#106 How Much Should You Leave To Your Beneficiary

Micah 00:09

Welcome back to the Plan Your Federal Retirement podcast. I’m your co host, Micah Shilanski, and with me, we have a great advisor in our office, JT, Ferrin join us talk about some really important things. JT, how’s it going?

JT Ferrin  00:22

Pretty good. Micah, excited to be here.

00:24

Oh, super excited, right? Okay, I know taxes definitely are my favorite topic. Estate Planning, though, I gotta say, don’t turn off the pod just yet, there might be some key takeaways for you, knowing not only how much you should leave, but what mechanisms you need to know on how to leave money to your beneficiaries, JT, is pretty important, and something we run across quite often.

Micah Shilanski  00:45

Yeah, before we go too further, I do want to do want to do a quick little shout out to a couple of people that listen to the PYFR podcast and just give us some great feedback on it. Special shout out to Jason and Christine. It was great chatting with you guys. I ended up just running across them in Alaska, and they were kind of talking about the podcast, which was great, and I gotta say, JT, I was so happy because my wife was there, and they were talking about how great they love the podcast and all this great information. I was like, I wish I could like, This is so great. Please tell my wife more how I’m amazing, right?

JT Ferrin  00:45

Super important, and it’s one topic that’s often overlooked. I don’t know if it’s because people don’t want to address that and know that death and dying topics aren’t as fun as investments, but definitely a topic that gets overlooked, but very important.   Keep the compliments flowing. 

01:34

But on a serious note, one of the things that our goals are to transform people’s lives, that really is one of our goals that we want to do, and that transformation happens in little details, and JT, and I are blessed, because we can see this on a daily working with clients and helping little things. So often people come and they have kind of big goals, and that’s great, but in order to accomplish big goals, we got to take little steps along the way. And JT, when we’re working with clients, this is why we call this our process of success, right? We have a certain process we want our clients to go through, because at the end of this becomes a successful outcome. But one of the first steps in that process is estate planning. We got to talk about the death and dying stuff.

JT Ferrin  02:13

Yeah, because it is so important, and you never know when you you’re going to need it, right? You think you might not need it for 2030, years, but then something terrible could happen. And turns out, you need that estate plan affected immediately.

Micah Shilanski  02:26

So let’s bring up some real life scenarios, right? Of course, all of our clients names are Bob and Sue and JT, we had a couple attend a presentation we did not long ago. And do you want to talk a little bit about that? 

JT Ferrin  02:38

Yeah, just last year, Bob and Sue came to our seminar, and in our seminar, we talked about all the five areas of financial planning. We talked about estate planning, we talked about risk management, retirement income, investments and taxes. And so this is one of the topics that we’re bringing up, is estate planning. Well, we got the opportunity to meet with them, or at least schedule an appointment to address some of these issues. But unfortunately, Bob passed away before we had that appointment. Terrible thing. He had been fighting cancer for a number of years, and just caught up with him right there at the end before we could meet. So I had the opportunity to meet with Sue and first thing that we do talk about estate planning. Well, turns out that Bob and Sue had kept their finances fairly separate, and all of their checking accounts, all the money for his checks were deposited, were all in his name. They didn’t have any estate planning documents. We’ll get into the documents that we think everyone should have, but one of the important documents is the durable power of attorney for financial decisions, right? They didn’t have any of those documents, so he passed away, and she had to go two months without being able to access any any bank accounts that had there’s a mortgage payment in there, there’s utilities, insurances, car payments, credit card payments, all those things, had no access to money for two months. They had to sell some things. They’re trying to scrounge up money here and there, borrow it from family members, and just one document, durable power of attorney could have prevented all of that. So this is very important, getting all these documents in the estate plan all set up years before you need it.

04:21

Yeah, and this is why the we are so passionate about these things, and it’s for selfish reasons. Let’s be 100% clear, this is absolutely has a selfish element to it, because we have to help the spouses pick up the pieces when you did not get your job done, and that’s not a great place to put us or your spouse. Don’t care about us. Care about your spouse, right? Care about your kids, your loved one. And these are things. And I get it. I have a life too. I got a family. I got kids. We have things we want to do, and there’s not always a priority of updating my estate planning documents. I get that, even though I know it’s important, life gets in the way. So we got to find a good way to balance that and JT, bring up such a good point, especially when we know there’s an event happening, oh my gosh, a diagnosis cancer. Man, I can’t imagine all of the things that you have to do, how you have to work with your family you get a terminal diagnosis, but I do know some of the things you have to put on your plate and find a way to get them done. And estate planning is there. And JT we work with a client, and he passed away a couple of years ago. We got their estate planning done before he was diagnosed terminal. He went quick, within a few months pancreatic cancer. And while it was a very difficult thing for the wife and kids to go through, one of the things that made it a little bit easier is they didn’t have to worry about the finances. Sure, there’s a little bit of concern that’s always going to be out there, but they had access to money to pay all the bills. They had all the estate planning documents. They knew the things that needed to take place, and so now they could really be with and grieve and go through this process when he passed away, and not worry about those things, versus the other spouse in the situation doesn’t have access to money in bank accounts. That makes life really, really hard, and you got to make some really difficult decisions that could have been avoided. So JT, let’s talk about this just a little bit. I want to make sure this is unique to federal employees. So let’s talk about these documents and how they’re powerful. Let’s talk about how they play with your federal benefits, how the TSP comes in? And I want to make sure we’re addressing that question. You know the title of the podcast, right? How much should you leave your beneficiary? All of it may not be the best answer, so let’s talk about that. 

JT Ferrin  06:33

Great. And the federal employees have a lot of benefits, and TSP included, FEHB or survivor benefits. And with all of those great benefits come the opportunity to add beneficiaries. So that’s going to be a big one, but kind of in general, the documents that we think everyone should have, there’s three documents that everyone should have. So between spouses, that’s six documents, three documents each. That’s a durable power of attorney, talked about that a little bit already, advanced healthcare directive and a will. The fourth optional document would be a trust.

Micah Shilanski  07:06

Now, these are really important right now, I know we talked previously on other podcasts, more in depth, so we’re going to hit some highlights on them. That durable power of attorney JT is talking about is probably one of the most powerful documents you’re ever going to sign. It gives someone else the right to make any financial decision that you can make. Now the durable word here is really important, because that means it lasts through incapacitation. This is where we can also insert our disclosures. We’re not in attorneys. This isn’t legal advice at all right? This is our perspective on how we see them from a financial planning point of view. But it can, a misconception that comes up on these power of attorneys is like, Oh, if I get the power of attorney, I don’t need a will, because I’ll have power to do everything. Keep in mind the power of attorney takes place today, but expire whenever it’s signed and enforced, but it expires upon death, so once someone passes away, that power of attorney is not active anymore. Then after the power of attorney, we got the advanced healthcare directive, right?

JT Ferrin  07:59

Exactly. The advanced healthcare directive is a similar document, but instead of financial decisions, it’s for healthcare decisions. So if you become incapacitated, who can make those healthcare decisions for you, who can get in the operating room, and what are the protocols there?

Micah Shilanski  08:12

Now this is, again, super important, because now you might be thinking, Well, Micah I’m married. I don’t need these documents because my wife and I are just like, joint on everything, and we’re good to go. And that’s not the society that we live in. I understand how you know it should be that way, and how we think it’s that way. Here’s a simple answer. Call your spouse’s doctor and ask for information, they are probably going to tell you no, because this little thing called HIPAA, right? You are not authorized to get that information, and that’s the same thing if they get admitted into a hospital. My niece shared this story a couple times, so bear with me if you’ve already heard it before, but when she turned 18, we got her for her birthday, estate planning documents. We thought it was hilarious. We got her a real gift too, but we made her do her estate planning documents, a healthcare direct power of attorney and a basic will. She’s born in June. Little do we know, two months later, in August, she would go to the emergency room because she wasn’t feeling good. The they dismissed her because they said it’s really nothing. She collapsed in the emergency room. She spent the next two weeks in ICU. We hear about this, we show up and I’m like, Hey, I’m here to see my niece, Jazz. They’re like, Oh, hard stop. She’s an adult, and so you have no authority to come in here and see her. We pulled up that healthcare directive. With that healthcare directive, because we were on it, we were able to get in there and help administer care to my niece and to be with her during this time. If we did not have that document, the hospital did not have the legal right to allow us in the room, that’d be like, just me randomly, JT, walking into your room and saying, Well, I know. JT, I should make his medical decisions. No, I got no authority to do that. This documents is what grants you the authority. I’ll take a little step off my preachy box so JT can talk about the will. But these things are really, really important.

JT Ferrin  08:14

And good thing to point out there that even though you’re married, you still don’t have need the advanced healthcare directive, because HIPAA laws are so strict. So the will, when we pass away, our assets transfer to our heirs three different ways. The first way is by title, any joint ownership. This would be joint checking accounts, joint brokerage accounts, maybe jointly own your home. If one spouse passes away, the other one becomes the sole owner. It’s the easiest and best way for things to transfer. The second way that things transfer are by beneficiary. This would be your TSP. Could be life insurances or even a trust. Good thing here is that it avoids probate. Probate is the third way that things transfer. If you die without a will, it’s called Dying intestate, and assets go through probate. Probate is the state’s way of distributing your assets. They choose an executor of the estate and where those assets should go. The will doesn’t avoid probate, but it gives directions for probate. So within the will, you get to decide who’s your executor, and you get to decide where those assets go, that didn’t transfer the other two ways.

10:02

I like it now. JT, these are really important, right? Because a lot of times clients want to avoid probate. They’re not 100% sure why, but they’re like, Hey, I heard a probate is a bad word. Probate is the court sponsored process for administering your assets after you pass away. The will is the document which helps guide probate, as you were talking about, right? So again, I’m just going to echo what you said, those beneficiary designations and titling, right? If you do your titling correctly, if you do beneficiaries correctly, there’s no need to go through probate. So it could be a great way that you can avoid probate and avoid some hassle, by setting up that titling and beneficiary really correctly from the beginning, right?

JT Ferrin  11:42

Exactly now, what about that fourth document, a trust? Right? If we have a will, do we need a trust? Or if we have a trust, do we still need a will?

11:52

It’s a good question, right? So a trust comes into play for a couple of reasons. Right? Number one is, I want to avoid probate. Well, Micah, you just said you could avoid it via title and beneficiary. Sometimes, most of the time, but not always. One example could be what’s called ancillary probate. Any place that you own physical, real property in it has to probate has to be done in that state. Only few states allow beneficiaries on title. Alaska is one of them, or the reasons where one of the amazing states in the US, we allowed you to put a beneficiary on a title of a piece of real property. Most states do not allow that. So if I owned a rental property in Arizona or a second home down in Arizona, and I died, even though, you know, I have titling set up in Alaska in Arizona, they’d still have to go through probate. So one way to avoid that is we create a trust, a couple, mini different trusts. All we’re talking about today is that revocable living trust. What we like about revocable trust versus irrevocable, right, irrevocable, as you sign that thing you are done, I hope you made really good decisions. But, revocable, we can make a lot of changes while we’re alive. So I could use a trust if I had property in other states to own that property, and that would avoid probate. But JT, the main reason that I see this, the second one, and this is why I have a trust, is control from the grade. I love titling. I love beneficiary designations. But what happens is, when I do titling and beneficiary designations, and I die, that money goes immediately to my beneficiary. It is now their money. They get to decide what to do with it. Okay, well, maybe that’s a great decision if I’m leaving all the money to my spouse. However, what if I’m leaving all the money to my kids? I got a 15 year old and 13 year old, I think that are amazing. Would I leave them a ton of money when they’re 18? Let’s think about it this way. Listeners, if you were 18 years young and you got a check for $1 million what would you have done with it? Buy a fast car and good parties, right? And maybe a little world traveling is more than likely what we would have done with this, and we blow the money. And I love to say, Well, I’m not guilty of that, but JT, and I see this a lot of times when people inherit money. So I like a trust because it allows control from the grave. It’s my money, and I want to make sure it doesn’t hurt my kids. So we have rules set up in place to help guide them. Help be a parent from the grave. If they listen, they get money. They don’t listen, they don’t get the money. That’s kind of how we’re guiding them and setting it up.

Advert  12:04

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JT Ferrin  14:50

I love that. One of my favorite exercises to do with clients is to go through the beneficiaries and put $1 amount to each beneficiary, Bob and Sue. Did you know that your children, child one, two and three, are going to get X dollars when you pass away? Sometimes that’s a big number, a million dollars, I add life insurance in there, and it can definitely be a lot more. Are you okay with that child inheriting that money outright with no strings attached? And the reactions I get are mixed, but usually it’s no, no, we don’t want to give a million dollars to the 15 year old.

15:25

And it’s not that you have a bad kid. That’s not it at all. Right? It’s what experiences have we had in life to make us successful when we get this and that’s why that question, how much should we leave. Now, as we talk a little bit more about that in a second, let’s make sure we remember your key beneficiaries that you have as a federal employee. You have four different beneficiaries as a federal employee, you have your last paycheck, your FERS pension, your FEGLI, federal employee group life insurance, and your TSP, your thrift savings plan. Those are the four different beneficiaries.  with four different forms. We’ve talked about this in the podcast, but I’m still seeing it as issue. Meeting with prospects and new clients, that’s something we’re going to talk about again, the TSP, when they made their big change over to the new system. And a lot of people love it. It’s great. It’s it’s a lot better. I really appreciate it. But they have lost, or potentially do not have a lot of former beneficiaries. So if you pull up your TSP statement, boy, JT, what is on page five? Now, I think it’s on page five. Yeah. Okay, so on page five, it should list not only your primary but your contingent beneficiaries. So if you look on there and it says, if it doesn’t list your beneficiary, take the assumption, the most conservative option, that the TSP has lost your beneficiaries, and you need to fill out the forms again. Again, you should have a primary. If I die, where does my money go first? You should have a contingent. If I die and my primary is dead, where does my money go? If you do not have a contingent beneficiary, you spell Micah, M, I C, no, just kidding, right? But you should have a contingent and clear rate on these documents, and a lot of times, people will read these documents and even on the instructions, and this is where I disagree with what the government says on the instructions, it says, great news. If you want this money to go to your spouse, just leave a blanket will automatically happen. Let me ask you listeners a question, has the government ever made a mistake? Because a lack of clarity?

Micah Shilanski  15:26

Hum, never,

15:26

Okay, well, JT doesn’t think so, right? There you go. That is an option, as we like to say, I like to be abundantly clear where this is going. I have dozens of TSP stories of things that have gone wrong. I’m not knocking the TSP. They’re fantastic. But where it’s all people ran. Mistakes can happen. I want to put as many arrows in your quiver as possible to make sure you and your loved ones are taken care of. I’m gonna come off my soapbox now. I’m on it a lot in this podcast. I love it, but about beneficiaries, right? Really important. I guess I’m not off it just yet, because we still got bank accounts that can have beneficiaries, potentially real properties and side accounts, retirement accounts, life insurance, like any of those things, all of those things, should have a beneficiary that, JT, I want to bring back in that comment you said I would love to have inside of there a list of all of our clients accounts, how much beneficiary value it is, and who does it go to in dollar amounts. That is a great idea. 

JT Ferrin  18:21

Now, I love that. You know, taking it one step further, we talk all the time about survivor income analysis and doing a cash flow timeline, retirement income timeline, then we take it one step further to say, well, we have this beautiful retirement income timeline. It shows all your sources of income and how they change over time. But how does it change if one spouse were to pass away? Is there still enough income there to provide the surviving spouse with the current standard of living?

18:49

Right? And this is a cash flow question, right? So I’ll tell you a little bit my own personal story as we go through this. JT, something happened just relatively recently. Is whatever we’re going to camping and is someone always comes to me, and generally, the husband says, Micah, if I die, what does my wife do? And I say, I said, number one, they call me right away, right let us know that you passed away. We’re going to step up. And there’s a whole little list of things that we’re going to help with, and we’re going to help guide, especially on the financial matters. And so I was sharing this a little bit. My wife listens to the podcast, and so she’s heard me say this before, so she JT hit me up the other day and says, Well, Micah, what happens if you die? I said, well, great news, your spouse calls me. Oh, wait, no, I am the one that died. Okay, great question, you know, but I still kind of talked about it, and I was like, well, let’s go through, kind of what this process would be. And I ended up writing a little bit of a letter to Kelly that says, God forbid if I were to pass away, right? And then kind of, here’s the steps that you need to think about. Of course, it’s getting in touch with our office, right? We’re still going to follow the same steps, but she wanted to have that, that connection, to know that she was taken care of. And it wasn’t call a, you know, we don’t have an 800 number, but it wasn’t just call the office and they’ll figure it out. She wanted a little bit more of a play by play. So one of the things that I love spouses to do, especially for kids, potentially, after your estate planning documents are done, write an I Love You letter. Right? Now, run it by the attorney, because we want to make sure it doesn’t contradict what you’ve said in your estate planning documents and we create an issue, but it’s the sweetie. If you read this, I’m dead. I love you. Here’s some things I’m thinking about. Here’s some ways I’d like you to use this money. Here’s some things I hope you do inside of your life, and I gotta say, sitting on the side of the table with the beneficiaries, they have whole legal documents or an I Love You letter from their parents. Which one is more valuable? The I love you letter, right? When I’m guiding them, they’re like, Micah, I don’t know what to do. I’m like, All right. Well, let’s look at what your dad said. All right. Your dad send the letter. He wants you to do A, B and C. What do you think about that? You know what? You made really good decisions. Maybe I should do that. Okay, great. Now the legal documents said to go do these things, right? But, but it’s in legalese, and it’s different. So that personal letter is really important. And my wife asked me for that the other day, and I just that was a good thing. We should be thinking about.

JT Ferrin  20:58

Fantastic, especially because the passing alone is so hard already, just on the emotional side, especially on the emotional side, but tying up all those loose ends and settling their estate is such a big project that to have that letter, it gives you a little bit of that closure on the emotional side. But then also the instructions. It’s invaluable at that point.

Micah Shilanski  21:20

And then JT, I love your point. I went off on a little bit of a tangent on that letter side. But going back to that sort of vibrant income analysis, I think is so critical, right? That says, okay, when I pass away, cash flows, the heartbeat of retirement. Cash flows, the heartbeat of so many of these conversations. When I pass away, what income is going to be provided to my spouse, God forbid, my spouse passed away, what income is provided to me, and that’s going to be a corollary between how much are we spending. Now, JT, you know this answer, right? Sometimes, especially with Guy math, when you’re saying, Hey, we’re spending $10,000 a month, but one of us dies immediately. What does the guy say – was spending going to go up or going to go down? 

JT Ferrin  21:57

Well, should go down. It should be half right? So if you’re spending 10, it goes to five, right?

22:01

Right, right. Mentally, that’s immediately where we go is this, there’s not two of us. But guess what? You know what? The utilities still get left on. The mortgage payment doesn’t go down. The property taxes don’t go down. Your taxes actually go up, because now you’re single file versus married filer, right? So there’s a lot of things in here which argue that your income, excuse me, your expenses, are not going to drop that much. I could be wrong. So take the more conservative option. Let’s say your expenses stay the same. Where are you going to replace that income? And that really answers a lot of questions when you claim Social Security, because there’s a survivor benefit attachment to that. How do you use your TSP in retirement? Do you need life insurance or not? Need life insurance in retirement, the survivor needs analysis is really critical to help with all of those questions. 

JT Ferrin  22:44

I love it, and it shows exactly how much money is going to be left over and how much income is tied to each spouse. You know, one big misconception is that we have, in some scenarios, we have one spouse that had a full 30 year long career, and that maybe one spouse stays home with the kids, even the spouse to stay home with the kids has some income, right Social Security. There’s a spousal benefit there, and if that spouse were to pass away, there is a reduction in total income. So it’s important to look at how income changes if both spouses were to pass away, and make sure that there’s enough income to continue that standard of living.

23:20

And this comes to the question, how much should I leave to my beneficiary? Right? And this is where life insurance comes in. Most of our clients are like, hey, everything goes to the spouse both ways, but then when it comes to the kids, well, with retirees, do you need life insurance or not? I will say a lot of our clients don’t really need life insurance in retirement, but some of them do. And what I like about life insurance, this is a very simple question. It’s when you die, is there enough to take care of your spouse or not? Yes or No? If yes, you don’t need life insurance. If no, then you need life insurance, right? Then the question is, for how long and how much? And that’s just a math equation, which is, let’s simplify this, right? It’s just math at the end of the day. So gotta have that question, how much should I leave enough to maintain spouse’s lifestyle? That’s what you got to be looking at. Then another question comes in says, Okay, how much should you leave to your kids? You know, what if your spouse is taken care of, you can give some of your kids, but what if there’s a little bit left over to make the world a better place? Should that be something inside of your estate planning documents as well? How do you make the world a better place after you go, something to think about.

JT Ferrin  24:24

Yes, definitely. And we have a lot of different ways to go about that, whether it’s a trust or just provisions in your will. So lots of things to consider there. 

24:34

All right. Well, this podcast is all about taking action. I know JT and I like to get up on our soapbox talk about a lot of things that we see with clients, and we want to translate and relate to you guys so we can spread this message. So my first action item is going to be totally a selfish one, but I want to help transform so many lives. Share this podcast. Get this information out. Send it to your HR. Send it to other federal employees. Let’s share this message. Help grow. Help more federal employees be confident and competent in their retirement. 

JT Ferrin  25:02

Great. Next one. Review your TSP beneficiaries. We mentioned that years ago. Tsp lost those beneficiaries, and even if you put something on there, on those forms when you first were hired, there’s a chance that it might not be there anymore. So check out page five, if nothing’s there or sometimes there’s a warning label, almost what it looks like as a big exclamation point. Definitely review those. Make sure that you have beneficiaries and that they’re the beneficiaries that you want.

Micah Shilanski  25:30

I love it. Last Action item for you guys, get your documents done. They don’t to be super complex, right? What are your goals? That’s what you need to go with if you need help with this, to pick up the phone. Give us a call. Call someone that understands. not only your federal benefits, but the financial planning element of how to incorporate those together to make sure you’re getting the most out of your benefits, and your spouse, your survivors are taken care of. Thank you guys so much for joining us on this journey, JC, I really appreciate you being on the podcast, and until next time, happy planning.