For people with children, estate planning is usually a matter of dividing things up among the children. Often it’s simple: divide everything equally. Regardless of the size of the estate or changes that occur after the will is prepared, the formula remains the same. (Of course, complex family situations require more complicated estate planning.)
But if you have no family, then the first step in estate planning – deciding who gets what – can be a challenge.
Identifying Your Assets and Liabilities
Before you think about the “who,” it helps to think about the “what.” Start by listing your assets and beside each item, write the name of the person or organization you want to give it to. Use a question mark if you’re not sure and an x if you don’t care. This will help you decide what to focus on.
Your list should include real property (your house and any other land and buildings you own as well as any interests you may have in gas, oil or minerals resources); personal property (furniture, jewelry, cars, etc.); and financial holdings including stocks, bonds, and bank accounts.
Do you have debts? Are any debts owed to you? If someone owes you money, you can forgive their debt in your will or direct your executor to pursue recovery.
Organizations, law firms, and estate planning workshops frequently provide checklists and organizers for listing your assets and liabilities. These can also be found online, e.g., How to Make a List of Your Personal Assets.
The lists are useful for reminding you of forgotten items and categories of items, but don’t waste time filling out paper forms. Instead, use them as a model for creating an online file. This will greatly facilitate making changes and sharing information with relevant people. If you enter your items in a spreadsheet, you’ll be able to track the changing values of your assets over time.
Evaluating Your Assets
The size and contents of your estate may change dramatically between the time you first prepare estate documents and your death. If you expect to be poor in old age, estate planning can be minimal, perhaps involving a holographic will.
What about property and tangible assets? Will you be leaving behind a house? How about jewelry or artwork? I’ve heard people joke about their kids earning their inheritance by cleaning out the garage. Absent kids, decisions about passing on your assets are often more temporary, depending on your circle of acquaintances, the causes you support, and other time-limited considerations. The fluidity in your circumstances may dictate frequent changes to your estate-planning documents.
In my own case, for example, I own my house outright. If I were to die this week, I’d just as soon it go to the nice couple down the block who are renting and can’t afford to buy. It would give them a boost up, be good for the neighborhood, and certainly no loss to me. Similarly, I have friends who’d benefit from an infusion of cash and if I weren’t around to use my savings, I’d just as soon they did.
But fast forward ten years, or even five, and the couple have moved out of town. Friends have prospered on their own. Some may not longer be friends. The house may have to be sold to pay for assisted living. People without families or strong convictions about how they want their assets allocated may find themselves changing their estate documents often. It helps if you keep a copy of your will as an electronic document that can be altered without a lawyer’s assistance. (Changing Your Will)
As with post-retirement planning in general, long-term care is the wild card in estate planning. Current estimates suggest that as many as 60% of current seniors will need multiple years of long-term care, for which costs can be astronomical, especially if Alzheimer’s is involved. If you run through all your assets in the course of paying for long-term care, estate planning will have been unnecessary.
Identifying Your Beneficiaries
Taking the optimistic view and assuming that we can afford our own care with something left over, we need to think about possible beneficiaries. Beneficiaries may be individuals or organizations.
Wills and trusts generally include four categories of gifts: specific, general, demonstrative, and residuary.
Specific gifts are specific items or amounts. For example, your will might state, “I leave my oak kitchen table and chairs to my friend Jane Smith.” You can also choose to forgive a specific debt:“I forgive the debt for $10,000 owed to me by Frank Jones.” Specific gifts are the first to be distributed from your estate after your debts and taxes are paid.
General gifts are paid out of your estate but not from a specific source. Your will could state, “I leave $10,000 to Homes for Animals Charity.” That money could come from a savings account, brokerage account, proceeds from a property sale, etc. General gifts are the last to be distributed as your estate is settled.
A demonstrative gift is money that would be paid from a specific source, e.g., “I leave $25,000 to my godson John Jones, to be paid from the proceeds of the sale of my house.”
Residuary gifts come from the balance of your estate that remains after all gifts are dispensed. In addition to miscellaneous possessions, this could include bequests to individuals who’ve died, property inherited after the will was written, recovered debts and gifts that weren’t accepted. For a residuary gift, you might say, “I leave the rest and residue of my estate to Help the Children Charity” or “I leave the rest and residue of my estate to my best friend Mark Jones.” If you don’t include a residuary clause in your will, assets in that category will be handled as though you had no will.
You can’t leave money to a pet because pets are considered to be our property. However, you can leave a sum of money to a friend or animal shelter with the requirement that it be used to care for your pet.
Gifts to Non-profits
Absent family, it makes sense to leave your assets to causes and charities you’ve supported during your life. If you’re familiar with an organization and know that it uses money wisely, you can make it the beneficiary of a retirement or other account, name it in a beneficiary deed, or list it in your will or trust.
If you don’t have a specific charity in mind but know what kind of organization you’d like to support – medical research, art, environment, assistance to the needy; local, national, or international – you can do some research about which organizations are the most effective and which spend the most on staff salaries and perks.
The Tampa Bay Journal published a shocking investigative report about America’s worst charities. Some use less than one percent of their proceeds to benefit whatever they claim to support; 99% goes for salaries, offices, travel, and conferences. I don’t recommend giving money to any non-profit that spends less than 75% of its income on the cause it represents. You can check the organizations you’re interested in using the following links:
If you leave substantial funds to a non-profit through a will or trust, you can stipulate how your gift is used – that is, whether it goes toward the organization’s general operations or is earmarked for a specific purpose (but see below: **). You can select a dollar amount, a percentage amount, or part or all of the residue of your estate left after other payments are made. You can also make a contingent gift to the organization in the event another beneficiary doesn’t survive you.
If you’re dividing your assets between individuals and organizations, it’s a good idea to use a Roth IRA for individual gifts and other retirement accounts for gifts to organizations because Roth IRAs are always inherited tax-free. Other retirement accounts inherited by individuals under the age of 65 are taxed as capital gains. If these accounts are left to non-profits with 501c3 status, the organization will receive the full amount without any deductions.
Make sure you name the charitable organization and its full address in your will along with what you want them to receive. Gifts to non-profit organizations are excluded from estate taxes.
**Depending on whether your assets are passed on through a will or trust, you’ll need to take different steps to ensure that your wishes are followed. If assets are handled through a trust, your successor trustee can be instructed to withhold funds unless your stipulations are met. (Revocable Living Trusts) If a will is used, a Letter of Instruction can be prepared clarifying your wishes. (Of course, it would be a good idea in either case to consult with the organization beforehand and seek assurances that they’re in accord with the terms you lay out.)