Daniel Kopp Estate Planning for Military Families | Military Money Manual Podcast Episode 83

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https://military.wisestewardshipfp.com/militarymoneymanual – Free resources for Gold Star Spouses and Families

Daniel Kopp CFP, joins Spencer Reese and Jamie to explain survivor benefits for Gold Star Spouses and Families.

Programs and resources for active duty military widows include:

• Survivor Benefit Program (SBP)
• Tax exempt VA Dependency and Indemnity Compensation (DIC) rates for the surviving spouses and dependent children of Veterans
• 12 months of BAH or on base housing
• $500,000 of SGLI plus $100,000 death gratuity, both of which can be deposited directly into a Roth IRA thanks to the HEART Act
• Fry Scholarship, which essentially sets up an individual GI Bill scholarship plan for each surviving child and spouse
• And many more resources and programs available to assist surviving military spouses during this extremely difficult time

More information on the HEART Act: The HEART Act permits Surviving Spouses who receive death gratuities and SGLI death benefits to invest some or all of the funds into a Roth IRA, thereby allowing the funds to grow tax-free, including when they are withdrawn or passed on their beneficiaries.

Military Money Manual Podcast Episode #83 Links

• Free 5-day course to maximize your travel benefits and learn all about military credit cards
• The Military Money Manual book
• Wise Stewardship Financial Planning
• Legacy Planning for Military Families | Military Money Manual Podcast Episode 36
• Ssa.gov
• VA website
• Gunnery Sergeant Fry Scholarship
• Erik Baskin – BLUF Finance, Side Hustles on Active Duty Military Money Manual Podcast Episode 72
• military.wisestewardshipfp.com/militarymoneymanual
• lifehappens.org

Outline of Episode:

• Estate planning is a gift of love
• SBP, the Survivor Benefit Plan
• Do these benefits have to be due to a war casualty?
• 12 months of BAH
• SGLI
• Death Gratuity
• HEART Act
• Fry Scholarship
• Payment timeline
• Financial counseling for grieving member
• Initial steps to take
• Things you can do now to prepare
• Talking to your family members about your plans
• Inventory of belongings
• Intangible asset planning
• Accounting for your family
• Trusts
• TSP order of precedents
• How often to reassess plan
• Storing your documents

Military Money Manual Podcast Episode #83 Transcript

[00:00:00] Daniel: The biggest benefit that people are not typically aware of to have full SGLI coverage is the HEART Act associated with being able to put the entire proceeds of the SGLI, so in this case, up to $500,000 plus $100,000. So right now, up to $600,000 into a Roth IRA within 12 months of the payment receipt.

[00:00:43] Spencer: We're continuing our conversation with Daniel Kopp from Wise Stewardship Financial Planning. Last week we discussed how to understand your money story, which is a fascinating episode. Recommend you go back and listen to that one. This week on the show, Daniel is going to help us with estate planning for active duty military families. 

Daniel, welcome back. 

[00:01:00] Daniel: I'm so glad to be here, and especially talking about what I think is probably one of the most unknown or at least confusing areas on how all these benefits work for those who are still on active duty.

[00:01:14] Spencer: Okay. Daniel, it's your show. Where do you want to start with this one? I know for me personally, the first exposure I had to estate planning for active duty was just when I signed up for my SGLI and updated my vRED, at least that's what we called it in the Air Force, but it was basically the emergency, what do you want ot happen.

[00:01:34] Daniel: Who disposes of your remains? Yes, exactly. A lovely question. I think I was probably only a sophomore before going to field training and ROTC and the MPF, whatever Sergeant shoved the paper form. “Sign this!” “What is it?” “Sign it here.”

[00:01:49] Jamie: Okay. That's exactly what I remember. Here's your life insurance. Sign this. They're like, do I need it? Like how much? Which line do I sign? They're like, just sign it. We just need you to sign it.

[00:01:58] Daniel: Yeah. So first caveats, right? So I'm a financial planner, but I'm not an attorney.

So what we're going to talk about today is not legal advice, and it's for information purposes only. Because a lot of this is going to be very unique, but we're going to talk at the big picture level about how it's going to apply to you. So one of the things, I also want to frame this. We mentioned this in the prior episode, where money can often be a taboo subject based on your experiences, your family, and just your comfort level.

Money can sometimes be a taboo subject, let's just say that death is even more of a taboo subject. I know we have some dark humor within our military circles that can alleviate that a little bit, right? But at the same time, ultimately, estate planning is combining the taboo subject of money and the taboo subject of death together.

Yay. Let's start there. Yeah. So if this topic is hard for you, if you are sitting here listening, thinking, I'm not comfortable with this. One, recognize you're not alone, okay? It's a very common reaction. So I want to frame that starting up front. 

Estate planning is about love. And what do I mean by that?

I mean that this is a gift of love that you provide for your family, for your loved ones, for those that we're going to talk about in these documents and these planning circumstances. For a couple of things. 

One, many of the things that we hope will never happen specifically when we talk about like some medical directives and living will, we hope those things never happen, but yet at the same time, we know we all have a life expectancy, right? And at some point, these things are coming into effect, hopefully not for a very long time. And so that's where you get to have, now I have lived this. I am a widower. I have seen what a spousal death looks like, right? And so in my work now, I have the privilege of taking those personal lessons born of pain and grief to help widows.

And I work with many widows, often gold star widows in my practice. Understand a lot of what we're going to talk about today is the importance of that comes down to framing. And if you can understand that this is a gift of love, that you give your spouse, your partner, your children, your loved ones, your family, the causes, the values that you care about.

If this is difficult, that can be an entry place, a starting point for you. So we'll start there. All right.

[00:04:14] Jamie: Yeah, we talked in our episode 36 about legacy planning for military families and what I had done personally and having run an estate for a non-military relative, and I love that concept of it's the final act of love in my mind like you said.

To your family to have everything organized to understand your benefits and make sure they know what to do, who to contact, and what's available to them, should you pass.

[00:04:35] Daniel: Yeah. Spencer, what have you seen? How does that resonate with you?

[00:04:40] Spencer: I just think it's incredibly powerful that you went through this experience personally, and you've turned around and used that experience to help others going through the same experience. Other than grandparents, I've been blessed that I really haven't had anybody close to me go through death. But I think it's amazing that you've managed to take that experience that you went through and then turn around and offer a helping hand to those who are going through a similar experience, especially the gold star widows that you talked about, widows and widowers who have had service members pass away while they've been on active duty.

Because I can imagine that going through that experience can be, first of all, sad, and terrifying. A lot of emotions, but also very lonely because you probably don't have anyone who has gone through a similar experience. So for you to be there and be that trusted partner and say, Hey, I've been there and it sucks, but these are some of the practical things that you can do, I think, I just think that's incredible that you can be there and be that resource for people.

[00:05:49] Daniel: Yeah I describe it as purpose in the midst of the pain, right? And that's the journey of grief. It doesn't end, it just evolves. So this is my way of taking what I've learned to impact others. 

So when we talk about understanding where your benefits are as a member on active duty, most of what we will talk about is the financial stuff.

So we're not going to talk about some of the things that a casualty assistance officer is going to deal with. So while you were on active duty, you are covered by potentially a lot more benefits than you even understand. 

The first of these we'll talk about is SBP, the Survivor Benefit Plan. Now, most people in the military understand this because this is the quote-unquote big decision when you approach military retirement when you have to opt-in and your spouse must sign off with the agreement based on how much to cover.

And of course, that's a very big deal. I just did an SBP analysis for a newly retiring O-5 at 20 years. And the net present value of his pension at 41 years old is $1.9 million. In other words, that's how much money it is worth for the duration of his expected life stand based on actual statistics from the DOD Office of the Actuary.

Speaking of which, if you are an approaching military retirement, there are some great calculators out there that the DOD Office of the Actuary puts out to help you analyze some of the decisions. So that's when you start paying for it. But what many service members don't realize is the whole time that you're on active duty, you're actually covered by SBP.

You're just not paying for it. So what is that? It's 55% of your base pay with a little bit of a calculation thrown in there, so it's not a huge amount. So you know, if you're early in the service, it's not big bucks like it might be relative to, say, a 25, 30-year career E-9 or O-6, things like that.

But it is still quite a bit of money. So that's part one. 

Now thanks to some lobbying efforts and advocacy from great organizations like MOAA and others, there is no longer this SBP DIC or depending indemnity compensation offset sometimes used to be referred to as the widows' tax. So used to be you could get one or the other and there were some offsets, but now you'll get both.

So you'll get 55% of this, basically high three kind of essence, of your base pay. And so the payment from DOD. It'll be paid to your surviving spouse, and if you don't have one, then your children, based on certain circumstances. 

The second part is DIC. This is paid by the VA dependency indemnity compensation, and if you're the surviving spouse, it's a tax-free payment.

So in 2023, it's $1,560.74, and it adjusts upwards for inflation, so you get taxable. SBP, tax-free DIC, and you're also going to get Social Security survivor benefits. So based on your work history that you have paid in your FICA and your social security taxes, you are most likely covered once you have served just a few years on active duty.

So I actually pulled up my benefits statement just to show you what this would look like as an example, you can get yours at ssa.gov. So right now, based on my initial years of service in a few years afterward, my minor child would get $1,924 a month from Social Security, and then a spouse if caring for a disabled child or child younger than 16, my kid would get another $1,924 up to a family maximum of $4,536.

So there's a per kid portion, and then there is a spousal portion subject to some earnings test. That your spouse would get caring for your children. So that mainly applies to like stepchildren scenarios and things like that. So that's the basic level that you're going to get, and we'll talk about some of the other ones, but this is oftentimes a significant monthly amount.

So you might be getting several thousand dollars a month from Social Security, $1,600, and change from DIC, potentially a similar amount maybe more based on your SBP. Regardless, when I even talked about life insurance and some of the other benefits. 

Pause here guys, reflect, and ask questions.

[00:09:58] Jamie: So first question I have, all three of these are monthly payments. SBP, DIC. Okay, so this is monthly income coming in recurring and a predictable amount for your family to plan on. And it can be pretty much known in advance, a pretty good, almost a hundred percent picture of what it would be.

[00:10:16] Daniel: These are quantifiable. Yes. So now SBP is a payment that for the surviving spouse would continue for the rest of her lifetime, provided I say her, either spouse, I just often work with widows. But oftentimes there are some remarriage provisions later on. But otherwise, it's a lifetime payment. DIC, lifetime payment.

And then survivors benefit from social security is for kids until they graduate high school. So then, or when they turn 18, whichever's later, that will stop. And then once the kid turns older than 16, the spouse who's caring for them would stop. So some of these don't last forever.

[00:10:51] Jamie: My second question about SBP. Does it have to be a war casualty?

Do you have to die in combat to be eligible for any of these benefits or if it's, God forbid, a car accident while you're on authorized leave, it's the same benefits?

[00:11:04] Daniel: That's a great question. So as long as there's a death in the line of duty, you're eligible for these payments. I've not personally come across a death that was ruled not in the line of duty.

I've heard that it's technically possible. That's more of a JAG-type question. I believe if you were doing a crime or something illegal. Potentially not, but yeah, you're in a car accident, you die of a disease. I've had Gold Star widows whose spouses died of cancer while on active duty, and it qualified.

[00:11:29] Spencer: With these monthly recurring payments, for a lot of widows that might be enough to cover their lifestyle and provide for their children and even save a little bit for college if there's a child or two.

[00:11:48] Daniel: I'm glad you brought that up. So I also didn't mention, there's also the 12 months of BAH that'll be paid out.

So oftentimes if the surviving spouse is living on base, they have that 12-month period, if they wanted to stay there before they have to make an alternate living arrangement. But if you're say, outliving off base, then you would also get 12 months. Of continuing BAH. So that's the payment side of things.

Now we'll start talking about the other benefits. Of course, the most prominent one that people might think of at this point is SGLI or Serviceman's Group Life Insurance, plus probably one of the worst-named products in the world, the death gratuity, that extra $100,000. I'm actually going to Capitol Hill latest this month in one of the changes.

I'm lobbying. Please, Can we change that? Gratuities are tips. They're not what you get when your spouse dies. Yeah. But it is an extra amount. So right now, SGLI is $500,000 with the recent raise, so $600,000 in total. 

You can actively choose to opt out of SGLI, but the default for most service members, and in fact, if you were previously opted out, you just got pre-enrolled, whether you realized it or not with this recent change.

So that is a life insurance amount that will be paid out to whatever your beneficiaries are on file. All right? 

The biggest benefit that people are not typically aware of to have full SGLI coverage is the HEART Act associated with being able to put the entire proceeds of the SGLI, so in this case, up to $500,000 plus the $100,000, so right now up to $600,000 into a Roth IRA within 12 months of the payment receipt, military spouse dies in the line of duty, SGLI payment paid out. That amount can be put into a Roth IRA or Coverdell ESA. But really Roth IRA's going to make the most sense for future tax-free growth.

And I know you guys have talked about how much Roth IRAs benefit, so just pause for a moment and just think about the financial ramifications of an enormous lump sum going in, oftentimes at a younger age for that kind of lifetime compounding. It's powerful.

[00:13:43] Spencer: Is the SGLI payment tax-free?

[00:13:46] Daniel: Yes. Life insurance in almost every single circumstance for a military member is going to be tax-free.

The exceptions would be for the ultra-wealthy.

[00:13:57] Spencer: So potentially a $600,000 lump sum going into a Roth IRA in a widow or widower's twenties or thirties. That can easily compound into multi multiple millions by the time they can access it without penalty at 59 and a half.

[00:14:15] Daniel: So that's the big thing, right? So you just said it, right? So that basis, that $600,000 that went in can be accessed at any time for any reason just like your own contributions. So you have the ability to pull out from it. It's not necessarily locked up earnings potentially could be minus the exceptions, things like that.

So I want to just emphasize this for the listeners. So if you had previously thought SGLI was a bad deal for whatever reason. And if you are really young and in really great shape, maybe you pay a little bit more than say, a comparable term policy out. But because of these HEART Act benefits alone, if you have a spouse or people who depend upon you financially, leaving SGLI at the maximum amount is almost always, in my opinion, a no-brainer.

Now if you have no dependents, maybe you don't need it as much, but don't forget to re-enroll when you get married or something in your life changes. But because of this HEART Act benefit, in my opinion, the vast majority of all military service members should stay opted into full SGLI.

[00:15:12] Spencer: So my understanding then is that if you had a separate term life insurance policy from, say, AAFMAA, USAA or a similar that had a wartime clause that you know would cover you and that payment is not eligible to be deposited into a Roth IRA through the HEART act.

Is that correct?

[00:15:28] Daniel: Yeah. The HEART Act is very specific that it is the payments from SGLI and Death gratuity. Now you and I know that a dollar is a dollar, so you have a sequence if when the payments arrive is a little bit off, you know the dollar amounts. You just have to keep track of the basis on your own. So there's some extra financial record keeping that comes along with that, but it's not hugely administrative.

[00:15:48] Jamie: And the SGLI amount you've opted into. So say you choose $100,000 dollars of coverage, that's the most that you could then carry over to your Roth IRA in the HEART Act?

[00:15:57] Daniel: Yes. Plus the gratuity amount. So yes. So yeah, if you took less SGLI this is capping some of your ability.

Yeah. Something that people don't always understand. So you mentioned earlier, Spencer, paying for college. So if you die in the line of duty, whether or not you've transferred your GI bill, your children, and your dependents will be eligible for the Gunnery Sergeant Fry Scholarship, which has a few slight differences, but for the purpose of this discussion, you can think is equivalent to the GI Bill. 

All right, so you've got a bunch of kids. So now when you start talking about planning for how much life insurance you might need or some of the other estate planning needs, not only is there income from the sources we talked about, there's some life insurance and now you're getting education benefits that will be in place for your kids.

So the 36 months of tuition payments plus the BAH and everything that goes along with that. So you may, in certain circumstances, also have dependents eligible for Chapter 35, which is the VAP, but generally speaking, the Fry Scholarship is going to be more valuable. And that's typically the one that I see working with Gold Star widows.

[00:17:13] Spencer: And the Fry Scholarship is a full transference of your GI benefits to your children, and then they can split it however they want.

[00:17:21] Daniel: So but even more generous than that, it is not a transference, it is a Fry Scholarship for each dependent. So you've got three kids and a spouse. Spouse gets a fry scholarship and each of your three kids gets a Fry Scholarship.

It's not one lump sum for them like we would typically see with an active duty transfer. And split up with the months. No. For each member, for each dependent.

[00:17:44] Spencer: We're talking about 36 months, and then all the provisions of the GI Bill but for each individual.

[00:17:49] Daniel: There are some slight nuances related to the time of use and things like that and remarriage provisions.

But you can learn all the nuances on the VA website. But yeah, for purposes of this discussion, it's extremely generous, and when you start planning around college, like that's going to cover the vast majority, at least the financial plans that I've run.

[00:18:09] Jamie: So when you say scholarship, it's not like the school is sponsoring the scholarship. This is a VA-run program.

[00:18:16] Daniel: Any school that will take the GI bill will nine times out of 10 take the fry scholarship. I suppose there are a few exceptions out there in the private school that I just haven't run into. And with that too, you may have the ability to get the Yellow Ribbon matching right. So this becomes extremely powerful.

[00:18:32] Spencer: Yeah. That is a fantastic benefit for the children there and for the widow or widower.

[00:18:37] Jamie: Daniel, what's the timeline that you would expect, I know we like to joke about having to fill out the paperwork with your finance office or S1. Is this something where your spouse, God forbid something happened, they're going to be able to pay rent next month?

Does it happen that quickly?

[00:18:54] Daniel: So that was the purpose with the original like $100,000 extra death gratuity is the quick payment of that to help cover some of these expenses. DFAS, as you might imagine, is not always the most prompt agency, right? So sometimes starting the benefits like the SBP and the 12 months of BAH are not always immediate.

At least that's been my experience over the years. Social Security, as long as you can get into a Social Security office relatively quickly. Over the past couple of years, COVID made getting appointments and communicating online very difficult. It's starting to get better, but that mainly starts right after you've had the appointment with Social Security. The DIC, again, it's that same boat. 

So yes, you could be in a situation where there's a little bit of a cash crunch, and that's why that $100,000 gratuity shows up pretty quickly and the SGLI payment is done as soon as you turn in the paperwork via the MPF.

[00:19:47] Jamie: The $100,000 is a matter of days sometimes typically, right? Your commander signs the paperwork, and sometimes in the week.

[00:19:55] Daniel: That's intended to help bridge that gap in that time period.

[00:19:59] Spencer: I can imagine that there's probably a lot of emotions when a  widow or widower would check their bank account and be like, first of all, they're processing the death of their loved one.

And then second of all, they probably received the largest lump sum payment they've ever seen in their life. Is there any advice, or have you seen this and experienced it where they call you and they're like, I don't know what to do, and what do, what do you say to them?

[00:20:24] Daniel: Yeah, the fog of grief at this time is certainly hugely overwhelming for the vast majority of widows and widowers going through this circumstance. Even as a finance nerd, knowing some of this stuff was still incredibly challenging. So that's when you, of course, the beauty of relying on your unit and the leadership and the casualty assistance officer.

There's also free financial counseling that's initially provided through the VA for members who receive SGLI payouts, not just spouses, but say you die in the line of duty and you designate your parents, they are eligible for the VA free financial counseling. So that can help be a bridge while this newly grieving member tries to figure out what's next.

But yeah, this is where it gets hard. Sometimes triaging decisions into now, soon, and later buckets are really the best place to start. I'm going to have some checklists that reference some of the things we talked about where people can go to military.wisestewardshipfp.com/militarymoneymanual.

You guys can put it in the show notes as well about questions like checklists after a member dies, right? Resources on understanding what some of these benefits look like as we get into estate planning and life insurance. All this stuff comes together.

You're not alone. It feels overwhelming. It is. And there are places that can help.

[00:21:48] Jamie: The initial steps, like initial actions, don't spend all your money like you get a fat payment. If someone calls you and their spouse just died and they haven't even had the funeral yet. What are we doing initially?

[00:21:59] Daniel: I feel at that stage trying to make a lot of decisions is just overwhelming in and of itself.

So don't make any irrevocable decisions if possible, and then lean on those around you, who know you, who love you, and care about you, but figuring out a new baseline is typically a year's long process, not something that you're going to figure out in that first couple months even so just prioritizing memorial service, funeral, receiving all the people who are coming in, but on the financial side, yeah, trying not to make any irrevocable decisions in those first few months.

[00:22:33] Jamie: So Daniel, just all these things running through my mind now. Is there anything I need to do now, like designated beneficiaries or things like that? Are those in the checklist that you mentioned on the website you gave? And we'll put that in the show notes as well.

[00:22:44] Daniel: Yes. So one of the things that you need to do, one of those is review beneficiaries.

So if you have not looked at the SGLI paperwork from the time that you first entered into the active service, it's quite likely that your life has changed, right? I cannot tell you the number of times that I've heard the stories about people who were married, divorced, remarried, sometimes even had kids, and with a second marriage or something like that, and their ex-spouse is still on the SGLI paperwork.

We're going to talk about this in a minute. It does not matter what your will says. Beneficiaries overrule anything with that when it comes to life insurance payouts. So if your SGLI beneficiary statement has not been checked recently, that is absolutely something you should do today.

[00:23:25] Spencer: Daniel, I want to talk next about the documents that Jag or the Judge Advocate Generals can provide on base.

I know I used them before deployments to generate wills, advanced medical directives, and several other documents. But can you just take us through what services people can expect and then how do they want to organize these documents? What's the best way, to have them ready in case the unthinkable happens?

[00:23:50] Daniel: Yeah, so typically the beauty of a JAG is right, you get access to free documents that otherwise you might be spending money for. So that's typically like you said, your will talk about more than a second. Your healthcare directives or a living will, like a medical power of attorney or a regular power of attorney, and then things related to limited powers.

But mainly the thing that you want to be focused on here is the five major decisions of an estate plan. And that can be done with a JAG or with a regular estate planning lawyer or some of the online services and things like that. And that's determining beneficiaries. So I referenced that term earlier with life insurance.

This is who will get the assets when you die. So TSP retirement accounts, these things all have individual beneficiary designations that you have to set up that might very well parallel the beneficiaries that you outlay in your will, but not necessarily, and again, beneficiary designations on retirement accounts and life insurance policies are the fact. It doesn't matter what the will says, right? So aligning everything to ensure it's synced up is one of the biggest parts of helping clients organize their financial lives that I do with the estate planning process. 

The second part of it is the method of distribution. So how you want things to be distributed.

We'll talk about more the young beneficiaries, but ultimately timelines, like if it's going to your spouse you don't necessarily need to hold stuff back. And then who you're naming as those key roles like successor, trustees, financial power of attorney, executor of disposing of following out the requirements of the will.

For parents with young children, the number one thing that the will provides, of course, is naming guardians. All right? So if you die on active duty or anywhere when you have not named guardians in a will, then it's up to the court to decide. So a judge will make a decision on who becomes the guardians for your children.

Now, this is typically in the case of both parents deceased, not just one as the active duty member, say for example, but again, blended families, other dynamics that this becomes very crucial. So naming these and you typically, we'll often see clients will name primary, secondary, tertiary, right? In order of succession, in case that person that you name is the number one is not able to do it for whatever reason, saying that their circumstances have changed or they've died, or in a coma, things like that, and providing for that level of control.

So that's the basics of estate planning. We'll dive more in here, but that's where we want to start.

[00:26:27] Jamie: Is that something we should talk to? Say, I want my sister or my aunt or my parents to be the guardian of my kids. Is that something we need to talk about ahead of time? That I'm putting them in the will and making sure they're okay with that?

[00:26:39] Daniel: I don't know your family, Jamie, but imagine that the reverse happened, right? One of your family members suddenly has given guardianship to you without ever asking or communicating how would you feel. So for some families that might be okay, some families that might not be right, it goes back to the things we talked about in the prior episode with financial openness, right?

Estate planning openness, especially around big picture topics like guardianship and financial executor and trustees. Ideally, these are conversations that are happening ahead of time and not being sprung on people in a very hard time otherwise.

[00:27:16] Spencer: So Daniel, you mentioned earlier five major decisions on an estate plan.

Can you kinda walk us through a checklist of what you're thinking about when you're working with a client developing an estate plan?

[00:27:27] Daniel: Yeah, and everything that I'm about to go over here is in the free resource that you can get at that link mentioned earlier in the show notes. So if you want to have access to this in writing so you can refer back to it and not just my words here.

So one of the things that you might be surprised with is just an inventory of your stuff. So a will controls your physical belongings. So that might be things, tangible assets like homes, land, real estate, or vehicles, collectibles, or other personal possessions. So oftentimes I'll see clients who have some.

Maybe objects of monetary value and they want to make sure that those go to the people that they want. But then there's also objects of sentimental value and they want this ring that belonged to great-grandma so and so to go to, this person over here. So that's the opportunity to outlay those kind of things.

Then you also have the intangible assets that can be directed through a will. So checkings and savings accounts. Sometimes you can have TOD or Transfer on Death set up with those. That'd be very similar to a beneficiary form, but if not, then the will directs how that flows out. You also have just ordinary brokerage accounts or individual accounts, so not in a retirement structure. Then any kind of like ownership in a business if it's not set up elsewhere could be directed via a will.

And you may think, I don't have a lot of stuff, and that may be true, but especially as your life evolves and changes it’s something to come back and review regularly. 

The second part is accounting for your family. We referenced that throughout this whole episode of understanding what benefits you have while you're still on active duty.

The beauty is most people on active duty have far more benefits than they know or are aware of, but then come day one of non-military life, whether that's separation, or retirement, SLI goes away. You can't opt into VGLI, but it gets expensive over time. Suddenly Fry Scholarship is no longer automatic. DIC is no longer automatic.

Your death has to be in the line of duty. So every time I run a financial plan, 99 times out of a hundred day one of leaving military service, life insurance needs jump dramatically. Okay, so accounting for that well enough ahead of time. I know you and Eric talked about that in the prior episode with Eric Baskin.

So do you have enough life insurance to account for your family? And then providing some documentation around that. This is one of the things that the JAG office is not always going to be able to provide, at least in my experience, which is setting up a trust. Spencer, when I say trust, like this word means different things for different people or contexts, what do you think when I say, oh, you should consider setting up a trust.

[00:29:54] Spencer: Well, the first thing that would jump to mind is some fat cat banker sitting in New York City hiding illicit optional assets. So I deal with the finances in a different country, New Zealand, where trusts are much more common. A lot of people own their homes through a trust. A lot of people own their businesses through a trust because there are tax advantages to it.

Yeah. Whereas in the United States, we've gotten rid of a lot of those tax advantages to it. But I'm guessing that in terms of an estate plan, there are advantages to using a trust.

[00:30:25] Daniel: Yeah, so typically what I see, at least amongst my active duty planning clients is typically trust, like what you're thinking of the rich ultra high net worth kind of concept is around estate tax avoidance.

And that's not what we're talking about here for 99% of military families. When I'm talking about trust in this concept, it's to use my joke, my grandfather is, you say you use trust when you don't trust someone. And that’s kind of the essence of it Imagine a scenario where both parents have died, right?

And there was life insurance and other assets set aside to protect them. The guardianship maybe was taken care of, right? And so these children be well cared for, but suddenly they reach the age of majority, 18 in almost every case and state. Suddenly that percentage of assets, whatever it looked like, say there are three kids.

So the estate is split up equally between the three kids. At age 18, the firstborn, kid number one goes off and suddenly has access to several million dollars worth of assets. I don't know about you, but I remember what I was like at 18. I hope I was responsible, but maybe not that much. And maybe that's not right.

The kind of financial situation that we want to set our children up for, right? So a trust provides financial control and protection for most military families in an interim stage in between early adulthood or age of majority, and at some undetermined point later on. So typically what I see with most of my clients as they go through the estate planning process, who have young children, they'll set up the guardianship, they'll review all the things we talked about.

And then they'll consider setting up a trust. So if something happened to both parents, both spouses, then the assets would flow into a trust. It's held in trust for these children, and a trustee will control it beyond their 18th birthday. So typically provisions will be in there that they can pay for things like college.

Say if the Fry Scholarship was insufficient or maybe didn't exist if they're not longer on active duty, and then some other milestones like providing for a wedding or a first car or the down payment on the first house, and then splitting up the distributions over time, say across the twenties, thirties, sometimes even longer than that, right?

Just providing a level of control so you don't have this enormous rush of money at a young age. So that is something that oftentimes, in my experience, JAG offices. Do not set up. There are some exceptions, but this is where if you have young children and are in a financial situation where you might want to provide financial controls or protections for them beyond the age of majority, a trust can help do that.

[00:32:52] Jamie: So a lot of times people talk about a trust from the aspect of, oh your home needs to be in the name of the trust. Your car should be in the name of the trust. Is it that complicated? Or could I just have a trust that establishes only what to do with the money that comes, like that big windfall, or does it really have to be this big, complicated process?

[00:33:09] Daniel: Great question. So there are two elements there. One you just referenced might be called a testamentary trust. In other words, a trust that does not exist until your death, right? That the will last will and testament. So it springs into existence at that point and then would become funded, right?

So I've seen oftentimes in my examples with Jag wills where a testamentary trust might be written into it, so if you die in a spouse's deceased or something along those lines, then the assets would then flow into it. Whereas what you're talking about with a car and house putting into it, the beauty of that is it helps avoid probate, which speeds up the process, lowers costs, and keeps it private.

That's where you're talking about an irrevocable living trust, which could serve the purpose of putting assets in to avoid probate. But at the same time, also be set up to help provide financial protection. So this is where it starts to get complicated, right? And part of the guidance is allowing financial experts to come alongside and guide you, whether that's a financial planning team with a financial planner, estate attorney, or maybe even a tax preparation professional as your financial life gets more complex and you start adding in businesses, blended families, special needs kids.

All this stuff increases the need for this level of control in your estate plan. If you are single, have no dependents or are married with no kids, the level of this complexity falls off, right? Not always the case, but often not always necessary.

[00:34:35] Jamie: Hey Daniel, going back a little bit, I just thought of a question I wanted to ask you.

The TSP office, when I went to update my beneficiary documents recently, they told me I don't need to actually file anything with them as long as I just wanted to go to my wife. Is that true? That seems weird to not have that on file at all to me.

[00:34:53] Daniel: This is a very interesting question and has it come up a lot, especially with the recent TSP transition, because a lot of people's beneficiaries got deleted out or eliminated somehow in that kind of whole thing.

So yes. Part of this goes back to ERISA laws, which are laws that govern how retirement accounts work. So this is not necessarily specific to the TSP and you could Google this like the TSP Savings Plan, order of precedents. So if you have never filled out a beneficiary form for the TSP and you want it automatically to go to your current spouse, then that's already what's on record.

So the way it works is, if you don't have a spouse, then the next one would be to your child or children equally and descendants of deceased children by representation. Sometimes called per stirpes, which is just the Latin for down the family tree. And if there's none, then it would go to parents equally or surviving parent if none to the appointed executor, if none to the next of kin, et cetera.

And it just keeps going down this order precedence. So you would fill out the TSP, I think it's form 3 if you wanted an order different than that. Otherwise, the order precedence governs that and. The kind of all retirement landscape when it comes to workplace 401ks, for example.

[00:36:01] Jamie: Okay, so that's good. One thing off my to-do list from the checklist, I don't have to update that one account at least.

Daniel, how often should I be like reassessing this plan? Is this an annual thing that I'm looking at or every six months, every month?

[00:36:14] Daniel: Typically anytime your life changes, right? So with active duty families, your life changes a lot. So I'm mainly talking about big financial changes. Marriage, divorce, free marriage, having a kid, having more kids, and then with that changing state of legal residency or changing major ownership.

So you bought a new house in a different state. You may not have changed to your legal residency. For tax and estate purposes, you bought another one. So anytime those big financial changes, that's an opportunity to go back and reassess. If none of those has happened, then typically we review that every other year with clients.

The last piece I want to say too is also just so in addition to reassessing, is just making sure of storage because just like any financial plan that's never executed you can get your legal documents, but if it's not signed and appropriately notarized and then stored where people can find them. I think you can see the obvious, right?

So getting the legal documents and then making sure that the appropriate people are informed as we talked about with the guardianship. So you don't just suddenly spring on, Hey, I made you the executor of my will, but also people can have access to these documents. A fireproof safe is often a good place for people as opposed to a safety deposit box.

Because if you die and your heirs are trying to get into a safety deposit, a box at a bank, let me tell you, it's very difficult to get the paperwork necessary to get into that. And then if you don't have that, the next best option might be triple bagging it in Ziplocs and sticking it in the back of the freezer, as long as people know where to get access to it.

Or maybe even make a special copy or a certified copy. And giving that to somebody like your executor or successor trustee or something like that. So the best plan has to be known where it's at in order to be executed.

[00:37:53] Spencer: Daniel, I have to say, man, you knocked it outta the park. Two super value-add episodes.

In the last one, we talked about understanding your money story, and in this episode, we talked all about estate planning. I learned a lot. I will admit estate planning is not my forte, so I really enjoy that. You came on the show and broke down the monthly payments that you can expect your widowed spouse to receive.

And then the lump sum payments. And I had no idea that the SGLI and death gratuity were eligible to be deposited into a Roth IRA and count towards a contribution as a basis that you can draw from tax-free for the remainder of your life. So that's an incredibly powerful tool that a widow or widower who loses a spouse on active duty can utilize to just make their life a little bit easier.

And I'm so glad that you shared that, that tip with us. Again, Daniel's sharing a free resource with everyone. It's military.wisestewardshipfp.com/militarymoneymanual. We'll have a link in the show notes, so you can just go to this episode number militarymoneymanual.com/ep83 and then the episode number and you can download that free resource that Daniel will send you.

Daniel, again, thank you so much for sharing this stuff. It's a tough topic to talk about sometimes, but I think that you're going to, hopefully not a lot of people, but you're going to help some people out there that are going through what could be one of the toughest times of their life.

[00:39:29] Daniel: Yeah, and that goes back to what we talked about, right?

The gift of love that you provide, understanding these benefits, planning around them, and ensuring that your wishes are carried out, allows your family, and your loved ones, to have such a different experience as opposed to a confused and chaotic one. And that's the beauty of these resources that the DOD and other agencies have provided.

So now that more about them, you can be better forewarned, better planned, and to the extent you can, happy financial planning.

[00:40:00] Spencer: Thanks again, Daniel.

[00:40:24] Jamie: The views and opinions presented here are those of the speakers and do not necessarily represent the views of the DOD or its components. Reference to any commercial products or services does not constitute DOD endorsement of those products or services.