Estate planning for singles

Get your documents and beneficiary designations up to date

Consumer Reports Money Adviser: May 2012

Some say the single life is carefree, but not when it comes to estate planning. In most states, if you’re single and die without a will, your assets will go to your relatives even if you wanted them to go to a partner, friend, or charity. Your property will pass to your children, if you have any, and then to your parents. If you don’t have any children and your parents die before you do, your estate will go to your siblings or down the line to more distant kin. In a worst-case scenario, a long-time partner will get nothing while a cousin will inherit everything.

Moreover, singles can’t take advantage of the federal tax law that permits married people to leave assets of any value to their spouses free of estate tax. That’s also true for same-sex couples, even if they’re legally married in a state that recognizes such unions. Failure to plan can also cause problems while you’re still alive. If you become incapacitated, a judge might give one of your relatives the right to make medical and financial decisions for you. If you have no living relatives, the court may appoint a stranger as your guardian or conservator.

To avoid those problems, attorneys who specialize in estate planning advise singles to take the following steps:

Create a will and revocable living trust. If you fear that a relative might contest your will if you name your domestic partner in it, consider using a revocable living trust, which would provide instructions for how you want your assets distributed after you die. Unlike a will, a living trust lets your successor trustee distribute your assets to the beneficiaries named in the document without going through probate, a public court proceeding.

Update beneficiary designations. The person you name as your beneficiary on life-insurance policies and investment accounts like 401(k) plans will inherit those assets no matter what your will or living trust says. So remember to review and update documents related to those accounts every few years or after a marriage, divorce, death of a loved one, or birth or adoption of a child. If you neglect to do so, your 401(k) could end up in the hands of your ex-spouse.

Draw up powers of attorney. Unlike married people, unmarried partners or friends generally can’t make medical and financial decisions for each other without signed authorization. Therefore, singles should select a person they want to act for them and sign legal documents that give him or her that power.

To allow someone to manage your finances, you should sign a durable power of attorney. To ensure that you get the medical care you want, you should set up a health-care declaration or living will and name a health-care proxy or agent and a durable power of attorney for health care. (Some states combine the declaration and power of attorney in a document called an advance health-care directive.) In your declaration, you describe your wishes if you’re too ill to make decisions. In your durable power of attorney for health care, you appoint an agent who will make sure that doctors follow your instructions.

You might also consider setting up a revocable living trust and naming a bank or other professional trustee to manage your finances if your health fails. To ensure that your needs are being met, you could also name someone who knows you well as your trust protector and give him or her specific powers in your trust document, such as the authority to replace a trustee who is not following your wishes. “By doing this, you make your trust personal and not just about money,” says Jim Schuster, an elder-law attorney in Southfield, Mich.

Avoid estate tax.
Under current law, a single person can leave as much as $5 million to heirs free of federal estate tax. You can also make annual tax-free gifts of $13,000 to anyone during your lifetime without incurring the gift tax. Don’t ignore estate-tax planning, even if you doubt that you will ever be worth more than $5 million. Current rules apply only through 2012, and unless Congress acts, the exemption will fall to $1 million next year.

Advice for same-sex couples

Estate planning poses challenges for gays and lesbians even if they marry or enter a domestic partnership or civil union in a state that recognizes such relationships. That’s because the federal government doesn’t recognize same-sex marriages. So while same-sex partners who marry in New York, for example, can leave any amount of property to each other free of state estate tax, they won’t avoid federal estate tax.

Attorneys advise same-sex couples to plan as if they are single. “We recommend that all couples and individuals have a will—and maybe a trust—as well as a financial power of attorney and a health-care directive,” says Judi O’Kelley, deputy development director for Lambda Legal, a civil-rights organization. (The group’s website, LambdaLegal.org, has details about state laws affecting same-sex couples.)

Couples who are rearing children should also complete a second-parent adoption, a legal process in which the partner of the legal or biological parent adopts the child, giving both parties the same rights.


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