#122 Estate Planning Myths and Facts: What Federal Employees Must Know

Micah Shilanski  00:00

Welcome back to the Plan Your Federal Retirement podcast. I’m your host, Micah Shilanski, and with me to pick up on our previous conversation, talking about survivor benefits. Now we’re going to pivot into mistakes that we see clients and individuals make from our seat at the financial planning table. We’re going to be jumping into the estate planning side, which is so often overlooked, and just like on the previous podcast, we invited back Christian Sakamoto, a great financial advisor up in Washington, join us. Christian, thanks for being on the pod again. 

Christian Sakamoto  00:28

Yeah, of course, excited to be here today, and I know last time we were talking about the survivor benefit side, so I’m excited to be talking about estate planning side, because I know those two are pretty close, and I know there’s a few mistakes that we see just working through the day to day with clients, and so I’m excited to go over it today. Christian, We always start with death and dying, we always start with estate planning, why? Well, it is super duper important to make sure that it’s done, and oftentimes we’re meeting with clients that these documents are done, but it’s been a long time since they’ve reviewed them, or what have you, but it’s super important that we focus on that first, because it really is the foundation of the financial plan. We can talk about tax planning, we can talk about strategic asset allocation, we can talk about some of these fun things, but I think those come later. Their foundation of that financial plan is going to be really centered around estate planning. Wouldn’t you agree?

Micah Shilanski  00:48

Now, as you know, we have our process of success when we’re working with clients, right? And there’s a certain order of operations that you need to go through when you’re building a financial plan to get the best outcome for our clients, so what’s the best outcome? Well, spoiler alert, it’s not what Christian and I want, it’s all based on our clients goals, right? What do you want, what do you want to achieve? But here’s some common things, right? They want financial security, they want financial independence, I really should say, right? So they can choose to retire when they want to, they want the cash flow to do the things they want to do, they want to make sure if they die, their loved ones are taken care of they want to plan for some unforeseen events, like, what do we do in these other situations, whether it’s a premature death, whether it’s some type of dementia, alzheimer’s Long Term Care planning some big medical event, right? They like to have these different plans in place, and so we created this process of success. Then when we go through this, it comes out with a really good outcome with our clients, but Christian what’s the first thing in that process of success, we always start with? Christian, I love that. I’d also add to it. This is the one thing that there’s maybe a couple others, but this is the big thing. There’s no undo button for right? And so like, if we don’t get this done and you die. The fixing this post mortem is really challenging, if not impossible. My time machine is still broke, we’re still working on it right, so there’s no way we can go back and fix these things, so this is one of the first reasons we start in our process of success with, as you said, death and dying is estate planning, we have to get these things done correctly so that when, not if, when we pass away, things happen the way we want them, and I would say Christian, a big mistake in this one is, and this isn’t even our top three boy we should add to that one, but I think the big mistake is a lot of people think they know how the estate planning process works, and the problem that you’re doing is you’re applying logic to it, and this is a bit of a government process, so forgive me with this one, right? It doesn’t always fit that side of it. There’s a bunch of legality stuff that comes in here that we need to be careful in what we think will happen versus what actually happens at the end of the day. 

Christian Sakamoto  03:37

100%, and I like what you had said, like there’s no undo button after you’ve passed, and so these documents guide that process, whether it’s financial related, whether it’s health related, guiding where your stuff goes, right? Those are all important things that if we just take a little bit of time and just we’re a little bit intentional about this, then we can cover that.

Micah Shilanski  03:59

100%. All right, so let’s kind of dive into this. Christian, there’s these top three mistakes that we see. At first it was like, what are the mistakes, then it was like, you know, got a little expansive and kind of to limit them down to kind of be some actionable items for our listeners, but I’m going to kick it off and say the first mistake that we see, I should say some disclosures in here. Christian and I are not attorneys, this is not illegal advice, all those other fun disclosures, please insert here. This is about our perspective, working with federal employers preparing to retire, right? What are things we see that then need to get corrected? All right, that aside, that would see the first mistake that we see Christian is getting the wrong documents.

Christian Sakamoto  04:36

Right, and I think there’s some assumptions there when it comes to the documents that we need to just kind of check the box, right? And everybody’s heard of a will, okay, check the box, I’ve got a will, maybe it’s a power of attorney, but there’s some others there, and it could be state specific that you really want to make sure, especially on the health side, if we’re thinking about an Advanced Health Care Directive, there’s a difference between the documents that you need to have and some of the documents that you might want to have, and maybe that’d be a revocable living trust, and even under that, there might be cases in your family where we have to include maybe a special needs provision or spend thrift provisions, and so it can get really detailed there.

Micah Shilanski  05:17

Yeah, 100%, and so sometimes I’m going to put inside of here Christian the wrong documents is sometimes clients will say, and by the way, when we bring this up as examples, if you think we’re talking about your particular case, I promise we’re not. We’ve seen it a bunch of other times as well, and this isn’t then as anything disparaging, this is a learning process to go through. Who have clients come and says, Micah, everything’s taken care of, I got a power of attorney when I die, they’ll just take care of everything, because I have a power of attorney in place, and that’s a great sentiment, right? But the little piece of detail that you’re missing is power of attorneys expire upon death, potentially in disability if you don’t have the right one set up, so they expire upon death, so this power you’ve given to someone else, they can’t legally do. Christian, I’m also going to add to this one, saying, Micah, it’s okay, my son has my bank account login information, anything happens to me, he’ll just log on to my bank and he’ll take care of everything, which, while he might be able to do that legally, pretty sure that’s against the law. That’s called fraud, right? You’re impersonating somebody else logging onto their bank accounts, especially when they have passed away, this is a no no, so while they have the ability to do that, doesn’t mean they have the legal right to do that, and so getting these documents in place, it’s dispelling a little bit of what do we think should happen, and what does the legal system say, and how do we need to work through that.

Christian Sakamoto  06:35

Right, there’s also some really helpful places online that you can get access to to put and produce these documents if we don’t want to hire an attorney, because hiring an attorney is an option, and sometimes it’s the best option, but in other cases, we can go online to, you know, will.com, legal zoom, maybe we go, you know, the Suze Orman has her own deal there, jag, they also offer those kind of the free services for getting those legal documents, whether it’s online or, you know, through some sort of a program and you were sharing with me earlier, thrifty is good, cheap is not always good, right? So if we’re trying to save a buck here and there just to get the box checked that we have these estate planning documents, but then we don’t go through and review them to make sure they’re right for our situation, we might be doing ourselves a disservice, it might be even worse. 

Micah Shilanski  07:30

Yeah, so an example of this, right? Let’s say I have a toolbox, and in that toolbox, all I have is a flathead screwdriver. You know what, I could probably get away with a lot with a flathead I can put holes in walls, I can unscrew most things, I can use it as a pry bar, but I can’t do everything, and the things it can do it can’t do always well, right? So we got to be thinking about like, how big of a toolbox do we need to deal with an estate planning issue? And sometimes we think that our situation isn’t that complex, then as you start walking through it, there’s a fair moving parts, so here’s my kind of rule of thumb. If you have a super simple, I love you situation, no kids involved, or especially, no minor children involved, and your marriage is sweet, if I die, everything goes to you, if you die, everything goes to me, if not split between you know, all of our siblings, man, maybe jag is a great option for you, or legal zoom could be a good option for you, if it’s super, super simple, if it’s anything more complex than that, that’s when I start getting these yellow flags, red flags start coming up in my mind and like, ooh, maybe we need to kind of talk about this and work through some of the options. Now, before you go and hire an attorney to do this, you got to be really careful. I know Christian one of the things that we run into several times is that we’ll run across a client that their friend is a is an attorney, or a family member is an attorney, and we ask them what type of law they practice, and it’s, I don’t know, it’s family law, it’s divorce planning, it’s taxes or whatever, but they’re like, oh, I can also do an estate planning document, it’s not a problem, they’re not that complicated, and then they draft the documents, and when we read them, we’re like, okay, well, you didn’t make this very complicated, but at the end of the day, it doesn’t achieve the client’s goals. Here’s an easy example of how this works. This is what I call it’s the where we say the last to die a lottery, right? I see this happen a lot with blended families, is they go hire an attorney, and it’s a blended family, husband and wife, they each have their own kids from separate relationships, and they say, hey, if I die, I want everything to go to my spouse, but then if she’s dead, then I wear everything to go to my kids, and she goes, well, it’s the same thing that I want, and so the attorney says, great, that’s what we’re going to put together. What they’ve created is a last to die lottery. Husband passes away, we always pick on the guys first, everything goes to the wife. Now the wife owns all of the assets. The wife now dies, everything goes to her kids. You just disinherited half of the family tree, and that wasn’t the intent, but that’s what you asked for, so a lot of times when you do people that can also do estate planning, they’re a little bit more order takers. They will do exactly what you ask, but if you do not ask the right things, you may not get the right outcome.

Christian Sakamoto  09:59

Right, and we had another client that their their parent, their living parent, was aging, right? And they had gone to the attorney and they said, hey, I want to move my assets to me and get them out of that parent’s name, and the attorney just did it, they were the order taker, they did what the client asked them to do, and unfortunately, what happened was that the parent died just several months later and missed out on the step up or adjustment in basis that would have saved that client 1000s and 1000s of dollars in taxes, right? Hundreds of 1000s of dollars in taxes. Yeah. So we have to be very careful, too with the attorney that we’re working with that they’re not just doing what we tell them to, especially if we you know, could admit we know a lot, but there’s things that we don’t know, so can you help us out here, and can you give us some of that pointed advice tailored to our specific situation? 

Micah Shilanski  10:56

Did you know that OPM has over a 20% error rate when processing retirement applications? Now, I’m not trying to throw them under the bus at all. There’s a lot of moving parts that come into retirement from your records. So what your HR has, what gets sent to OPM, and all of the process in between. But what I hate to see happen is when federal employees get caught up in little things that could have been avoided, and that’s why we created a free guide to help guide you through one of the biggest mistakes we see in calculating retirement pension, and that is figuring out what your RSCD is, your retirement service computation date. Now I think this is such a big area that that causes so much confusion, because it seems so simple. It’s Micah, when did I start working for the government, and when am I going to retire? And boom, you have how long I’ve worked for the government. If only it was that simple. There’s so many moving pieces to this. You need to know how much time you have that counts towards retirement. More importantly, you need to know how to check to make sure your HR, your agency, OPM, has that same information so you get the most out of your benefits. In order to figure out how to do that when download our free guide today at planyourfederal retirement.com/verifyrscd that again, is planyourfederalretirement.com/verifyrscd. That way you can get the facts about how to calculate your rscd for retirement and avoid one of the biggest mistakes that hamper federal employees retire. It till next time. Happy planning.  You know, Christian, I’m going to add to this too and forgive us, you know, listeners are piling on, right? But this really comes from a love capacity. We want you to have the right things, and these are definitely mistakes that we see as meeting with a new client coming in, and they have a bunch of kids, which is beautiful, and most of them are minors. Two of them are kind of adults, and so said, you know, we changed the beneficiary to our eldest daughter. She’s going to inherit everything, and we just told her, take care of the rest of the kids, and so I start talking a little bit more, and I got a little bit of pushback. Says, whoa, our daughter is great, she will do exactly what I asked, you know, and she’s going to make sure these kids are taken care of, and the questions I was asking, unfortunately, weren’t very good, because the client was starting to get defensive, and so I said, you know, I gotta pause right here and apologize for my line of questioning. This is nothing against your daughter. I’m going after the IRS tax code. All of your money, the vast majority of your money, is in retirement accounts, if you leave them all to your daughter, your daughter has to pay taxes on all of this money, then she gives the money out to the four other siblings. This may not be the best scenario for you and I walk through a quick little tax example. They’re like, holy crap, no one ever said this before, they had worked with an estate planning attorney, they had worked with these other things, they hadn’t looked at it from a tax perspective, which is so, so important, an income tax perspective, right? So when you’re doing this, sometimes we set something up in a certain way, and it’s not talking bad about your kids or anything else like that, it’s like, hey, we gotta deal with the tax code, right? It’s out there, and we don’t want your biggest beneficiary to be the IRS. 

Christian Sakamoto  13:59

Well, I would wrap up the FERS myth with, you know, it being the wrong document is just not finishing the document right, so we’ve got clients that say, yep, I got it done, we look at the document that will the healthcare directive, the advanced healthcare directive, or the durable power of attorney, and it still says draft or it hasn’t been signed or hasn’t been notarized, so gotta double check that the document was actually notarized, signed, witnessed, everything’s good to go there or saying I’ve reviewed them, it’s been recent that I’ve got these documents, and then we look back and it’s 12 years ago that the documents were put together, and just time has just flown since then, right? Everybody’s busy, so just making sure that the documents got done? 

Micah Shilanski  14:42

Well, I guess I’m guilty of that one, right in my mind, I’m like, oh, we just updated these right? Then I think back about it and says, holy crap, this was years ago that we had ours updated, so that’s one of the reasons, every two years this needs to be pulled out, so we talked to our clients about every two years we got to pull these documents out and review them, and if they’re good, sweet, get them back up the shelf and they’re good to go. If they’re not, we have to make a plan in order to fix it, not a wish, not a hope, an actual plan to get these documents addressed. I could spend all day Christian on this first mistake, all right, maybe we should move on, for the sake of time, to the second mistake that we really see, which is not distributing the documents.

Christian Sakamoto  15:21

Right, right, so last week, we were talking about the in the event where someone passes away, and well before they pass away, they put their documents in a safety deposit box, right? And then it’s locked, and how that might not be the best idea. If we don’t know where the key is, right, we got to know where these documents are, so we only make sure that the the documents are actually being distributed to our loved ones, to our family members while we’re alive. We even had a client who she put them in the fridge thinking, hey, this is a good idea, because everybody’s going to check the fridge if I’m gone and there will be my documents there, so it’s a really good idea. We got to make sure that we actually distribute these documents and not just hidden away. 

Micah Shilanski  16:09

And this is also I love that Christian we would distribute these documents, right? We need to talk about it with the kids, with the beneficiaries, with the trustees, with the personal representative, right? If you don’t know what those terms are, it’s basically who’s getting the money and who’s in charge of the money, right? You need to talk with them while you’re alive, and so what I love to see is for them to read the document. If you go with a trust, we’re not going to talk about all this in length, it’s way too many pages long. There’s only, like, five pages that are really important, right? The rest is really boilerplate, but there’s probably five, maybe 10 pages and some trust that they really need to look at and say, hey, do they understand what your intentions are, do they understand what their wishes are? If you are disproportionately giving money to your children, let me say this another way. When mom and dad die Kids, look at how much did I get in a percentage means how much was I loved, right? You could say, Micah, that’s not the case at all, I’m just telling you, I deal with a lot of beneficiaries, and this is the case, and what we see is, if one kid got 60% and one kid got 40% I was loved less. Now you could say their financial situations are different, you’re helping them out in different ways, all, etc, it’s I was loved less, and this creates a lot of family turmoil. Now I’m not saying treat every single kid equally, that is definitely not the right answer, but it’s a communication question, if it’s going to be disproportionate in any particular way, I love to explain why. Hey, sweetie, remember, we already paid off your student loans, we helped with other things, we hadn’t helped your other siblings, this is the reason they’re getting more. Hey, he’s going to be the trustee, or she’s going to be the trustee, so they get an extra one percentage point for dealing with the hassle of being the trustee, right? But we have this little explanation that’s there, and I gotta say, sitting from the other side of the table, right? You have already passed away. I’m dealing with your heirs and your beneficiaries that I love you letter, that communication that they got from you, that explains why, not in this cold legalese document, but in the the the parents words, and this helps so much people understand.

Christian Sakamoto  18:05

100%, and I recommended that recently, just like a couple weeks ago, when we were working with our clients that were getting their estate planning documents done, they had three kids, and we were going through, okay, who? Who’s gonna get what? And it was slightly different for each kid, right? And I said, just make sure that you have a family meeting this holiday season, and as we’re getting these documents wrapped up to do exactly what you just said and discuss the why behind it, and having it be discussed now, instead of something that is, again, like, why is it happening that I’m only getting 30 and my sister’s getting 40, and then the other sisters getting the other percentage, you just have to have that conversation now, and it really alleviates quite a bit, especially when we’re of sound mind now, and not in a situation where we might be experiencing diminished capacity, which is another thing that we see, unfortunately happen to clients, is what does that look like for diminished capacity, and what would we do in that situation?

Micah Shilanski  19:04

And this is really good, these are hard plans, right? 100% diminished capacity is very hard to plan for, because nobody wants to lose control. No one’s willing to give this thing up. When is too much loss, right? When are these things happen, but the important thing is to have a plan to involve your loved ones, the other people that it affects that says, hey, if something happens to me, what plan would I like to see in place? And what I don’t like to see is a lot of people transition this burden onto their kids or onto somebody else that says, well, they know what I want, they’ll figure it out, they’ll make good decisions. The problem is that puts a heck of a burden on the kids in order to fulfill that so that could be true, they may want it, put it in writing. Let’s be clear, let’s have that conversation so they know what it’s like. There’s a lot of caregiver guilt out there that says, I don’t want to put mom and dad boy, my wife and I were talking about this, right? I don’t want to put my mom and dad inside of a nursing home. That doesn’t sound like a good plan to me, okay what is that? No, they don’t need the care, right? All of these things are they’re in good health, they’re doing all that fun stuff, but it’s your conversations that we have now, I’ve made it clear to my children, Christian, I would highly recommend you do the same, I’m taking care of my kids at least for the first 18 years of their life. They’re responsible for taking care of me for another 18 years yet to be determined in the future, I think this is fair, no? Could be a good option. Solid advice, All right, we’re gonna put that one aside, this little joke. What we’re talking like my parents, like, if something happens, I don’t want to put them in a nursing home, okay, what does that look like, they move in with us, do we bring in a caregiver for them somewhere else, right? This changes a whole lot of family dynamics, and I’ll tell you what, a lot of caregivers, family caregivers, they have guilt, they don’t want anyone else to take care of them, they want to be the person. The problem is you burn yourself out, and you you get health issues, and you’re not really being a great caregiver because you’re burnt out, so we need to have these communications before it’s needed. It’s okay to bring an outside help, it’s okay to use this money to make sure these things are taken care of, etc, because there’s a lot of guilt that comes when I said that enough, there’s a lot of that emotional guilt that comes with kids when they have to deal with this, it’s tough,

Christian Sakamoto  21:08

And you can have plan A today, but then life throws a curveball, or you get through plan A and you realize, hey, maybe this isn’t the best plan, so you have to adapt to the situation as things change, but I like that, we just need to have that conversation now to know, okay, well, what is Plan A? And if things don’t go so well, maybe we start thinking about Plan B and start thinking about that now.

Micah Shilanski  21:28

Amen, Christian, the third mistake that we see is not updating these documents, right? And this is such a big enough thing, I think it deserves its own category. I know we’re talking about this, right? It could really be inside of, you know, not distributing the documents as well, but really, this is its own category of things, which is saying, hey, when we talked about this a little bit before, how often are you reviewing these? How often are you bringing these up to your loved ones as well, just because you had a conversation with them 20 years ago? That doesn’t count anymore. One your wishes have probably changed in 20 years. We need to pull those documents back up. You know, little sneak peek. If you come in and meet with myself, or you meet with Christian or one of other advisors on our team, one of the things we’re going to do is we’re going to ask you for your state funding documents, and we’re going to take them, we’re going to read them, and we’re going to put them to the side, and then we’re going to ask you to tell us what they say, um, says, God forbid if something happens to you, what do you want to see take place? Now the answer we get all the time is the discretion what says, well, it’s right there in my will. I’ve already said what I want, and they’re kind of pointing the documents or trying to reach for him, and I’m like, no, that’s like, I promise I’ve read them, I want you to tell me what you would like today, and so often they repeat, or excuse me, they tell me what they want. Christians is that normally match what the documents say?

Christian Sakamoto  22:38

Sometimes yes and sometimes no, so we have that clarification that, no Bob, what you said is not actually how the documents are written, right? And if you want that to be the case today, I’m glad we reviewed this, because we can make that change, but as they currently are, it might not be the case.

Micah Shilanski  22:57

Right, and this is a great time where we get the attorney of all right, it says, hey, our opinion from financial planners, not legally, right, I think it says something different, awesome, let’s bring the attorney in and they can, they can, you know, settle the dispute, what does it actually say? But this is the power of having a third party person read these documents, whether it’s your trustee, whether it’s your personal representative, your executor, who’s going to be in control after you’ve passed away, they should read the documents while you’re alive, they should ask questions to make sure that you can understand, and you need somebody else, your financial advisor, your CPA, something of that nature, not your attorney, right? You need somebody the attorney created the work, you need somebody to check the work right, and to say, hey, does this all mash and make sense?

Christian Sakamoto  23:38

 100%, exactly, and again, having worked with lots of clients that said, oh yeah, I just did this, and then it’s a decade ago that they actually did them, and just saying how time, how time flew, but then in that 10 year time frame, they didn’t review it a single time. That’s the big mistake too, is just making sure we’re reviewing them, are we reviewing them every month Micah? Probably not, probably don’t need a review every month, maybe once a year, maybe every two years. 

Micah Shilanski  24:05

Like two years, right on time, or any big life change, right, that I would add that every two years, or any big life change, what’s a life change, a birth, a death, job change, retirement, moving right, anything of that nature, that should circle these documents back up. Now, why does that matter? Oh, well, maybe the person that died is the person you put in charge. Okay, maybe we should think about this. I’m moving from Alaska to Texas. Different laws, Alaska to California. Way, different laws, right? We need to probably revamp these documents a little bit based on the state that you’re in, so any big life change, you got to pull these out and review them. Great idea. You know, Christian, I love being on this side. I was recently taking a class, and they’re saying all the stuff you had to do on a frequent basis, and I was getting a little bit overwhelmed, because I’m like, holy crap, all this other stuff I have to add to my list to continually review, so it’s really great to be in back in my wheelhouse, and being able to tell our listeners, this is stuff you need to review, but it is really important guys, because if we pass away with the wrong documents, the IRS could be a really large beneficiary. You could give money to people you didn’t intend to, and the court system is full of cases where people’s intent did not happen. It was what was written on these documents. All right, Christian, we’ll jump off our soapbox. You know, this podcast is all about action items again, you know our goal? Our goal is help transform another 1 million federal employees lives with great information, so make sure you’re sharing this information out there, and Christian, what other action items do we have for our listeners?

Christian Sakamoto  25:31

 Well, just like what we were talking about, make sure you’re reviewing them. If you have these documents in place already, review them if you haven’t in a while. Also if you don’t have them, we got to set a date to get those done, we got to make sure that these documents actually get done, and they’re not just on the to do list once again, moving on to the next year and next to the year and next year.

Micah Shilanski  25:55

Yeah, absolutely, and then, you know, you already said, set the date, which is the second one, which is great. The other one I would add inside of there is a death worth report. I like to see not a net worth report, net worth is all of your assets minus your liabilities, what do you own versus what do you owe? Death worth is going to include life insurance proceeds. This catches people by surprise so often, when I die, how much money really goes to my kids? And then I don’t like percentages Christian you know this, I like dollar amounts, right? When we list our beneficiaries, we give a beneficial report to our clients every couple years, and we put the names of the beneficiary and the dollar amounts they are going to inherit, because also, now it’s okay if Timmy gets 30%, $1.2 million oh, I do not know if Timmy should be getting $1.2 million right? Maybe that’s a little too much money, so the dollar amount is really important.

Christian Sakamoto  26:39

Definitely changes the perspective on it. 

Micah Shilanski  26:41

Yeah, awesome. So again, share this podcast, get this information out there, we love that you guys stay tuned listening. I think our next episode, we’re gonna be jumping into the TSP withdrawals, because there’s so many important things we have to know about that. Christian thank you for joining us, and until next time, Happy Planning!