects of affection. Unless the default distribution in state law matches your wishes, you need a will to ensure property goes where you want.
A will is even more important for a single person who lives with someone outside of marriage. Some older couples eschew marriage to protect Social Security, medical, or pension benefits. Others don’t marry because of prior divorces. Still others don’t marry in order to protect their children’s inheritances. In many states a surviving spouse is entitled to a minimum share of the marital estate, regardless of what the will says. That might be altered with a prenuptial agreement, but many people don’t want to deal with that topic.
You might decide to leave nothing to the significant other, or to leave part of the estate outright. Another option is to put property in trust providing income to the partner, but leaving the trust principal for the children or others.
A house can be a complicated issue. You might want your children eventually to inherit the house, but you also don’t want your significant other to be forced to leave shortly after you pass. One possibility is to leave the partner a life estate, with the children eventually inheriting full title. Another option is to allow the partner to live there for a year or two before the children get full rights.
Estate tax reduction can be a larger problem for the single older American whose estate is greater than $1,500,000. You get only one lifetime estate and gift tax exemption, and obviously there is no marital deduction to eliminate estate taxes by leaving assets to a surviving spouse.
This makes lifetime gifts more important as the key way for a single person to reduce estate taxes. To the extent you can afford to, make annual gifts of appreciating property to the adult children or other objects of your affection. Up to $11,000 annually can be given to each person tax free. Get this property out of your estate before it increases in value and increases estate taxes.
It also makes sense to use the lifetime $1,000,000 gift tax exemption. (This exemption is not increasing above $1,000,000 the way the estate tax exemption is.) To the extent you can afford it, give the property away now and get that future appreciation out of your estate. If you aren’t comfortable giving a person full title to property now, make use of trusts, limited liability companies, or limited partnerships.
A single person with an estate significantly larger than $1,500,000 also might want to make large gifts using strategies that decrease gift taxes. These include grantor trusts, private annuities, and family limited partnerships.
Life insurance also might be more important for single individuals. When significant gifts and gift tax reduction strategies are not practical, buy life insurance if age and health make the insurance obtainable and affordable. Then, the estate will be taxed but the insurance will pay the taxes. Be sure to use an irrevocable life insurance trust or other strategy to keep the life insurance out of the estate.
After the will and any related work is done, turn to the beneficiary designations for your annuities, IRAs, retirement plans, and any employer benefits. A will or living trust doesn’t control these assets. The form kept with the custodian determines who the beneficiary is. If there is no beneficiary named, either the plan or law decides what happens to the benefits.
You have many options, but you do need to make it clear where the assets should go. The website Archive in the Estate Watch and Grandkids’ Watch sections has articles on how to choose beneficiaries for an IRA.
Another good move is to make an inventory of your assets. This is especially important for unmarried older Americans living together. Otherwise, heirs could disagree over which assets belong in the estate and should be transferred under the will.
Ideally, an unmarried couple has an agreement covering their relationship, especially the issues of property and support. This is helpful if the relationship dissolves. It also is helpful for the heirs. Otherwise, the surviving partner and children might dispute ownership of property or promises of continuing support.
Being single would seem to simplify estate planning. But in at least some ways an estate plan is more challenging for a single mature American.