Estate Planning for People With No Heirs

While the process differs by state, the inheritance hierarchy usually goes like this: surviving spouse, followed by children, and then grandchildren. If none of those relatives can be identified, your assets could go to parents, grandparents, siblings, nephews, nieces—or even the state if you have no will or next of kin. In pretty much every case, it's better to pick someone yourself so you can decide who receives your assets after you die.

Rather than let the state decide, people without heirs may designate a beneficiary to inherit their assets. It can be a relative, friend, or charitable organization—generally, anyone except the attorney who drafted your will.

If philanthropy appeals to you, you have several options, including:

• Charitable remainder trusts: The donor receives an immediate charitable deduction based on the present value of the cash or other property that is transferred to this irrevocable trust. The donor also receives an income stream from the trust for years or for life, and a designated charity receives the remaining assets upon the donor's death.
• Donor-advised funds: The donor makes an irrevocable, tax-deductible contribution of cash, securities, or appreciated noncash assets; the donor can invest those funds for future potential growth and recommend grants to qualified 501(c)(3) charities at any time.
• Private foundations: This type of charitable organization is typically founded by a family or an individual with an initial tax-deductible gift and is managed by a board of directors or trustees, who may be paid for their efforts and who control the disposition of all assets; grants are not limited to qualified 501(c)(3) charities.

The choice between them comes down to personal factors, including how much oversight you want to have and whether other family members will be involved. Be sure to talk to your financial advisor and a tax professional with experience in charitable giving prior to implementing one of these giving strategies.

In addition to stipulating what to do with your financial assets, those without obvious heirs should designate a person who can make critical decisions in case of incapacitation:

• A durable power of attorney for finances, for example, authorizes someone to handle your financial and legal affairs.
• A durable power of attorney for health care authorizes someone to make medical decisions on your behalf.
• A living will details the medical interventions you would and would not like to receive to keep you alive.

Without such legal documents and ironclad instructions, your next of kin (as determined by the state), even if a distant relation, may decide for you.

You'll also want to name an estate administrator (a.k.a. executor or personal representative) to take over upon your death. An administrator will handle probate court proceedings, distribute your assets, manage the sale of your property, and notify your banks and credit card companies of your passing (which can help protect the deceased—and hence the estate—from identity theft). You could choose an accountant, an attorney, a financial planner, or even a professional executor, if available in your state.

Not all aspects of estate planning have to do with money. A few hours spent today can take a lot of uncertainty out of the future.