Estate planning for a single individual is very different than planning for a married couple. A single individual cannot take advantage of the fundamental planning strategy that provides additional protection from estate taxes available to married couples—the marital estate tax deduction.  Thus, for the unmarried client the consequence of failing to plan can be particularly harsh. Without proper planning, the wealthy single client’s estate could possibly end up being consumed by estate taxes.

 BASIC PLANNING

 Certain planning documents are needed regardless of whether the individual is married or single. But when planning for single individuals, the ramifications of not executing certain documents can be more detrimental. For example, in the absence of a will, the state’s intestacy laws will prevail. But that distribution may not comport with the decedent’s wishes. So having a will drafted becomes very important. Then there is the question of who is legally authorized to make medical treatment decisions for the single individual. Taking the time to specifically state what the client’s wishes are with respect to property transfer and health care can minimize taxes and ensure that the single individual’s financial and medical treatment wishes are carried out.

 The basic estate planning documents for a single individual are:

• Will
• Trust (revocable or irrevocable depending on the circumstances, as explained below)
• Durable General Power of Attorney
• Health Care Power of Attorney
• Living Will (“Advanced Directive”)
• HIPAA Authorization
• Funeral, burial, and remains planning

The revocable trust does not protect property from being subject to estate taxes. Nevertheless, it can serve a very important function in the single client’s estate plan. A married couple can usually depend on their spouse to immediately step in and take care of business matters if the other spouse falls ill or becomes incapacitated. Single individuals may not have someone who can immediately step in and legally handle their affairs. If a single individual transfers property into a revocable trust during his or her lifetime, the question of how to handle the property will be answered in the trust’s provisions. Moreover, assets in a revocable trust pass outside of probate, providing privacy and eliminating probate fees.

Proper Beneficiary Designations for Qualified Retirement Plans. Most people view naming an account beneficiary (e.g., qualified plan) as a mundane matter, but failing to think through the consequences of beneficiary designations can bring unwanted consequences.  Because the retirement plan account may be the single client’s largest asset, it is especially important that beneficiary designations are up-to-date and are in line with what he or she truly wishes.  For example, careful selection of an IRA beneficiary—such as a niece or nephew—can set up the opportunity for a “stretch IRA” where the taxable distributions are drawn out for as long as possible.  But most important, it is critical that the single client not name his or her estate as the beneficiary of their retirement plan account. A poor choice of beneficiary could result in plan assets being completely distributed over five years with no choice to stretch.

GIFT AND ESTATE PLANNING STRATEGIES

Annual gifts. The annual gift tax exclusion ($13,000 in 2011) should be the core of the single individual’s gifting strategy. Because these gifts can be made to anyone, the single individual may want to consider giving to as wide a field of potential beneficiaries as possible: parents, nieces, nephews, cousins, and friends. If this simple, yet very effective gifting strategy is followed through consistently, a substantial amount of wealth can be given away during one’s lifetime.  If an outright gift is not desired, property contributed to an irrevocable trust is permanently removed from the single client’s estate and, therefore, decreases the amount of assets potentially subject to estate tax.

Lifetime Gifts. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Tax Act”) was signed into law December 17, 2010. It triggered an unprecedented two-year window of opportunity for single individuals to make substantial gifts in excess of the $13,000 annual exclusion. The significance of the surprisingly generous giving limits Congress provided under the 2010 Tax Act make the years 2011 and 2012 especially critical years for single high net worth individuals. During 2011 and 2012, the unified gift and estate tax exemption amount is $5,000,000, which is a $4,000,000 increase from the $1,000,000 level that was scheduled to be effective under EGTRRA 2001. Consequently, for those individuals who haven’t started their gifting program, this represents a prime opportunity. And for those single clients who have previously gifted $1,000,000, they now have an opportunity to give an additional $4,000,000 without incurring gift taxes. Simply put, for wealthy single clients, this period may be the best in recent memory to give away money.

Gifts in Trusts. The irrevocable life insurance trust (ILIT) may be the single individual’s best tool for leveraging wealth for his family members.  The increased $5,000,000 exemption may allow a donor/grantor to make larger gifts of “seed money” to the trust, thus increasing the overall wealth that can be transferred to the trust without transfer tax. This, in turn, will alleviate the problem of finding money to fund future premium payments.

Assuming that the single client has nieces and nephews, a multi-generational trust (“dynasty trust”) can function as a “family bank.” This type of trust can be funded with a gift of up to $5,000,000 without incurring any current gift or generation-skipping taxes by using the lifetime gift and GSTT exemptions.The $5,000,000 can be leveraged by purchasingcash value life insurance on the life of the aunt or uncle who funds the trust. Certain family members can often serve as trustees for trust property in which they do not have a personal interest. As family members need funds to buy houses, start businesses, pay tuition, or meet other worthy objectives, they can borrow the funds at a market rate of interest from the “family bank.” When they pay back the loans, the money is returned to the trust with interest.

A GSTT exempt trust can benefit family members for several generations and, when life insurance is purchased in the trust on the beneficiaries, the trust can also be a source of liquidity for their estates. Assets placed in trust can be protected from creditors in most states, be professionally managed, avoid probate, allow for incentive planning for beneficiaries, provide for family business succession, preserve certain family properties, and remain under family control.

Other Gifts

• Tuition paid directly to certain educational institutions on behalf of another individual counts as a tax-free gift.  A single client can pay college tuition for nieces and nephews and not have the amount counted against the single client’s lifetime gift exclusion or their annual exclusion for that individual. 
• Medical expenses paid directly to a health care institution also count are considered tax-free of gifts and do not count against the single client’s lifetime gift exclusion or annual exclusion gifts.

CHARITABLE GIVING

Charitable giving can be a very important component of a single client’s estate plan.  In addition to annual exclusion gifts, the following charitable strategies should be considered:

• Annual exclusion gifts. A single client can give as much money tax-free to as many charitable institutions as he or she chooses. His income tax deduction may be as high as 50% of adjusted gross income. A consistent annual giving program could help the client remove a sizable amount from his or her estate and entitle the client to the income tax charitable deduction.
• Charitable remainder trusts. Both types of trusts (charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTS)) can provide an income stream to whomever the single client chooses (including himself)—whether they are a relative or not—with the remainder passing to the client’s favorite charity. Such trusts can be set up for two lives (i.e., the client and a favorite niece or nephew). CRUTs are generally more popular than CRATs because of their ability to receive additional contributions. The client can take a current income tax charitable deduction for the present value of the portion that will go to charity.
• Charitable lead trusts. These trusts (charitable lead annuity trusts (CLATs) and charitable lead unitrusts (CLUTs), provide a stream of income to the charity first, with the remainder going to the client’s heirs (nieces, nephews, or cousins) or friends.  Charitable lead trusts are  particularly attractive now when because IRC Section 7520 rates are low. A two-life charitable lead trust can be set up with the client and a favorite niece or nephew.
• Other charitable giving vehicles that can generate a stream of income for the single client include charitable gift annuities and donor advised funds. The client donates property and receives an income stream in return—plus the ability to take a current income tax charitable deduction for the portion going to charity. These charitable giving vehicles provide a less expensive charitable giving vehicle (since charitable trusts can be expensive to set up and maintain) and are fairly easy to implement.
• Estate tax charitable deduction. Donating money to charity through a testamentary bequest can play an important role in the single client’s planning strategy. The income percentage limits on the charitable donations during life do not apply in the estate setting. Thus, a single client could conceivably give his entire estate to charity and protect his entire estate from estate taxes.  Ideal assets are large 401(k) and IRA retirement accounts.

OTHER PLANNING STRATEGIES

Grantor Retained Annuity Trusts (GRAT). With a GRAT, the grantor transfers assets into an irrevocable trust and retains an “income” interest of a fixed payment, usually for a fixed period of years. When the GRAT is created, the single client makes a taxable gift of the remainder interest to the beneficiary. The value of this gift is measured by IRS formulas which essentially subtract the value of the income interest from the fair market value of the donated property. When the grantor’s “income interest” ends, the beneficiary (niece, nephew, or friend) receives the property. The objective of the technique is to keep the property out of the grantor’s taxable estate, keep the gift tax valuation as low as possible, and transfer property and property appreciation to heirs.

CONCLUSION

Contrary to popular thought, there are numerous planning opportunities for single clients to help them avoid unwarranted depletion of their estate by estate taxes.  The 2010 Tax Act provides a short-term, but substantially expanded gifting window of opportunity for single high new worth (HNW) taxpayers.

___________________________________________
This material includes a discussion of one or more tax-related topics. This tax-related discussion was prepared to assist in the promotion or marketing of the transactions or matters addressed in this material. It is not intended (and cannot be used by any taxpayer) for the purposes of avoiding any IRS penalties that may be imposed upon the taxpayer. New York Life Insurance Company, its employees or agents are not in the business of providing tax, legal or accounting advice. Individuals should consult with their own tax, legal or accounting advisors before implementing any planning strategies. Bates 00443959 (exp. 12-31-2012).