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Estate Planning Considerations for Couples With No Children

Estate Planning Considerations for Couples With No Children
Recently the Wall Street Journal published an article titled Estate Planning For Childless Couples, which outlined two important estate planning considerations for couples that do not have children: (1) distribution of the couple’s assets after death; and (2) naming someone other than one’s spouse to make health care and financial decisions if neither spouse is able to make such decisions.

Let’s start with the distribution of the couple’s assets. Last year I wrote about what happens to someone’s property in Illinois if he or she dies without a will. Let’s apply that to a hypothetical husband and wife with no children and no estate plan. If the husband dies first, Illinois law dictates that all of his assets pass to his surviving wife. At the death of the wife (assuming the wife has not remarried and has not had any children), the assets then pass to her siblings and parents. See the issue? In this example, only the wife’s family inherited from the couple due to the order of their deaths. The husband’s family received nothing. Many couples without children will set up an estate plan that allows the surviving spouse to use all of the couple’s assets, but at the death of the surviving spouse the remaining assets are split 50/50 between their families. Or, some prefer that a portion of their assets pass to friends or charity. All of this can be accomplished with proper estate planning.

The second consideration is naming a backup person – called a successor agent – to make health or financial decisions if neither spouse is capable of making such decisions. While one’s spouse is the obvious first choice to make health care and financial decisions, there are times when both spouses are unable to care for each other or even themselves. In this case, having designated ahead of time the person that is in charge of making all decisions greatly decreases the likelihood of a family dispute over who should make such decisions. A backup agent could be a family member or close friend. As the WSJ article notes, if there is not a trusted family member or close friend, then there are care organizations that are willing to serve as an agent. Regardless of who is named as successor agent, it is very important to have this Plan B in place.

Of course, there is always an alternative to setting up an estate plan: spend every penny before one’s death and leave nothing behind. Brilliant plan, so long as one can predict the exact date of his or her death, in which case I would suggest a lucrative career in the fortune telling business.

Does the State Get All of My Property if I Die Without a Will?

bbmnyLike life’s other burning questions – “Why are we here?” “What does it all mean?” and “How DO I survive a zombie apocalypse?” – you may be wondering: “What happens to my assets if I die without a will?” It’s a common myth that if you die without a will, your property goes to the state in which you reside. Indeed, we occasionally hear about such situations: in New York, a man died with $40 million, no will, and no known heirs. But since it’s unlikely that Mythbusters will tackle this one anytime soon, here’s the truth: each state has a statute that gives you a default estate plan even if you don’t have a will.  While it’s tempting to take the easy route and leave your estate planning to Uncle Sam, what the state dictates and what you would choose might not always be the same. For example, if you die in Illinois, the statute states:

  • If you are survived by a spouse but no kids, everything goes to your spouse.
  • If you are survived by kids but no spouse, everything is distributed in equal shares to your kids. For example, if you have two kids, each kid gets one-half of your property.

The statute mimics what most people are likely to do with their assets. Not bad, but the statute continues:

  • If you are survived by a spouse and kids, one-half to your spouse and one-half in equal shares to your kids.

For many parents – especially those with young kids – this sounds like a terrible idea. Do you really want to leave half of your estate to your children while your spouse is still alive? Do you want your children taking control of the assets (read: $$$$) at age 18 without any restrictions? Yeah . . . probably not. Covering all scenarios, what happens when you have no spouse and no kids? The statute gives away your property in the following order:

  • In equal shares to your siblings and parents (with a double share to a surviving parent if one is deceased). For example, if your mother is living but your father is deceased, and you have three siblings, it goes two-fifths to your mother (she gets a double share) and one-fifth to each of your three siblings. If you have no siblings but have nieces and nephews, your siblings’ share will be divided among your nieces and nephews.
  • If your have no living siblings (and no living nieces or nephews) or living parents, then one-half goes to your maternal grandparents, and one-half to your paternal grandparents. If a set of grandparents isn’t living, their share passes down to their living descendants (first your aunts and uncles, then your first cousins, then the children of your first cousins—i.e. your first cousins once removed).

Still with me? If there are no aunts, uncles, first cousins, or first cousins once removed, your property still doesn’t pass to the state.  The statute continues on (and on) to your great-grandparents and their descendants, i.e. out to your second cousins and second cousins once and twice removed.  If there is still no relative found, the statute looks for your “nearest kindred of equal degree”—basically anyone remotely related to you (degree is determined by a table of consanguinity). If a relative still cannot be found, then, and only then, does the property pass to the state. As you can see, it is very unlikely that the state would get your property after you die.  However, just because it is unlikely, doesn’t mean that everyone shouldn’t have a will. After all, wouldn’t you prefer that your money goes to a friend or your favorite charity instead of second cousin (twice removed) Vinny who always gets inappropriately drunk at family reunions? Bottom line: drafting a will takes only a modest amount of time and effort, and doing so ensures your wishes are carried out – even if you don’t survive that zombie apocalypse.

Will I Owe Estate or Inheritance Tax When I Die?

mneEstate planning isn’t a common topic in pop culture, but John Oliver discussed the federal estate tax (the tax on a person’s wealth at his or her death) on last Sunday’s segment of Last Week Tonight (the estate tax commentary begins around 7:15—beware there is course language, only some of which is bleeped out). Many clients come to me with concerns about minimizing taxes at their deaths, so let’s answer a common question: to whom does the estate tax actually apply?

The federal estate tax only applies to the richest 0.14% of estates, so there is a good chance you are in the 99.86% of the population that the tax will not affect.  Under this year’s federal tax rules, your heirs will not pay tax on the first $5.34 million of your wealth. If you are married, this means you and your spouse can pass along $10.68 million of your wealth without giving a dime to the IRS. Any amount of wealth over the exemption amount is taxed at 40% at your death (but the tax can be avoided by giving assets to your surviving spouse or to charity). This amount that is exempt from estate tax is tied to inflation, so it is increasing every year. Basically, as John Oliver points out (in much more colorful language), if you don’t think the sum of everything you own is appropriately called an “estate” (think Downton Abbey for context), you likely don’t need to lose sleep over paying estate taxes.

In addition to the federal tax, some states impose estate or inheritance taxes of their own – find yours in this useful chart. In Illinois, you can pass along the first $4 million ($8 million for a married couple) of your wealth tax-free. Any amount over the exemption is taxed up to a maximum rate of 16%.

Several things to note: first, even if the estate tax does apply to you, talk to your estate planning attorney about techniques that can be used to reduce your estate tax bill at your death. Second, the exemption amount has become much more generous in recent years—in 2001, the amount exempt from the federal estate tax was only $675,000 per person.  In fact, the 2014 budget proposal proposes to decrease the estate tax exemption to $3.5 million and increase the tax rate to 45%. This may be a difficult provision to push through Congress, as a large portion of the American public favors repeal of the estate tax altogether even though it only applies to a small fraction of the population.

Remember that there are numerous other reasons to have an estate plan in place, so just because your assets won’t be subject to estate tax doesn’t mean you shouldn’t have an estate plan. And if the estate tax doesn’t apply to you, you can sleep easy knowing that, as John Oliver so eloquently puts it, you will avoid “the government literally taking your money over your dead body.”