When you’re single, you don’t have to worry about caring for a partner if they become ill, but you do need to make sure there are very clear plans in place if you become ill and are unable to make decisions for yourself, even temporarily. Older singles worry about being incapacitated with no one there to make decisions on their behalf - and they invest a lot of effort to ensure this doesn’t happen. Many times, their efforts are in vain.
It is also critical to implement plans for your sudden passing.
There are many things to consider when implementing a plan for incapacitation, such as who you will designate to make decisions and manage your affairs, how much power that person will have, and when that power takes effect. Planning for your passing involves determining who gets what and when they get it. These decisions may change over time, as your financial situation changes and if/as your relationships change.
The most costly, and painful, mistakes a single person can make:
- Adding a family member to your checking or savings account. Many older singles like to maintain a large financial cushion in a bank account to pay bills if they are away or incapacitated, so they make a family member a co-owner on the account. Unfortunately, this solution can have unintended consequences, such as increased financial liability or loss. If the co-owner on your account is involved in an accident and a lawsuit is filed, the money in your account may be made available for damages – leaving you open to increased financial liability. Depending on the amount you maintain in your bank account, there can also be the appearance of the account being “gifted” to the family member. In this instance, a gift tax return may be required – again leaving you open to increased financial liability, from a tax perspective. The co-owner has full access to funds, meaning they could clean out the bank account without your knowledge – leaving you open to financial loss. If you were to suddenly pass, the co-owner owns the account and is under no legal obligation to share with others you may have intended to receive assets at your passing – leaving your intended heirs open to financial loss.
A better solution for ensuring your needs will be met during a period of incapacitation may be to appoint a person or financial institution to act as power of attorney over your accounts. This requires careful consideration, as the named person/institution must be one you trust implicitly. Engaging with an attorney who specializes in estate planning is the best way to have a document prepared that will ensure your wishes are being carried out and your needs are being met. It is a good idea to meet with several attorneys before deciding on one, to be sure you are being heard and you feel comfortable moving forward. - Going to the expense of creating trusts and not assigning accounts/assets to them. Singles often go to the expense of completing estate documents to avoid probate and estate taxes by creating revocable, irrevocable, and/or charitable trusts. What they may not realize is that completing all the paperwork is only the first step in the process. These trusts do not help you avoid probate unless they are funded with assets. You need to change the registration of your bank accounts, brokerage accounts, and other assets to fund your trust. You may also need to consider making changes to your life insurance and retirement plan beneficiaries as part of a trust strategy. Well planned and fully executed documents are useless if the Trusts go unfunded. This mistake impacts you and your intended heirs.
- Putting your funeral wishes with your will documents. Wills are not typically located and read until after the funeral, leaving your funeral arrangements at the discretion of friends or family members rather than in accordance with your wishes. This can be avoided by completing a pre-burial arrangement plan that specifies exactly what you want, relieving friends or family from making important decisions when they are at their most vulnerable and ensuring your wishes are met. A pre-burial arrangement plan also prevents your friends or family from paying for a service that you never wanted.
- Not naming a beneficiary on all your accounts and keeping them up to date. Beneficiaries are not just for life insurance and retirement plans. Virtually all assets have a way to name a beneficiary and avoid probate, whether the beneficiary is a Trust or an individual. Failing to name a beneficiary where necessary – such as life policies and retirement plans – may mean that your assets go to someone you never intended, and delaying the process of paying out the death benefit. Updating beneficiaries as life situations warrant – death of a beneficiary, a broken relationship, etc. – has the same unintended consequence of not naming a beneficiary. People have unwittingly left assets to a relative with whom they have lost touch simply because they failed to update a beneficiary designation. Obtain competent advice as you establish each beneficiary designation and verify that your desired outcomes are reflected in the paperwork. Also, keeping copies of the beneficiary forms with your estate planning documents assists your heirs, alleviating wasted time chasing these documents down.
- Not making charitable gifts from your IRA. This option is only available to people over the age of 70 ½. Making charitable donations directly from your IRA benefits you in that the amount of your gift – while still counted as an IRA distribution, whether a “required minimum distribution” or not – is not taxable. Depending on the size of your gift(s), this can result in huge tax savings annually!
Each of these costly mistakes are easily avoided with proper planning. Consult with your trusted financial advisor to make sure that the strategy you have in place is the best one for you and your beneficiaries.
