If you’re single, you might think you don’t need an estate plan. However, this is not true. Singles face a unique situation when it comes to dividing assets, making it necessary to have directives in place. When it comes to married couples without a will, if one spouse dies, most of the property will usually be passed on to the other spouse. However, with singles, the situation is not so cut and dried.
Laws vary by state, but generally if you’re single and die without a will (known as dying intestate), your assets will be distributed among your closest relatives. If you have children, assets would first be passed on to them. Next in line would be your parents, your siblings, and then distant relatives. If you do not have any relatives who are still alive, your assets would go to the state. If you’re among the nation’s more than 105 million singles, it will be important for you to have an estate plan, as without one you’ll have no say over who gets what.
“If you’re single and die without a will, you may find that your assets could be disbursed in ways you never wanted. Typically, your state’s statute will direct the assets to your close relatives (children, parents, or siblings), and will do so in percentages by the statute. To avoid the state deciding how your assets are distributed, you should speak with your estate planning lawyer about putting in place a will and other appropriate documents that ensure your wishes will be carried out,” Doug Rothermich, managing director of wealth planning strategies at TIAA-CREF, told The Cheat Sheet.
Although respondents in a survey conducted by WealthCounsel and WealthManagement.com said they want to protect assets (22%) and avoid probate (59%), most Americans do not put an estate plan in place because they aren’t clear on why they should do so or how to begin.
“Your estate planning documents should clearly spell out who will receive your assets, or if you have specific wishes about supporting charities or causes with your assets when you die. Understanding the many tools available to you and choosing the right family members, friends, or other representatives to carry out your wishes are critical components of the estate planning process for single people,” said Rothermich.
If you have no children or close relatives to whom you would like to distribute assets, you may want to choose a charity or friends instead. Fortunately, if you decide to give money to relatives or donate to charitable causes, this can reduce the value of your estate and your estate taxes.
Said Rothermich,“In addition to gifts to individual beneficiaries, you may reduce your estate value and tax liability through charitable giving. Such gifts to qualified 501(c)(3) organizations can also be tax-deductible for income tax purposes, and will reduce the value of the estate by the amount of the gift.”
In addition, a trust can be another key tool for planning your estate. “A trust is an entity that holds assets for the benefit of a third party. There are many different kinds of trusts used for passing assets to a spouse, children, charitable organizations or other beneficiaries. Trusts may offer tax or other advantages,” said Rothermich.
Keep taxes in mind
Estate taxes will depend on what type of ‘single’ you are. Each situation will have its own unique outcome. There are different rules depending on whether you are a widow or widower, never married, or divorced.
“If you’re not married, taxes on your estate will depend on whether you never married (or are divorced) versus whether you’re a widow or widower. If you are single, your estate will not incur federal taxes until it exceeds the value of the individual estate tax threshold applicable to you. In 2015, that’s $5.43 million minus any taxable gifts you’ve given during your lifetime. Taxable gifts are those that exceed the annual exclusion amount, which is $14,000 in 2015,” said Rothermich.
Rothermich says if you are a widow or widower, the federal exclusion amount not only includes the individual estate tax threshold, but may also include the unused portion of your deceased spouse’s estate tax exemption (depending on when your spouse died). “This is referred to as portability. In order for it to apply, your executor must elect to add your deceased spouse’s exemption to yours on his or her estate tax return by filing IRS Form 706 within nine months of the deceased spouse’s date of death,” said Rothermich.