"No-Kids" Estate Planning Techniques
Our firm has helped hundreds of families with their estate planning needs. But we are often asked "How would you address estate planning for childless couples?" or "What about single people with no dependents?" Add to these categories the many families whose children will not need a significant inheritance, those who wish to help other family members or charities, and there is a substantial population of people who do not "fit" the traditional spouse and children planning concepts.
Here are a few estate planning techniques worth considering:
Tuition payments
You can pay for anyone’s education without owing gift taxes, as long as the payments are made directly to the school and are used to cover tuition and books, not room and board. (This is in addition to the $11,000 per year you can give to any number of people, free of gift taxes.) This allows you to target the money for a specific purpose.Also, don’t forget the new tax-favored college savings accounts offered by some states. You can use your $11,000 tax-free gifts to open accounts for anyone. The money grows tax-deferred until it is tapped for tuition, books, and sometimes room and board. Then the earnings are taxed at the student’s tax rate.
Grantor Retained Income Trust
A "GRIT" lets you transfer assets to heirs during your lifetime with tax advantages. Congress has outlawed its use for lineal relatives (spouses, children, siblings), but it can still be used to benefit non-relatives or collateral relatives (such as nieces, nephews, cousins).Consider the example of a 50-year-old woman who contributes $1 million to a GRIT for her niece. During the predetermined life of the trust — let’s say ten years — the aunt is required to receive the income (if any) generated by the $1 million. Investment of the money can be conservative or aggressive, depending upon the terms of the trust. If the objective is to "grow" the principal, which will pass to the beneficiary when the trust ends, then income will be kept to a minimum. Using historical investment averages, this hypothetical $1 million GRIT could expand considerably, perhaps to three times its original value, benefiting the niece, with reduced tax consequences. GRITs must be carefully drawn, and expert investment advice is always recommended.
Private foundations
James, 54, a business owner, and his wife, Nicole, 51, an architect, expect to amass assets of about $9 million by the time they die. With no children of their own, they are already paying the private-school tuition of one of James’ two teenage nieces and will probably pay for both girls’ college and graduate school, too. With the estate tax exemption of $2 million and some careful planing, they can leave substantial inheritances to the girls, tax-free.They are contemplating leaving the balance of their estate to their own private foundation, to benefit local charities in Pasadena and Glendale. The nieces could be trustees, drawing a reasonable salary and distributing the money. One underappreciated benefit of setting up a foundation is that the responsibility of running the foundation helps build the character of the trustees. The nieces could name their own children as successor trustees, so James and Nicole can create a legacy of character and compassion.
Due to the heavy setup and maintenance fees, plus reporting requirements, it usually doesn't make sense to create a foundation unless you're giving at least a few million dollars.
To make sure that your designated trustees are up to the challenge of managing your foundation, consider establishing your foundation while you are still alive and can observe how the foundation is managed. This allows you to co-manage the assets while imparting your own style and priorities to your co-trustees.
Charitable trusts
Charitable trusts are ideal when an individual, couple or family have non-cash assets with meaningful market value. The transfer of the assets to one or more charities (either immediately or sometime in the future) provides an income tax benefit to the donor, offers transfer of capital gains liability, can provide a stream of income to the donor or other designated beneficiaries, and may be earmarked for specific purposes.There are numerous options for the childless and for those who do not choose to leave their entire estates to their own children. Please call us at 626.584.8900 to schedule an appointment to discuss your needs!
