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Planning Guide for Singles

  • Deirdre R. Wheatley-Liss
Chapter

Abstract

Sometimes it’s hard to be single. Tax laws are harsher for singles than for marrieds. In addition, you may need to decide whom you want to benefit because you don’t feel you have obvious heirs. Your blood heirs may be disappointed with your choices, and because they have standing under the law, this increases the chance of a will contest. All this means your estate plan may need to be more thoughtful than that of your married friends.

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Sometimes it’s hard to be single. Tax laws are harsher for singles than for marrieds. In addition, you may need to decide whom you want to benefit because you don’t feel you have obvious heirs. Your blood heirs may be disappointed with your choices, and because they have standing under the law, this increases the chance of a will contest. All this means your estate plan may need to be more thoughtful than that of your married friends.

A quick note before you read too far: If the goal of your estate plan is to pass your assets to your children and then grandchildren, I set out lots of ideas for you in  Chapter 13, “Planning Guide for Kids.” Most of the ideas in this chapter revolve around a single individual who may be considering a large group of people as beneficiaries and who perhaps wants to benefit different people in different manners.

Chapter Brief

People don’t deserve to share in your estate just because they’re related to you. Who do you want to benefit when you go? Family? Friends? Charity? Pets? Leaving a percentage of assets can be attractive, but you need to anticipate challenges in carrying out the plan. The lowly tax-allocation clause can be the difference between a successful plan and a failed one. By understanding the grounds for a will contest, you can use practical preventions to keep your plan intact.

Who Gets Your Assets

When a married couple comes to see me, there is a customary order to their estate plan: they want to benefit each other and then their kids; or, they want to benefit each other and their respective kids. They may throw in some bequests to other family members or charities, but for most married couples, this is what their distribution scheme looks like.

When I meet with a single client, the universe of “who’s going to get my assets” expands exponentially. If clients have children, they tend to give them the bulk of the estate, but there may be other people they’re very close to whom they don’t want to forget. Clients without children might be looking at family members such as parents, siblings, or nieces and nephews, but they’re just as likely to have other people in their lives whom they’re closer to than blood relatives. I have a number of clients whose closest companions are their pets, and they want to make sure they’re cared for. Finally, a number of my single clients are very involved in charities and would like to see those organizations benefit instead of their family.

What kind of questions should you be asking yourself in narrowing down your list of beneficiaries? Let me share with you some conversations I’ve had with clients over the years:
  • Family. The questions of family tend to revolve around whether you’re leaving assets to a group of people (my siblings and then their issue) or specific family members. I’ve had clients come in and say, “I want to leave my assets to my nieces and nephews”—but in the course of conversation, only one niece’s name keeps coming up over and over again. My question is, are your relationships with all these people on the same level? If you’re closer to one versus the others, do you want to benefit that person more than your other family members? Just because somebody’s related to you, it doesn’t mean they’re entitled to a share of your estate. Just because they share the same degree of relationship with you that another person does, that doesn’t mean you have the same relationship with them. If you’re closer to your niece Hillary, for example, then consider leaving her a specific bequest before your residuary is divided up equally, or giving her a greater percentage of your residuary estate. Don’t feel bad about benefiting the person you’re closest to, if that’s what you really want to do.

  • Friends. The great thing about friends is that you can select them, unlike family, who come as part of the package. Your friends may be the people with whom you enjoy life, so they’re the people you want to benefit in the event of your death. A lack of blood relationship doesn’t mean they’re not important to you. However, you may not want to involve your friends in your estate if the balance of it is going to your family; after all, they may have no relationship with each other. This is where will alternatives can really come in handy. For example, you could name your best friend Ruth as the beneficiary of one of your bank accounts, with a note that she should take that trip she’s always wanted, and then have everything else pass to your siblings under your will. Or, you could divide your entire estate equally among certain friends and not leave anything to any family members. If you choose that approach, be clear in the drafting about your intention to exclude family members.

  • Charity. You may believe there are many more deserving people out there than your family and friends and want to benefit them through charities you admire. You could do this by leaving a specific amount to charities and then the balance of your residuary to friends and family, or the flip circumstance, where friends and family receive specific amounts and the residuary goes to charity. You should be aware that whenever charity is a beneficiary of an estate, the attorney general of your state gets involved to make sure the charity’s interests are protected. If your charity is receiving a specific bequest, the attorney general’s involvement is very straightforward—the will says the charity was supposed to get $50,000; did they in fact receive $50,000? If the charity is a residuary beneficiary, it becomes more complicated. The attorney general is likely to audit the expenses of the estate to make sure all the expenses were appropriate for the estate and none were personal expenses of the individual beneficiaries the charity shouldn’t have to share in. Because of the expenses this might generate, I strongly recommend considering specific bequests to charities.

  • Pets. You love your pets and want to make sure they’re cared for in the same manner you provided for them during your lifetime. In some states, you’re permitted to set up a trust for the benefit of your pet. Obviously, pets can’t inherit money directly—how would they sign checks? By creating a trust for the benefit of the pet, you can not only leave money to care for the pet, but also identify a person to provide the care and a committee to oversee the person who’s providing for the care to make sure they aren’t abusing the money you’ve designated for Kitty, Fido, Mr. Ed, or Alex the talking parrot. If you can’t set up a trust for your pet in your state, consider finding an organization you can contract with to provide care for your pet for the rest of its life in return for receiving a fixed amount under your estate plan. Believe it or not, there are rest homes for all sorts of animals. I would try to build in protections so somebody checks in to be sure your pet is receiving the care that was promised (sort of the same way you want to frequently and unexpectedly stop by the nursing home were Grandma lives).1

How to Give Assets

As a single person, there generally won’t be any tax benefits in your estate to setting up a trust for your beneficiaries unless you’re looking at the generation-skipping tax. You only have one federal estate tax exemption, and it will be applied before the assets are distributed to the beneficiaries. However, you should still consider how you can structure an inheritance to maximize your goals within your estate plan.

If your primary beneficiaries are your children or grandchildren, I suggest you look at  Chapter 13 to go through the options for planning an inheritance. For other beneficiaries, consider the following:
  • Outright. Clearly, the simplest method to leave a bequest, whether specific or residuary, is outright to your beneficiary. However, depending on who your beneficiary is, you may want to carefully consider who will receive the asset in the event that the beneficiary predeceases you. Would you want it to go to their children, with whom you may not have as strong a relationship, or be redistributed among your other beneficiaries? You may want to pick a new contingent beneficiary.

  • Family trust. Just because there are no estate tax savings, it doesn’t mean a family trust structure, where the trust assets are sprinkled among a group of people, wouldn’t best fit your goals. Think about leaving your assets in a sprinkle trust for the benefit of each of your siblings and their children. This way, if your siblings don’t need or use the assets during their lifetimes, the assets will pass outside of their taxable estate to their children. If you left the same assets to your siblings outright, and they had a taxable estate, the inheritance would end up being taxed once in your estate when you died and then again when they passed away. Also, an outright bequest runs the risk that the inheritance will pass to that brother-in-law you can’t stand.2

  • Single-beneficiary trust. If your beneficiaries are younger, you may want to consider leaving assets to them in trust until they reach an age of maturity.  Chapter 13 discusses how to leave assets to kids and presents some ideas about how to structure this type of trust.

  • Generation-sharing trust. For wealthier individuals, it may make sense to take the family trust a step further and structure an inheritance so that, to the extent the assets aren’t used during a beneficiary’s lifetime, they will flow to successive generations estate-tax-free. Although your estate would pay estate taxes upon your death, further taxes would be avoided on the deaths of subsequent generations.

How to Divide Assets among a Group

Let’s say you want to divide your assets among a group of people. Does it make a difference whether you leave a fixed amount as a specific bequest to four people and whatever is left over to a fifth residuary beneficiary? Or should you give everybody 20 percent? There are pros and cons to making a specific bequest of a fixed amount of money versus creating a percentage allocation among beneficiaries.

Percentage Bequests

If you set aside a percentage of assets to all your beneficiaries, their inheritance will grow or shrink depending on the size of your estate. If each of five people is supposed to receive 20 percent, everybody will get 20 percent. If one person passes away and the percentages are to be reallocated, the four surviving beneficiaries will each receive 25 percent. The potential downside to dividing everything in percentages is how administrative expenses are allocated.

Let’s say there are five equal beneficiaries to your estate, and you name your nephew Al as the executor. As executor, Al needs to spend lots of time with the attorney to make sure the estate is being properly administered. Assume that part of your inheritance consists of a retirement plan, and Al is a 20 percent beneficiary. Al has lots of questions about the retirement plan and poses them to the attorney, who answers them and incorporates them into the bill for the estate. The bill for the estate is shared among all five beneficiaries. Al’s sister, Abigail, thinks Al is wasting a lot of the estate’s money with the attorney (Abigail is one of those people who is always looking to find the worst in others). Abigail is sure she’s found the smoking gun when she sees that the attorney gave Al what she feels is personal advice and charged the consultation to the estate. Abigail gets her own attorney to challenge every step Al has made as executor, your estate dwindles, and only the attorneys benefit from it.

A percentage allocation gives rise to these types of disputes regarding the allocation of expenses. I bring this to your attention so you can take into account the relationships, if any, among the parties you name as beneficiaries.

Specific Bequests, then Residuary Bequest

Let’s use Al and Abigail as examples again, but add to the mix the fact that you named Al as the executor because he’s been the one helping you as you age. After meeting with me, you want your estate plan to take into consideration that Al and Abigail never got along. I suggest you leave Abigail (and perhaps some of your other four beneficiaries) a specific bequest of a fixed amount of money instead of using percentages.

The benefit of the fixed amount is that the person receiving the bequest gets what the bequest says; the expenses of the administration are charged against the residuary estate, so they have no impact on a specific bequest. Al could then be the residuary beneficiary.

The downside of this structure is what happens if the value of your assets goes down. Because specific bequests are satisfied before the residuary bequest, Al could end up with less than everybody else, even though you intended him to receive the bulk of your estate. This situation can be solved by indicating that the total of the specific bequests can’t exceed more than a fixed percent of your estate (say 50 percent), thus setting a minimum amount that Al will receive.

Don’t forget that specific bequests don’t need to be created inside your will or revocable trust. You could use a will alternative, such as the beneficiary designation on a retirement account or life insurance policy, or a joint account or a transfer-on-death account, to pass a specific bequest to a person outside of your overall estate plan. This is a good technique to keep in mind if some of the people you’re benefiting have no relationship to the other people (specific bequests to friends, a will or revocable trust to the family).

Special Tax Issues

Taxes are, well, more taxing when you’re single individual. I already mentioned that you have one exemption from estate taxes, not two as with a married couple.

The tax-allocation clause becomes a very important element of your estate plan when you’re single. If you only have residuary beneficiaries (you don’t make any specific bequests, and no beneficiaries receive assets as a result of will alternatives), then the standard tax-allocation clause that pays taxes out of the residuary will work for you.

However, if you’ve made specific bequests to some individuals or are using will alternatives as part of your estate plan, a tax allocation that provides for the residuary estate to pay all the taxes could shortchange, or even bankrupt, your residuary beneficiaries.

I’m going to use the example of your nephew Al again. Let’s say your estate is $1.5 million and you pass away in 2013. In your will, you provide that $250,000 goes to each of four other nephews and nieces, but Al is the residuary beneficiary. You don’t look at your tax-allocation clause, and it’s the standard one that says all taxes are paid from the residuary. Your federal estate tax bill is $210,000. Because that comes out of the residuary, instead of Al getting $500,000 as you intended, he only receives $290,000.

For single individuals with disparate beneficiaries, a better tax-allocation clause is to say that each beneficiary pays their proportionate share of the taxes. If you used that tax-allocation clause in the example, each beneficiary who received a $250,000 specific bequest would be responsible for 16.67 percent of the estate tax bill, or $35,000. At the end of the day, the four would each receive a specific bequest of $215,000. Al would also be partially responsible for the estate tax. Because his share of the estate represents 33.3 percent, he would pay $70,000. Al would end up with $430,000, which is less than the $500,000 you intended but reflects the fair allocation of the estate taxes.

Now, if you really wanted to make sure Al received a minimum of $500,000, you should’ve first made a specific bequest to him of the $500,000, next made bequests of $250,000 among the other four beneficiaries, and finally left any residue to Al as well.

Here’s one more little reminder. Eight states collect inheritance tax: Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee. If you live in one of these states, different tax rates may apply to different beneficiaries depending on their relationship to you. These taxes need to be accounted for in terms of whether they’ll be paid out of the residuary estate or allocated to the beneficiaries who receive the assets.

Risk of a Will Contest

One problem with having all these choices is that somebody might be very peeved about the decisions you make. It’s amazing how many people believe an inheritance is “owed” to them merely by virtue of sharing some DNA characteristics with you. Here’s the crux of the issue: if you die without a will, then the law leaves your assets to your relatives based on how closely they’re related to you. If a cousin can successfully overturn your will, the intestacy statute may provide that this person inherits your entire estate, even if you’ve never met them! This bias in the law in favor of blood relationships, combined with the money left in your estate, can be a fertile breeding ground for a will contest.

Four Reasons to Contest a Will

The good news is that, despite what you see on TV, there are only four limited grounds on which to contest a will:
  • The will wasn’t signed in accordance with state law. All the way back at the beginning of this book, I harped on how important it is to have a will properly executed under state law. If a will fails to meet the very stringent execution standards, then it won’t be deemed to be a will. If it’s not a will, it can’t transfer your property at death. This is one of the biggest areas of concern I have with using an online service or do-it-yourself estate planning—if you don’t get the signature section right, you don’t have a valid estate plan. This has led to many a person believing that they have a perfectly valid estate plan—but instead leaving their heirs in for a very nasty surprise because the will wasn’t executed properly.

  • Lack of testamentary capacity. This invalidates a will on the grounds that the person executing the will was incompetent to do so at the time they did it. You most often see this issue raised regarding an older person who modifies their will and removes some people who were beneficiaries under a prior will. The fact of the matter is that the level of capacity required to execute a will isn’t very high; it’s actually lower than the level of capacity needed to execute a contract. In essence, in order to be competent to execute a will, a person needs to know (1) the nature and value of their assets, (2) who would receive their assets if they didn’t have a will, and (3) the legal effect of signing the will. Someone would have a long road ahead of them to prove you didn’t have the capacity to execute your will. It’s hard to come by historic evidence of lack of capacity.

  • Undue influence. This is the biggie when it comes to will contests. The issue is that if a person is in a confidential relationship with you, then the person might be able to cause you such duress about your will that you lose your independence of thought process. What if you rely on one of your daughters to cook and clean for you, and she hints that unless she gets the house, she won’t be able to continue helping you? Or, what if a hired caregiver threatens to withhold your medication unless you change your will to benefit them? Or, perhaps your nephew helpfully drives you to his attorney to create a new will, which just happens to leave everything to him. When a will has unequal distributions, or distributions to non-family members, a court is reasonably concerned that the will was created out of fear that the favored beneficiary would cease caring for or even harm the person making out the will. Nine months before you died, were you threatened into changing your will to name your caregiver as the primary beneficiary? Or has your caregiver helped you for eight years, you don’t see your relatives, and you just got around to making out your will nine months before you died? This is such a fact-based inquiry that, again, undue influence is very hard to prove.

  • Fraud. You give a person a contract to sign, and it turns out someone slipped a will into the document and the person didn’t know they were signing a will. The will is invalid because it clearly isn’t an expression of the person’s intent. Another fraudulent situation is where somebody slips pages into the middle of the will. This is why I have the person making out a will or revocable trust initial each and every page.

Who Can Contest

If you’re still concerned about someone contesting the will, who has legal grounds to bring a suit? Three categories of people can do so. The first are people who are named under a prior will but aren’t named under the current will. This is most likely to come up when somebody is potentially claiming a situation of undue influence, or the will was changed under suspicious circumstances prior to your death.

The second category is one I alluded to before: people who would be your heirs if you had no will. Because of the possibility of disgruntled relatives with unreasonable expectations, you need to be very clear in your will about whom you’re benefiting and why. You should also be clear about whom you’re not benefiting, so they can’t raise the issue that you “forgot about them.” It goes a long way if you say, “I know Bill is my nephew, but it’s my specific intention to exclude him under this document.”

The third situation involves a promise to pay upon death. This is really a contract claim from a creditor rather than a will contest. The facts could be, “Mr. Smith told me I would get $50,000 at his death if I ran all his errands for him.” Again, this is difficult to prove. So if you’re Mr. Smith, and you want your neighbor to receive the $50,000, you need to write it down, either in your will or as a contract the neighbor can enforce against your estate.

Practical Prevention

How do you avoid a will contest? Another falsity of movies and TV is the value of the no-contest clause. You state in your will that if anybody contests it, they get nothing. There are a bunch of problems with this. First, if you don’t like the person you think might contest the will, it’s unlikely that you provided much, if anything, for them in the will, so where is their financial incentive to not contest it? The second problem is that courts are reasonably very concerned about the issue of undue influence. If the person who got you to create the new will under undue influence could be protected merely by putting a clause in the will saying that nobody else could contest the will, then your intentions would be thwarted at every turn. You can’t rely on a no-contest clause, and in some states, they’re absolutely unenforceable by law.

The bad news about will contests is that no matter what precautions you take, people may contest the will as a “nuisance suit” type of situation. They may understand from the outset that they don’t have the proof to demonstrate undue influence or lack of competency, but they’re not worried about winning the case. Their goal is to get your estate to give them some money merely to go away. If you’re concerned about these types of nuisances from a specific person, you should lay out in your will what the issues are, direct your executors to vigorously defend any lawsuit, and be clear about your intention not to benefit the nuisance party. The entire purpose is to give your executor grounds to seek damages from the party for bringing the suit, including repayment of attorney’s fees.

Let’s Get Real

If I were to sum up this chapter in one word, it would be clarity. For a single person, it’s even more important for your desires and motivations to be transparent and clear in your documents. You may want to include an introduction in your will or revocable trust that identifies not only whom you want to benefit but also why, as well as whom you don’t want to benefit. If you’re using a will alternative, make a statement in your will if the assets passing to a person outside of your will are in addition to or in lieu of any assets the person receives under your will. If you’re worried about a will contest, tell your attorney so they can make extra efforts to document your competency and intentions at the time of the will execution.

Footnotes

  1. 1.

    There is a fabulous resource, www.pettrustlawblog.com , where attorney Dennis Meek blogs about everything to do with pet law. As an animal lover, I enjoy following this blog, and I’ve gotten a lot of great ideas over the years about how to structure an inheritance to benefit pets.

  2. 2.

    If your beneficiaries are in their retirement years, you may want to consider the impact of an inheritance on long-term care needs. See  Chapter 20, “Planning Guide for Your Parents,” for ideas of how to prevent an inheritance from having an unintended negative impact on seniors.

Copyright information

© Deirdre R. Wheatley-Liss 2013

Authors and Affiliations

  • Deirdre R. Wheatley-Liss
    • 1
  1. 1.NJUS

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