A Wealth Planning Guide for Single People and Cohabitating Couples

Many people are single for a substantial portion of adulthood. Single people might be widowed, divorced, opposed to marriage, still searching, or in relationships that do not include legal marriage. All too often, single individuals and cohabitating (unmarried) couples fail to make estate plans. Cohabitating couples may put estate planning off until they are married, and single people may not feel that an estate plan is necessary. Regardless of your situation, there are many reasons to start the planning process sooner rather than later.

Tax Planning

Generally, married couples (who are U.S. citizens) are able to gift to each other without creating gift tax consequences. This is referred to as the marital deduction. However, single people and cohabitating couples do not have the option to use the marital deduction. Nevertheless, there are ways single people can transfer assets during life without generating gift tax. Single people can still use their lifetime estate and gift tax exemption ($13.61 million in 2024), the gift tax annual exclusion ($18,000 per donee in 2024),¹ and make unlimited gifts for qualified education and medical expenses.² This is important for people who are concerned that they may face estate tax liability and want to reduce the size of their taxable estate. For example, single people without children may use the gift tax annual exclusion to benefit their significant other and relatives. If there is a desire to transfer more than the annual exclusion amount allows ($18,000 in 2024), the lifetime gift tax exemption amount can also be used to transfer additional assets during life. Assets that are gifted away during life, have the additional benefit of keeping the appreciation on those assets out of that person’s estate for estate tax purposes.

There are additional tax planning strategies that may be available to you. For example, you may want to consider charitable trusts, which pay income to a loved one for life or a period of years, and then the remaining assets pass to charity at the loved one’s death. Properly planned charitable trusts can generate current income tax savings and reduce the size of your taxable estate.

Social Security and Pensions

Unfortunately for single persons, there are limited options with respect to Social Security and pensions. Social Security does not permit designation of a beneficiary other than a spouse, and most employer pension plans have the same restriction. As a result, the primary tool used to replace this type of income for a surviving loved one (who is not a spouse) is life insurance or the designation of other assets to be transferred to the person.

Importance of Creating an Estate Plan

In the absence of an estate plan, a single person’s estate will pass based on the intestacy laws of the state in which they reside, often resulting in an undesired distribution of assets. This is true even if a single person’s stated and known intent was for property to pass to a lifelong partner, friend, or charity. Cohabitating couples, regardless of the length of the relationship, receive nothing from each other’s estate without proper planning, which should include a will and revocable trust.

The will may direct specific property to named individuals, charities, or family members. A will may provide for an outright distribution or establish trusts for assets to pass to beneficiaries. A revocable trust can direct the distribution of a single person’s assets, can be used to avoid probate, and can be established during the person’s lifetime. Many working single people have retirement plans such as 401(k) accounts and life insurance policies which provide direct payment to named beneficiaries. It is important that beneficiary designations are updated, especially when a divorce, death, or birth of a child has occurred.

Incapacity Issues

A judge may be left to appoint a relative or stranger to make health care and financial decisions on behalf of an incapacitated single person if they have not established a plan for their incapacity. Establishing a Health Care Power of Attorney and a Durable Power of Attorney allows single persons to proactively appoint individuals to make decisions in the event they later become incapacitated.

Cohabitation Agreement

Unmarried couples who are living together may want to discuss with an attorney the creation of a legal document referred to as a cohabitation agreement. A cohabitation agreement can protect their rights as a couple, while at the same time safeguarding their individual interests and assets. The cohabitation agreement is a tool utilized to minimize future conflicts should the unmarried cohabitating couple go their separate ways.

Summary

Wealth planning is essential for single people and cohabitating couples. While some benefits available to married couples may not be available to single people, there are many techniques to consider for estate planning, tax-mitigation, and planning for loved ones in the event of death or incapacity. Take the next step in preparedness and contact your Comerica Relationship Manager to establish your wealth and estate plan or request to speak to a Comerica Relationship Manager today.

¹Kaufman, L.K., Walker L.L.P, J. 2016. Wills, Probate and Estate Planning (and Thoughts on Marriage) for Same-Sex Couples In Light of Windsor and Obergefell .Estate Planning Council of Central Texas. https://www.epcct.org/assets/Councils/CentralTexas-TX/library/1516657_4_SPEECH%20_%20G_L%20Basic%20Estate%20Planning%20(2).pdf
²Randolph, M., JD. (2016). QTIP Trusts. www.nolo.com. https://www.nolo.com/legal-encyclopedia/qtip-trusts.html