The Heirless Estate: What to Do and When to Do It

Estate planning is all about the disposition of your assets and, for many people, this involves determining how to divide assets among heirs. What happens, though, when you don’t have a spouse or children, or other obvious heirs to your estate? Unfortunately, many people in this situation don’t feel it’s necessary to plan where their assets will go, which makes it more likely that their money will end up somewhere they wouldn’t choose – namely, the state. For this reason, it’s always prudent to have a strategy in place and to plan ahead for various outcomes.

Understanding Inheritance Law

While regulations differ a bit by state, the standard inheritance hierarchy looks something like this: surviving spouse, children, grandchildren. If there are none, or those relatives cannot be identified, assets can go to parents, grandparents, siblings, and nieces and nephews. In instances where no such relatives exist, assets are escheated back to the state. Essentially, in the absence of a next of kin, the escheat process allows the state will lay claim to your assets and utilize your money for the public good.

Choosing Alternative Heirs

Obviously, it’s not ideal to simply let the state decide the disposition of your hard-earned assets. So, you may want to consider choosing an alternative heir instead. Alternative heirs can be relatives, friends, or legally recognized non-profit organizations. Anyone can inherit your assets, so be thoughtful about whom you designate as a beneficiary in the absence of obvious heirs. Of note: Some states will levy an inheritance tax, and it could be higher for a non-relative beneficiary.

If you choose a charitable organization to inherit your assets, you may also consider beginning your philanthropy while you’re still alive and able to witness your impact. If you’d like to go this route, you have several options open to you:

• Charitable Remainder Trusts. With this irrevocable trust, you receive an immediate charitable deduction based on the present value of the cash or other property that you transfer. You also receive a reliable income stream from the trust, which could be for a set number of years or for the remainder of your life. Upon your death, the non-profit receives the remaining assets.
• Donor-Advised Funds. Here, you make an irrevocable, tax-deductible contribution of cash, securities, or appreciated noncash assets. Then, you can invest the funds for future potential growth and recommend grants to qualified 501(c)(3) charities you’d like to support.
• Private Foundations. This type of non-profit organization is often founded by a family or an individual. It begins with an initial tax-deductible gift, which will be managed by a board of directors or trustees. Sometimes, these trustees are paid for their efforts in controlling the disposition of your assets. With a private foundation, you may grant funds to qualified 501(c)(3) charities, as with a donor-advised fund, but you’re not limited to just qualified charities.

As you consider the above options, think through how much control and oversight you wish to have. All three charitable giving are suitable ways to plan your estate, so base your choice on personal preference, as well as guidance from your financial advisor. It may even be possible to combine several of the approaches described above in order to accomplish your estate planning goals. You should also work with a tax professional who has experience in charitable giving before you implement any plans. This will ensure you’re meeting your goals in the most tax-efficient manner possible.

SEE ALSO: The Time is NOW to Think About Estate Planning

Non-Monetary Considerations

While the disposition of your financial assets is a critical decision point, it’s not the only consideration in your estate plan. Beyond money matters, you’ll also want to designate a person who can make decisions on your behalf, should you become unable to do so yourself due to injury or illness. You’ll want to plan for each of the following:

• · Durable Power of Attorney for Finances. This legal document authorizes a person of your designation to handle financial and legal matters in the event you become incapacitated.
• · Durable Power of Attorney for Healthcare. This document is similar to the above but authorizes your designated person to make medical decisions, rather than financial, on your behalf when you are unable to do so yourself.
• · Living Will. This document details the medical interventions you would and, importantly, would not choose to undergo in order to keep yourself alive. In Minnesota, Health Care Directive form combines Durable Power of Attorney for Healthcare and Living Will in one legal document. To learn more about Minnesota Health Care Directives, visit here:
• https://www.health.state.mn.us/facilities/regulation/infobulletins/advdir.html

Preparing the above legal documents ahead of time allows you to make your own, ironclad decisions. If you fail to take these steps, the state will determine your next of kin – possibly a very distant relation you had no contact with – to make decisions for you.

Naming an Estate Administrator

As you finalize your estate plans, you’ll also want to name an estate administrator, commonly called an executor or a personal representative. This is the person who takes over upon your death, handling matters such as probate court proceedings, distribution of assets according to your wishes, sale of your property, and notification of your death to banks, credit card companies, and other financial institutions. This step is critical in order to prevent identity theft.

When you have one or more heirs, it’s common to choose one of them to be your estate administrator. However, when you do not have an heir, you could instead choose an attorney, accountant, or financial planner to serve in this crucial role. There are even professional executors available for hire in some states.

SEE ALSO: Estate Plans Versus Wealth Transfer Plans

Timing

Estate planning is important at every age, though it becomes more critical as you age – especially if you have no intended heirs. The sooner you’re able to choose an alternative heir, prepare for non-monetary considerations and name an estate administrator, the better. These decision points protect your estate and your financial and health decisions from being made in a manner you have no control over, and they can always be revisited if your situation changes and an heir emerges.

If you are preparing plans for your heirless estate and you’d like guidance, please contact us today. We can help to take the complexity out of the estate planning process and give you the confidence to make the decisions that are best for your unique situation.