Beyond Bloodlines: Estate Planning When You’re Childfree

When it comes to estate planning, most parents naturally focus on their kids and grandkids, both in terms of who makes decisions and how assets should be divvied up. But what about planning for those who don’t have children? A 2024 CDC report noted that the general US fertility rate has fallen by 3% to an all-time low.[1] Additional studies suggest that this decline may partly reflect a conscious choice by many people to not have children.[2]

 

As the number of nonparents grows, it becomes increasingly important to think about their estate planning needs. For estate and financial planning professionals, the question is whether planning for those without children is just about choosing different individuals to handle financial matters and inherit assets—or if there are more meaningful differences between these cohorts that could affect their estate plans.

A Nonparent's Estate Planning Journey

To explore this further, let’s consider the planning needs of Layla, a 65-year-old nonparent living in Austin, Texas. Layla has $15 million in liquid assets and $4.5 million in real and personal property. While Layla would like to minimize the potential federal estate taxes owed upon her death, her more immediate concern is retaining enough liquidity to support her care—especially as she ages.

 

Layla is aware that older individuals without children often rely more heavily on formal support systems sooner and to a greater extent than parents of the same age.[3] But when it comes to deciding who should ultimately inherit her estate, she’s still a bit unsure. While Layla gets along well with her nieces and nephews, she is not convinced that they truly need extra financial help due to her siblings’ affluence. She also wants to make a difference in the lives of those who play a regular role in her day-to-day life. The tricky part is planning for a future where the people involved might change over time. How can she set things up to ensure her estate benefits those who matter most to her, even if her relationships evolve?

With some thoughtful planning, Layla can create a flexible estate plan that adapts to her changing circumstances. As a first step, she considers who should serve as a fiduciary. While her siblings might seem like a natural choice, Layla is concerned that they live too far away. Her estate planning counsel suggests she think about who she usually turns to for help with everyday tasks, like running errands or getting to a doctor’s appointment. Layla realizes she often relies on a few close friends and her neighbors, who have become her support network. This idea of a “chosen family” isn’t unique to Layla. Multiple studies in the US and abroad report that nonparents are more likely to create these extended networks with neighbors, friends, and even distant relatives, who provide various forms of support.[4]

 

But Layla faces a dilemma. Her chosen family members seem like the obvious candidates to serve as her fiduciaries, but Layla worries about burdening them with the responsibilities of serving as an agent under a power of attorney or as a trustee. To strike a balance between receiving care from those who know her best and not straining her relationships, Layla’s counsel suggests a shared approach to fiduciary duties between her chosen family and her siblings.

 

There are a couple of ways to make this work. Layla could appoint one of her local loved ones and give them the authority to delegate tasks they’re not comfortable undertaking. Alternatively, she could pair a local loved one with one of her siblings, splitting the responsibilities between them under the estate plan. In either case, Layla’s counsel promises to tailor the language in the documents to clearly outline each person’s role and duties, while keeping things flexible enough to handle any unexpected situations. This way, Layla can ensure her estate plan is both supportive and considerate of those she cares about.

Strategic Gifting to Chosen Family

Turning to transfer tax planning, Layla’s counsel asks about her past gift-giving behavior. Layla notes that she sometimes pays for certain outings or buys things for her local loved ones. In fact, she’s even contributed to 529 plan accounts for the kids of an especially close neighboring family. Again, this aligns with research on nonparents in general, including a 2009 study of Americans ages 51 and older, which found that nonparents are more likely than parents to give financial gifts to friends and extended family.[5]

To help Layla reduce her taxable estate while still supporting her wish to gift to a wide circle of loved ones, her counsel proposes focusing her transfer tax planning on an irrevocable trust designed to benefit her nieces and nephews, friends, and neighbors (a “friends and family trust” or “FFT”). Here are the ways they consider funding it:

1. Make annual exclusion gifts for the benefit of five (5) beneficiaries each year.
2. Contribute $3 million to a series of zeroed-out, 2-year rolling Grantor Retained Annuity Trusts (GRATs) for 20 years.
3. Contribute $300,000 to the FFT and sell $2.7 million of marketable securities to the FFT. In exchange, Layla would receive a 20-year, interest-only, balloon promissory note that accrues interest at the long-term applicable federal rate of 4.37%.

Layla’s financial advisor has run the numbers and shown her the potential benefits of different strategies for reducing her estate tax liability. Assuming median markets, here’s what they found:

• Annual Exclusion Gifts: By making these gifts, Layla could eliminate $3.4 million in federal estate taxes.
• Rolling GRAT Strategy: This approach would leave her with a residual federal estate tax liability of just $800,000, making it a highly effective option.
• Sale of Securities to the FFT: Even under the least beneficial of the strategies, Layla would still reduce her estate tax liability by $2.3 million.

Additionally, her advisor considered Layla’s lifestyle and financial needs. They factored in a $500,000 annual spending rate and an asset allocation of 60% equities and 40% fixed income—along with her plans to move to an apartment by age 70 and then ultimately to assisted living by age 85. Even under consistently hostile markets, Layla never falls below an 85% chance of supporting her lifestyle throughout her lifetime. This analysis gives Layla the confidence to move forward with the rolling GRAT strategy, knowing she can revisit in the future as needed (Display).

 

 

Planning for Future Beneficiary Changes

When Layla asks about changing the FFT’s beneficiaries over time, her counsel explains that an independent trustee can actually distribute the trust’s assets to a new trust for some, but not all, the original beneficiaries. This process, known as decanting, helps allay Layla’s concerns about potentially removing beneficiaries or splitting the trust if a conflict arises among the wider group. However, Layla still wonders whether there’s a way to add new beneficiaries to the FFT down the line. To address this, Layla’s counsel suggests choosing from among the three strategies outlined in the display below.

 

Layla likes the idea of using a trust protector or setting up a noncharitable purpose trust. But her advisors note that because the FFT is a grantor trust, she must pay federal income tax on the trust’s income from her own personal assets. Understandably, this makes her anxious about being able to support her own needs over time. Instead, Layla decides to give one of her siblings a limited power of appointment. This allows them to make trust distributions to non-beneficiaries, with the potential recipients being those who regularly interact with Layla, either virtually or in person.

 

Tailoring Nonparent Estate Strategies

When it comes to estate planning for nonparents, it’s not just about swapping out one set of relatives for another. Nonparents often have a wider, more diverse social circle that provides support and comfort, so including these individuals in a nonparent client’s estate plan can require some extra factfinding and specialized drafting. Having a chosen family can also influence how a client gives gifts, so it’s important to have some flexibility in both power of attorney and irrevocable trust arrangements to keep their gift-giving habits intact. While the flexibility of a chosen family means it can adapt to the client’s changing circumstances, its fluid nature can make it tricky to include future members in an irrevocable trust. This is where some creative drafting and strategic thinking from counsel comes into play.