One of the most important parts of estate planning is determining how to divide your assets. But what if you don’t have a spouse, children or other obvious heirs?
“Those in this situation might genuinely wonder, What’s the point?” says Bob Barth, a Schwab wealth strategist based in Orlando, Florida. “But passing without a will or immediate heirs increases the odds your money will go to someone you’d rather it not.”
While the process differs by state, the inheritance hierarchy usually goes: 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.
“With no will or next of kin, your assets become escheated—which is just a fancy way of saying the state lays claim to them,” Bob says. Indeed, such funds have long been used for the public good unless and until they are recovered by their rightful owner, reports the National Association of Unclaimed Property Administrators.
Rather than let the state decide, most of Bob’s clients prefer to designate as their beneficiary a relative, friend or charitable organization.
Anyone can inherit your assets, Bob says—except the attorney who drafted your will.1 (Beware, though, that some states levy inheritance taxes, and they tend to be higher for nonrelatives than for relatives.) “In pretty much every case, it’s better to pick someone yourself than allow an outsider to do it for you,” Bob says.
Similarly, you can name any recognized charity of your choosing. That said, many of Bob’s clients want to begin their philanthropic efforts while they’re still around to witness the benefits. One woman he recently worked with, for example, wanted to create a giving legacy with her four nieces so they could decide together on the right causes to fund. In such instances, 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.2
Bob says 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 a tax professional with experience in charitable giving prior to implementing one of these giving strategies, to ensure your charitable goals are met in the most tax-efficient manner. You can also work with your financial advisor to combine two or more of these approaches. (Find out how Schwab can help achieve your charitable goals.)
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 in the event you become incapable of doing so yourself.
- 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. “Many people have very strong preferences when it comes to these kinds of decisions,” Bob says. “Without these documents in place, it’s out of your hands.”
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). When a responsible family member isn’t available to serve in this capacity, you could instead 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,” Bob says. “A few hours spent today can take a lot of uncertainty out of the future.”
1In most states. | 2Limitations on the tax deduction may apply based on the donor’s adjusted gross income and whether the donor itemizes her or his deductions. For additional information on private foundations, visit irs.gov/charities-non-profits/charitable-organizations/private-foundations.