Deciding what should happen with your financial assets after you die is one of the most important elements of prudent financial planning — and it can be even more critical if you’re not married. That’s partly because the “marital deduction,” which allows a person to transfer unlimited wealth to a surviving spouse without incurring estate taxes, is not available to single people or to domestic partners.
Another danger for those who are unmarried: While your spouse would be likely to make legal and financial decisions that reflect your values and wishes after you die or are incapacitated, a court-appointed public administrator — the default decision maker when a single person has no adult children and no estate plan — is far less likely to carry out your wishes.
Critical for any single adult: A sound estate plan that addresses your health-care concerns, provides for the guardianship of any minor children and transfers assets to heirs of your choice while minimizing taxes. To make sure that your plan covers all the bases…
Inexpensive legal software can give you a head start, providing checklists and questionnaires to help you gather the information that an attorney will need. The best-selling program is Quicken Willmaker Plus ($37.99 from Amazon.com). You also can use estate-tax calculators and other tools for free at www.aarp.org. However, estate planning is complex, and hiring an experienced lawyer to guide you through the process will ensure that the documents achieve your goals and are valid. Also, since state laws rule estate plans, an attorney will be familiar with the conditions that apply specifically to your circumstances.
If you are a widow or widower, you may feel most comfortable working with the attorney who handled your spouse’s estate. Or find a reputable law firm in your area by searching for one through the National Network of Estate Planning Attorneys (www.nnepa.com)… the American Academy of Estate Planning Attorneys (www.aaepa.com)… or my Web site (http://personalfamilylawyer.com).
Many lawyers charge by the hour, and they will put together a basic will for as little as $50 to $200 depending on where you live. As a single person, however, you should consider retaining an estate-planning attorney who will take a holistic view of your financial and legal situations and make sure that your interests are protected.
Best: Find a lawyer who will create a comprehensive estate plan for a flat, up-front fee. Such a plan will include not only the full complement of legal documents (such as the will, durable power of attorney and health-care directive) but also advice on tax savings and the best ownership structure for your assets (including setting up trusts and possibly a charitable foundation). For a single person, the cost typically ranges from $2,500 to $4,500 plus $500 to $600 per year for a legal services plan, including annual reviews and updates.
The following are the “four legs” of your estate-planning stool…
Important: A beneficiary should never be a witness, because that suggests a conflict of interest. To make sure that your wishes are followed, you must name an executor, who may be a close friend or relative or a professional, such as a lawyer or trustee. He/she may choose to serve without compensation, but he typically is paid a fee of 1% to 5% of your estate’s value, depending on how complicated the distribution of the estate is.
If you are single but have young children, your will is where you name guardians, which may include one for short-term and one for long-term purposes. In a separate document, you also should name the guardians in case you are incapacitated but don’t die. You can do this for free at http://kidsprotectionplan.com. People who live alone also should make provisions for the care of pets in their wills.
Example: Jane wants her friend Mary to inherit her assets without interference from her family, from whom she is estranged. She creates the Jane Doe Trust, making Mary its beneficiary, and retitles all of her savings, mutual funds, real estate and retirement accounts in the trust’s name. She names herself trustee for her lifetime and appoints another trustee to manage the assets after her death for Mary’s benefit. The assets aren’t subject to estate or gift taxes as long as the total is less than $3.5 million — and Jane’s estate plan is difficult to challenge in probate court.
Caution: It’s a good idea to designate an agent younger than you are, such as an adult child, niece or nephew. You may want to avoid naming co-agents because if they disagree about an issue, they may end up having to go to court.
Important: If you store these documents in a safe-deposit box, heirs may not be able to gain immediate access without authorization contained in those documents. Give signed copies to your lawyer or executor. It also is smart to write an informal “letter of instruction” that lets people know where to find your will and other key documents. You can send this letter out yourself, or your lawyer or executor will send it to your designated guardians, trustees and health-care agents if you are incapacitated or upon your death.
Estate taxes are a bit of a moving target. In 2009, an estate can be valued at up to $3.5 million without incurring federal taxes — anything over that amount is taxed at 45%. Under current law, no estate taxes will apply in 2010, but in 2011, the exclusion drops to $1 million.
To make sure that most of your legacy goes to your heirs and not to the US Treasury, consider making gifts during your lifetime. You can give away a certain amount each year to another person — currently up to $13,000 if you are single, which is half the amount a married couple can give — without paying a gift tax. (There is no limit to how many people you can give these gifts to.)
If you are contributing to a college savings plan for the person, you can donate five years’ worth of the allowable amount all at once — that is, you can contribute $65,000 this year but make no further contributions during the next four years.
In addition, you can give away $1 million during your lifetime free of gift tax, but this lowers what you will be able to exclude from the estate tax. You also can give away an unlimited amount of assets to charity and directly pay a beneficiary’s tuition and/or medical expenses without owing estate or gift taxes.
Certain assets, including the cash value of insurance policies and retirement plans, such as IRAs and 401(k)s, pass to the beneficiaries that you designate by way of documents related to those assets, not what you say in your will. Check that you have filed the paperwork necessary to designate primary and secondary beneficiaries for all such accounts, and if an ex-spouse is a beneficiary, be sure to remove his/her name if that’s your intent.
