The responsibilities of single parents make their estate planning needs distinctly different from those of a married couple. With no surviving spouse to provide for, your planning should concentrate on protecting your child’s (or children’s) welfare and on minimizing potential estate taxes. This article considers the strategies single parents may want to employ.
As a parent, your primary concern is the well-being of your children, both in the present and future. When planning for the eventual distribution of your estate to benefit your children while also minimizing estate taxes, it’s important to recognize that some of the benefits afforded to married couples will not apply to single individual. So, what aspects of estate planning might require additional attention on your part?
At a minimum, it is essential for single parents to consider the following tips.
Name a guardian. It is essential that your will include the name a guardian for your minor children and, if different, the person who will be granted custody. Without this information from you, the state courts will make this decision, potentially placing your children with an individual you don’t believe to be the best to see to their needs.
Review beneficiary designations. Not all assets are governed by your will. Update your insurance policies and retirement plans to be sure that your children will receive your assets either directly or through a trust that you have created. If leaving an individual retirement account (IRA) to your children, look into what you might do today to enable it to be used as a stretch IRA in the future.
Obtain or increase life insurance. Review your life insurance coverage to determine if the proceeds will be sufficient to cover your children’s expenses as well as your estate tax obligations. Consider taking life insurance out of your estate tax calculation, set up an irrevocable trust that will own the policy and, through the trustee, make premium payments from contributions you make to the trust.
Provide for your children’s health insurance. Your children’s health insurance coverage might end upon your death, or it might be eligible for continuation for up to three years under COBRA laws. It may be a good idea to familiarize yourself with other health insurance options, whether offered privately or through your state’s exchange, and share this information with the guardian you named.
Gift, gift, gift. Monetary gifts to your children can reduce the size of your estate while benefiting your children. You might make these gifts through a trust, such as using the money to cover life insurance premiums. As a single individual, you may make tax-free annual gifts of up to $14,000 per recipient.
Depending on your situation, you may need to pay special attention to some of these points. For example, if you are divorced, it may be that your former spouse is still named as beneficiary of your retirement plans and insurance policies. If you are widowed, ensure that your estate plan also covers the assets you inherited tax free from your spouse, as those assets now belong to you.
The situation may become more complicated if you are in a domestic partnership. Although you may be raising children together, the tax rules regarding your estate could be different than those of married couples. For instance, assets do not transfer tax free from one unmarried partner to another. Using life insurance as an example, a surviving partner must own the insurance to avoid it becoming part of the estate of the deceased. Therefore, it’s often suggested that each partner own enough insurance to pay taxes on the other’s estate. Also, it is typically recommended that each partner name the other as beneficiary and guardian in their wills to help prevent the distribution of assets, or even the guardianship of a child, to a blood relative who feels entitled to them. For financial assets, you might consider a trust to avoid probate.
There are many factors to be considered when planning your estate and the well-being of your children. Begin building an action plan today.
Anita Srivastava is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Ridgewood, NJ. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
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Article by Wealth Management Systems Inc. and provided courtesy of Anita Srivastava
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