How to Protect Your Estate as a Single Parent

Your responsibilities as a single parent make your estate planning needs distinctly different from those of a married couple. With no surviving spouse, who will manage your estate and be responsible for the welfare of your children when you no longer can? Or perhaps there is a surviving spouse whom you don't consider the right candidate for the full-time care of your children. How do you go about leaving them in the care of a guardian of your choice?

To best protect your children, you need to be heard "loud and clear" within the context of an estate plan. If you do not leave behind a formal and legal plan to make your wishes known, you risk guesswork on the part of others. You also risk having your wishes altered in ways important to you when your estate goes through probate. In this case, the state will dictate the distribution of your assets.

If you do have an estate plan, it's important to make updates as circumstances change. For instance, a lot of people never seem to get around to updating their guardian choices. But when your child is still in elementary school and your mother is about to turn 80, you might no longer think this is the best situation for either of them.

To help you leave the fate of your children and your assets under your control, here we cover estate planning strategies recommended for single parents. 

A Guardian Plus a Trust

If your child is still a minor, your primary need is to arrange for a guardian. If you do not name a guardian and you die while your child is a minor, a court may choose a guardian who is unacceptable to you. That possibility is easily prevented by specifying in your will who is to have custody of your child. In addition, you can use your will to establish a trust that assures protection for your minor child's financial interests. With a trust, you are able to control the age and conditions for distributing trust assets to your child and, prior to that, ensure that the trustee will provide professional asset management. You may also use the trust to take care of any special needs you want to specify, such as your child's educational expenses.

Life Insurance Proceeds

If you own life insurance to replace all or part of your income, you can remove proceeds from your taxable estate by setting up an irrevocable life insurance trust during your lifetime and transferring full ownership of your policy to the trust. Proceeds paid to the trust would be managed and administered with the rest of the trust assets.

To qualify for the tax benefit, you will need to live at least three years after you make the transfer. (This requirement does not apply if the trust buys the policy on your life). Annual contributions you make to the trust would be used by the trustee to pay the insurance premiums.

Disability planning

Your estate plan should also provide for the possibility of your permanent or temporary disability. In that event, you need a reliable party to make financial and health care decisions if you become unable to make them for yourself. Your attorney can discuss the options available in your state. One strategy is to give a relative, friend, or other trusted person a durable power of attorney to conduct financial transactions on your behalf and, possibly, to make decisions concerning your health care. This can avoid court supervision if you become unable to manage your affairs for any reason. Or, you may want to consider setting up a living trust (or a standby trust) that allows a trustee to handle your financial affairs if you cannot.

Reducing your taxable estate

Though the federal gift tax and estate tax exemption has now increased to over $11 million, don't overlook estate tax planning. Your options for reducing the size of your taxable estate do not include the marital deduction, but giving a series of gifts to your children remains an easy and practical strategy, especially if you transfer assets that are likely to appreciate in value. You can make tax-free annual gifts up to $15,000 per recipient this year (adjustable for inflation in the future), either outright or in trust. Over time, annual giving can have a substantial effect on the size of your estate.

Other planning strategies might be appropriate in your individual circumstances. Your legal, financial, and tax advisors can suggest the most advantageous courses of action for you and your offspring.

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