#92: The Crucial Must-Do’s in Estate Planning

Micah: Welcome back to another amazing episode of the Plan Your Federal Retirement podcast. I’m your host, Micah Shilanski, and with me today, I got two great advisors, Christian Sakamoto and JT Ferrin, guesting on the pod again. Gentlemen, welcome. 

 

Christian: Hey Micah, how you doing? 

 

Micah: Well, we’re doing absolutely fantastic. And you know it’s a beautiful wintertime in Alaska. We can see that JT is crushing the winter background going on. We got to wait a huge way; they said it was a storm, but there’s only a couple feet of snow that came down within 24 hours.

JT:  And we’re like eight inches…

 

Micah: Depending on where you were.

 

Micah: You know, guys as we’re going through things right now, and it’s a busy time of year that we’re delivering lots of value to clients. One of the things we’re committed to this we’re doing an estate planning review for our clients. So in that estate planning review, kind of a couple of things have come up. One of the things I think that’s super important is going through and talking about the documents that everyone has to have now fair disclosure, we’re not attorneys. Yeah, I think I’d give great legal advice the Bar Association just disagrees with that. So apparently I can’t. So it’s not legal advice right. This is just our opinions from financial planning perspectives, but we can see a lot one on one with clients and a little bit differences instead of interest trying to throw any shade right here on estate planning attorneys but instead of a one-off transaction ricotta estate planning attorney, they prepare a document for once and you kind of move on to the next ten years your life. Gents, we get to work with these people all the time throughout their lives, and we get to see the implementation of how these documents work while you’re living. And then after you pass away. So there’s a couple of things here, JT, what are the top three documents that we think everyone should have who’s an adult 18 or over? Everyone needs to have at least these three documents. 

 

JT: Yeah, great question. It’s a Will, Durable power of attorney and Advanced Health Care Directive. Everyone should have those three documents. 

 

Micah: They are, right. They’re super important. So if we start breaking those down, right, we got the durable power of attorney, which is, dare I say probably the most powerful document you’re ever going to sign because you’re giving someone else the right to make any financial decision that you can make. That’s a pretty big deal. Then you get your Advanced Health Care Directive and that is for medical decisio,ns. If you’re unable to make your medical decision. So the example we give in Alaska, you’re driving home, you hit the moose on the way home and it doesn’t kill you, but you’re an ICU who is going to be able to make those medical decisions for you. Now you could be thinking Micah, I got this covered, I’m married, my wife is going to come in and make these decisions. Will is she or is she allowed to because just because you’re married, that doesn’t mean your spouse has the right to do certain things. That whole little HIPAA thing, right. Apparently there’s, you know, patient privacy and portability acts kind of thing out there. But the privacy part your spouse doesn’t have access to your medical records. So how do you allow them in those areas? When the durable power of attorney as the financial side there’s a lot of things your spouse can’t do because their name is not on it, your TSP account, your tax return, your bank accounts, right? They can’t access without you giving consent if you’re incapacitated. How do you give that consent? But Christian, what about the third one what is the will come into play? 

 

Christian: The will would be when you passed away, right? So you hit the moose on the way home you didn’t make it to the hospital right, you passed away. And this document is what will guide the probate process. This is going to be where all of the assets that you have now your will gets to dictate exactly where those assets are going. Now there’s an order of operations when it comes to death, and where your stuff goes. Things first transfer by title so think titling of a house, titling of a car, even titling on bank accounts. If you have joint title, automatically, the other person on that title would have that asset. Things then transfer by beneficiary and so then think of all the other accounts that you have, TSP. Right, your last LAS as an example, other retirement accounts that you have, you can name different beneficiaries life insurance, your Federal Employee Group Life Insurance has a beneficiary designation. Those people that you named on your beneficiary would then receive the money and the asset. Everything else that didn’t have a title or didn’t have a beneficiary designation would then be left to the will where it guides that probate process when you pass away. Again, where does your stuff go? Whether that’s physical assets, or other accounts that you just didn’t have a beneficiary designation listed for it? Right. So that will is a very, very important tool for that. 

Micah: It is it’s a super important tool that we got to have in place, right. So you get these three documents that you really need to have. In addition to those three documents we have to Christian admission beneficiaries, really important we get beneficiaries in place because guys, we see mistakes where these things happen, where beneficiaries don’t get updated. I’ve seen people that have been exes for 30 years, and they’re still a beneficiary on certain assets. And some people are thinking, Oh, well, it doesn’t really matter because I got a will and I fixed that in my will. So I never updated my beneficiary designation, but we got to understand how order of operation works. On the order of operations things first transfer when we pass away by title means how are things owned? My house is owned jointly with my wife and I so if I pass away, it automatically goes to her. It doesn’t matter what my will says it doesn’t matter what my beneficiary designation says it’s transfers by title after title is beneficiary designation. And so if I have a named beneficiary, that’s where it goes to, if there’s no title, if there’s no beneficiary, then it goes to the will and that’s where the will comes in place. Now, one of the things that sometimes we see and JT I know you have some experience with this is we’ll have clients that are maybe in a split up relationship, and you know, but they have minor kids with their accident, like alright, well, how do I take care of the minor kids and I’ve seen it more than one time, where at a client Colorado, or more than one time where it’s like, Well, I’m just gonna leave all my money to my ex spouse, then they’re gonna go ahead and take care of my kid. But JT let’s say you did that in that scenario. What happens in real life? 

 

JT: Yeah, I like what you said in the beginning there that if they plan is often just kind of a one off transaction with an estate planning lawyer, but we get the opportunity to meet with clients and review these documents review their situation throughout their life, and their things change. They get divorced, people pass away. Kids grow up, I know reminds me of a meeting I had just last week with a federal employee in California. You know, he’s divorced, but his, his ex wife is still listed as the beneficiary on his TSP so I brought that to his attention. He said, You know what, it’s fine. My wife’s raising our miner’s daughter. She’s 15. And so if she gets the money, it’s fine. She’s going to continue to raise our daughter. And I said, Okay, that’s fine for now. But nothing’s changed. What happens in five years? What happens? In 10 years? 20 years down the road? Are you okay with her being, let’s say 20 years old and inheriting a million dollars. The point is that things change as the estate plan changes, and that needs to be reviewed and updated regularly. 

 

Micah: I think it’s a solid point, right. And let’s kind of add to that. So if you had a million dollars in the TSP, and you leave it to your ex spouse, how’s it going to be taxed? Right? It’s going to be taxed at her at their rate. And she can’t really just turn on a give that later on when the kid is 18 to them, JT, just like you were talking about that is a lot of implications going on right there. So this is where knowing and understanding how these rules work is so so important. Christian, what other experience have you had working with other clients and kind of running into some snafu issues or some questions issues with regards to estate planning? 

 

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Christian: Yeah, biggest one would come what I would consider from blended families. So where one spouse was previously married and had children, another spouse was previously married, had children and then they were divorced. Now they remarried together having children from other marriages. The biggest question is how do we plan in that situation for not only the first spouse to die, but then the second spouse to die whose sets of kids are going to receive the money and how do we make it so that we can allow for the entirety of the family to receive the money that is deserved? And you know, one of those tools we’ve talked about in the past is using a trust. And we’ve seen it go the opposite direction where we don’t use a trust where those blended families in this example, depending on who’s which spouse passes away first, one whole side of a family could unintentionally be disinherited. Again, thinking as an example, you know, Bob and Sue all our clients names Bob and Sue. Say, God forbid Bob passed away. He said, I want every dollar to go to my wife, Sue, so every dollar goes to his wife, Sue, well, in Sue’s will it says every thing that I want to give goes to my children, and then when Sue passes away, it goes to her children. But what we forgot to account for is Bob’s kids when he was alive and he had, you know, those kids so the trust can be a helpful tool in that regard. I’ve just seen it go south to many times where we’re we’re just not planning in situations where there’s blended families. 

 

Micah: Yeah, that’s really good points, right about you know, making sure that we have things structured properly. When my kid turns 18. You know, do I really want them to get that money, etc. No, Christian it was funny. I was starting to fly today. We’re working through some cashflow issues and you just said Bob and Sue. But I said well, hypothetically speaking not about you guys. And the clients I just said, Wait, are you gonna give up Bob and Sue story where at the end of the day, we’re the Bob and Sue that this is affecting? It’s like, well, yes, this is aBbob and Sue story and you you may be Bob and Sue. So that is great. But yeah, these are real life things that we run across. And so let’s get into like, Who do we name on these documents? Because these it’s not enough just to have them. We got to be pretty intentional about this. So I’ll take the power of attorney. Christian wants to take the healthcare directive and JT could do the will. So on the power of attorney, the way this is set up again, it’s the most powerful document you are ever going to sign because it’s a sign because it affects your life, your cash flow while you’re still living. So you want to name somebody here who you would give a blank check to, and I’m gonna call it the pillow test. And you gotta lay down and sleep like a baby that night, not worry about it whatsoever, because you trust that person. That’s the level that you should go to with this. Now. The reality is sometimes we’re in a situation where we don’t have someone like that. Okay, does that mean you don’t need a power of attorney? Now you still need one but now we might need a limited durable power of attorney that instead of giving them full access, we’re going to be a lot more limiting and what those people to get do. So we can have a little bit more protections. And on all these documents, we really like 2d, right? Gotta have a primary and you got to have a backup man, if you can have a tertiary if you’re a third person, that’d be fantastic In there, but we at least got to be too deep on all of these documents. For sure. Christian, what about the Advanced Health Care Directive?

 

Christian: I would say a similar approach to the power of attorney right. The Health Care Directive, you make those health related decisions. Prior to the event happening, right? Do we want artificial nutrition or not? Do we want to stay plugged in or not? And that document you get you get to make those tough decisions to where you don’t have to let your loved ones make those tough decisions for you. So if you’re married, generally you would want your spouse to probably be the primary there doesn’t always look like that. That’s what we see. If you’re not married. You would then want to really have someone that is close to you that gets to oversee the decision there and not that they get the power to change it. But again, just that they’re able to see it come to fruition. And I think that that’s the biggest thing is making sure that there’s somebody close to you somebody that you trust on the document for the health care directive. 

 

Micah: Yeah, those are really good things right. So many trust. Again, this is a couple of deep inside of there, and these documents don’t have to be all the same people. It’s okay to have different people. Okay, joke with one client is like, well, one of my kids is is really good with finances. So I want them in there, but man, they would be too quick to pull the plug. I want to put my daughter in here for the health care directive. Right? And that was exactly what the client said. So you know, it’s okay to have different people serving in these roles. JT or the will, how was that will going to come into effect and who are we going to name on there? 

 

JT: Yeah, so kind of going back to a Christian said earlier, when we pass away things transfer three different ways. First, they transfer by title, then they transfer by beneficiary and then they go to probate. The will is the directions for probate. So that’s kind of the catch all it’s everything else, right? Who you named as the executor of the estate. That’s a pretty big job. They have a lot to do. And so you’re going to want to name somebody that’s responsible, somebody that you trust and somebody that’s up for the task, right? And then I like the idea of naming a secondary and a tertiary in case that primary person that you named, isn’t up for the task. And again, things change. Maybe they were up for the task 20 years ago when you named them, but maybe they’re not now.

 

Micah: I really like those things. Those comments that are there, right. So the other document that we can kind of add to this one as well as a trust. Now, I’m a huge trust fan. But just because I’m a fan of it doesn’t mean everybody needs a trust. A trust is an optional document that’s out there. And what I like about it, is that it gives me control from the grave. A trust can do two things for others, many different types of trusts. We’re only talking about revocable living trust for estate planning reasons, right. But a trust can do a couple of things that I cannot do inside of a will. And that’s really number one is privacy. It’s a private document. Probate is a public document right. Probate is a public process that goes through your will becomes a public document where everybody gets to see it, everyone can review it, etc. Whereas a trust is a private documents, I get a little bit more privacy. So I like that. Number two, I get control from the grave. My kids may not like that as much but it’s my money not theirs. So I got two young kids and so I want to be controlling from the grave and the way I look at it. If I wasn’t there, because I passed away, how can I guide them? Right? So if I was there, how would I be guiding them? What would I be encouraging them to do? And then I take that image and I kind of put that into the trust and say hey, here are the rules. Here are the guidelines that I want my kids to do and I carry a stick in this dollar signs on both. If you listen, you get money if you don’t listen, you don’t get money, right, but I can kind of guide people along that trust route. What are some other areas that you guys have seen people wanting to use trust for? 

 

Christian: Just yesterday we’re talking about owning land, and in some states like Alaska, you can name a beneficiary and transfer on death on your primary residence. But what about other properties? What about other states where you can’t name a beneficiary, owning the land in the trust gives you that control of who should receive that land when you pass away. And I think I already gave the example with that blended family right Bob and Sue and that’s a very, very good example of needing a trust in that case. And I would strongly, strongly emphasize that that’s super important. It’s very much a need to make sure that the trust is there in that situation. And to your point, Micah, if you have minor children, right, could be a huge benefit. Having a trust where you have that carrot and stick where you are allowing that control and parenting from the grave to be able to make have your children make those good decisions. Should God forbid you are not to be around. 

Micah: Yeah, all really good things. All right gentlemen. Well, this podcast is always about death and dying. Sorry about that. But we want to go ahead and make sure that we’re talking about some action items that are there for our listeners. What I meant to do this at the beginning of the podcast, but a special shout out to one of our listeners, Paul in Tennessee, man really appreciate you listening so intently to these podcasts. Paul, in the great questions that you asked Christian I like those but since he’s on the podcast, I can’t give you a secret question because it’s gonna hear. So I’m gonna have to put that in the future podcast for you. But with that in mind, let’s kind of transition to some action items for us. And I’m going to kick it off with something that we didn’t talk about, but something I love to do with our clients, and that’s create a flowchart of their assets. Now if everything goes to each other, everything goes through kids, man, that’s pretty simple. But if it’s anything more complex than that, you get all these legal documents, and it’s super easy to forget what you wrote or forget what it looks like in there. Create a one page flowchart of who’s in charge. And where does your money go when you pass away? JT, what’s another action item for our listeners? 

 

JT: Now, let’s say it’s the end of the year here is always a good time to review or update your estate planning documents. Like I said, things change. A lot of times people just put this on autopilot. They wrote the documents 10, 20 years ago. So get back in those documents review what they say review who those primary representatives are to the executors of the estate.

 

Micah: I love it. Christian, what about on your end? What’s something else that our listeners can do this week to really help improve their their estate planning process? 

 

Christian: Yeah, to the last action I’m just related to estate planning. If we don’t have these documents in place, right, we got to we got to go get them. Right. We got to get them done, even if it’s legalzoom.com or another equivalent version online where we’re not actually hiring an attorney. Just kind of make sure that that document is there, and they say least the first three we talked about the will, the power of attorney, the health care directive. Using a state planning attorney could be very useful and very helpful, but it’s not a need. If we don’t have those documents, we at least need a placeholder now is what I would recommend. 

 

Micah: I love it such great points. Gentlemen, thank you so much again for joining me on the podcast. Always a pleasure to have you and listeners until next time, happy planning!