Do you have a plan put in place for who will inherit your assets after your demise? Many people are solely focused on increasing their assets whilst they are still alive, but often forget about securing who it will all go to when they are gone. In this episode, Micah and Tammy will be discussing the documents that every person over the age of 18 should absolutely have, as well as several documents that are optional but will improve your estate planning in the long run.
Listen in as they discuss the importance of having an advanced health care directive and what a durable power of attorney is. You will learn the benefit of naming a beneficiary when dispersing your assets, why you must update your documents with every move you make, and what a trust fund is. Don’t wait until it is too late, start planning now.
What We Cover:
- The importance of updating your documents every time you move.
- Several documents you must have for estate planning.
- The importance of an advanced health care directive.
- What a trust is and why it’s beneficial.
- What a durable power of attorney is.
- What the federal estate tax limit is.
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Full Episode Transcript
With Your Hosts
Micah Shilanski and Tammy Flanagan
You can spend. You can save. What is the right thing to do? Federal benefits, great savings plans too. You can save your own way, with help from Micah and Tammy. You can save your own way. Save your own way.
Micah Shilanski: Welcome back to the Plan Your Federal Retirement Podcast. I’m your host Micah Shilanski. And with me as, usual, is the amazing Tammy Flanagan. Tammy, how are you doing, ma’am?
Tammy Flanagan: I’m good Micah. I’m kind of looking forward to today. This is a topic that’s kind of out of my wheelhouse, but I know enough to be dangerous, and I know enough to ask good questions. So looking forward to not only sharing information, but learning some stuff from you as well, as I always do.
Micah Shilanski: Oh, likewise. I always learn something chatting with you. So today it should hopefully be really good. And if you didn’t catch it by the title, we are going to talk about something that all of us need to do, and rarely we want to get around to it. And that’s estate planning. I know, don’t hang up just yet. Keep listening. I promise, we’ll get to some fun things about TSP. Maybe have a little bit of fun during the process. But Tammy, this is one of the things that I’d love to know when you’re meeting with people and you’re doing classes. But when I’m meeting with people, one-on-one, this is something the vast majority of people have not got around to doing, or they did something 30 or 40 years ago and don’t think it’s valid or current anymore. And things are definitely not in line. They don’t have their beneficiaries outlined. They don’t have their documents in place. And God forbid, if something happens to them, they’re really creating a mess for someone else to clean up.
Tammy Flanagan: Yeah, I agree, Micah. I think that it’s something none of us really want to get to and we put it on our to-do list and we’re just waiting for the right time, that never seems to come around. And I know one mistake people make, and we just about almost made this mistake when we moved. When you leave one state, and live in retirement in another, even though you have all those documents in place you were good and you did all of that, when you move, the laws change. You’re under state law for estate planning in most cases. So you do have to have your documents not necessarily done over, but updated to make sure they conform to the estate planning laws of the state, where you’re now living, maybe going to die in that state.
Micah Shilanski: Yeah. So a couple of quick disclosures out here, as usual, we are not attorneys nor do we play them on TV, only play them on podcasts. Just kidding. All right. So we are not giving you any legal advice, Tammy and I are going to be chatting about things from our own personal experience, from what we see as a financial planner. From what Tammy sees as a federal benefits expert and things that we need to be thinking about. So take this information, then go talk to someone who’s competent in your local areas. Tammy just said, the laws are different in every state. And I live in Alaska, which is a great state, has some wonderful estate planning laws. There’s some other states like California and New York, et cetera, that have some very particular estate planning laws that you really got to be careful of, if you live in those areas. So again, know your state, really important.
Tammy Flanagan: Yep. And in some states can make it very difficult on the beneficiaries. So when you’re thinking of moving in retirement, everybody’s looking at the weather and the traffic and maybe even, does my retirement benefit get taxed? But also look at the estate planning rules to see how it is for people who die in that state. Because the families can end up with some real consequences of that. Not necessarily to make you not want to move there, but just to be aware of.
Micah Shilanski: Absolutely. Okay. So let’s talk about a couple of different things, Tammy. There’s some documents that, in my opinion, every single person over the age of 18 needs to have, and this is going to be per person. Then we’re going to talk about some optional documents that you can have. Maybe you don’t have to have, maybe there’s some scenarios that makes a lot of sense. I’m going to share with you a little bit of what we have set up when we talk about our clients with. Does that sound good?
Tammy Flanagan: Yeah, that sounds good. I’d like to guess at some of those documents, I think I might know some of them.
Micah Shilanski: Oh, do you want to go first then?
Tammy Flanagan: No. Let me guess. You can tell me if I’m right or wrong, and the audience can play along with me. Because I bet you, they’re coming up with their own guesses. So how many documents are there?
Micah Shilanski: There needs to be at least three that you have for estate planning. Yes.
Tammy Flanagan: Okay. All right. Number one, a living will.
Micah Shilanski: A will. You got it. Yes ma’am.
Tammy Flanagan: But how about a living will like a medical directive, I think is what I’m thinking of.
Micah Shilanski: For medical directive, they changed that terminology in most states. I don’t think they use living will. It’s called an advanced healthcare directive.
Tammy Flanagan: There we go. Okay, so I got two then.
Micah Shilanski: Yes. So that one is really important. There you go. I got a bonus one in there.
Tammy Flanagan: And how about a power of attorney? A financial power of attorney.
Micah Shilanski: Perfect. I’m going to throw an extra word on there, just to make it fancy. I’m going to call it a durable power of attorney, but yes ma’am.
Tammy Flanagan: Okay. It’s all coming back to me now. Okay good. Well then, I’m on my way. I’m on my way. But not everybody needs a trust, right? That’s not something that we all need to do. So that’s something we talk a lot about. We hear a lot about, trust documents. And they do play a role for people who need them. But that’s maybe something else we want to share is, when that’s appropriate.
Micah Shilanski: Let’s do that. Let’s break through those three basic documents, a will, a healthcare directive, as well as a durable power of attorney. Then let’s jump into what a trust is. Because again, in my opinion, we all need those first three. The trust is optional, can be pretty beneficial. I know I have one. So we can talk about some pros and cons with that. Sound good?
Tammy Flanagan: Sure. That sounds perfect.
Micah Shilanski: First, let’s jump into things that affect you while we’re alive. And there’s two documents that we mentioned here, right? You said the living will, and now we’re calling that an advanced healthcare directive. And this affects you while you’re alive and it’s so, so important, Tammy, as you know, this is the document that says two things. Number one, God forbid, if there’s something happens to you, what are your end of life decisions? Do you want to stay plugged in or do you not? Most states are a right to life state. What does that mean? That means you’re probably going to stay plugged in. If you don’t have something expressly written, so you need to have this document.
Micah Shilanski: Number two, it’s also going to say, who do you want to make decisions? And this is a misconception that we see all the time. It says, well, I’m married, therefore my spouse will make my decisions for me. No. That is not the way it is set up. Your spouse doesn’t have the right to your medical files just because you’re incapacitated, unless they go to court and they become your guardian, or your conservator and have quarter pointed access in order to get that. A Little example of that, pick up the phone and call your spouse’s doctor and ask for a copy of her medical records. They shouldn’t share that information because that little thing called HIPAA, right?
Tammy Flanagan: Well, my husband gets mad all the time because it’s not even medical. It’s the cable company. He want to call them, and they won’t talk to him because my name’s on the bills. So HIPAA is medical, but it comes into play a lot. These days, we’re such a litigious society of everybody’s worried about getting sued or telling the wrong person. And I think it’s also important because we have a lot of couples who don’t get legally married. Especially later in life, you’re with somebody as a companion, you’ve developed this committed relationship, but you’re not legally married. So you don’t have all those benefits of a spouse. And like you said, even a spouse doesn’t necessarily have the right to make certain decisions on your behalf. So yeah, I think that’s probably one of the most important documents, because it’s one that once that happens, it’s too late to create the document.
Micah Shilanski: Amen. Yep. So there’s a couple of ways that you can get this one. This one’s pretty easy, of course, attorneys can help repair it. One of the things that I generally recommend Tammy is, go to your local hospital, go to your local doctor. They all have the documents available and just grab their form. And I liked that for a couple of reasons. One, it just gets it done or at least a bandaid on it. So you have something in place. But number two, generally, the forms your attorney is going to draft is not the forms the hospitals most familiar with. So if you go to a hospital they’re not familiar with the form. We’ve seen this, you go in on a Friday afternoon for an emergency. The spouse actually brought the advanced healthcare directive with them. They didn’t recognize the form. They wouldn’t accept it till the attorneys reviewed it. Well, it was out because it was Friday afternoon. The attorneys were all gone. They couldn’t review it until Monday. It was on Tuesday before she could see her husband and go through this stuff because she didn’t have the proper form.
Micah Shilanski: So I like having the local hospitals one. Yes. Technically they should accept more. But then this way it just is going to make it a little bit smoother.
Tammy Flanagan: Yeah. And that’s the thing too. As much as you plan ahead and you do everything you’re supposed to do, you want to still check with. Especially like your local hospital or your bank or whoever it is that you’re dealing with every day to make sure they don’t have their own specific document that they might want you to use.
Micah Shilanski: Yep. All right. So that’s the first one, is the advanced healthcare directive, used to be called that living will, really important. Let’s jump on the second one that affects you while you’re alive. And this is probably the most powerful document you were ever going to sign. And we call it a durable power of attorney. Now, Tammy, you were right. You said power of attorney before, but we want to throw this word durable in there. And basically what that means is, it lasts through incapacitation. General powers of attorney, the way they’re normally created, is that they can go into effect today, but they stop the minute you’re incapacitated. Well, maybe, that’s appropriate for some things. But for this case, we probably want something that’s going to go past incapacitation.
Micah Shilanski: So we use the example of being in Alaska. While we’re driving home, we hit the moose on the way home. Comes through the windshield. Doesn’t kill us. But now who’s going to, as you said, contact the mortgage company? Who’s going to pay the bills? Who’s going to contact OPM? Who’s going to deal with the IRAs? Who’s going to do all of these things? Who has the legal right to do that? And again, your spouse on a lot of these accounts does not have the legal right, if their names not on the account, you need this form, the power of attorney.
Tammy Flanagan: Right. Yeah. Very important. Also keep in mind that with the office of personnel management, where your retirement benefits come from, that’s not going to be good enough. So if you have a family member who’s incapacitated and you need to do something with the government, with OPM on their behalf, you’re going to have to use OPM forms. So you just need to contact them. They have specific language and a form for you to fill out and it has to be a court document. So unfortunately it might have to also go to court to get the document drafted. So there are different rules for different benefits that we have. And I know OPM has been a stickler on that, but it doesn’t happen very often that you need it.
Micah Shilanski: Yep. Good news is most of the time with OPM, you wouldn’t need it, right? Because if something happens to you in retirement, OPM is still going to be paying your checks. Even if you’re disabled, even if you’re incapacitated, they still go to your bank account. So if your spouse or a loved one has that power of attorney to your bank account, they have access to that money. So that’s at least a little helpful. But Tammy, on that same note, even some banks are notorious for not accepting powers of attorney, which they’re supposed to be able to have to accept, because it’s not on their letterhead. And why? You said it before, we’re a litigious society. And this is the form that has been abused the most over time, because it gives you the legal right to take assets out of someone else’s name, and put them in your name. It gives you the power to do that. So they want to be really careful with it.
Tammy Flanagan: Yes. Yeah. And you have to kind of create these documents when you’re still of sound mind. So when you have a loved one, who’s maybe getting into the throes of dementia, or going on the journey as we call it, sometimes. You want to get that done while you can still sign a document and know what you’re signing. So these are things you want to do now while you’re still healthy. And hopefully none of this will ever come to pass, but that’s why we do this, just in case.
Micah Shilanski: In every states, how they deem competency is different. But if we have any type of elder parents that we’re thinking about this for. One of the things you might want to do, is have the attorney do a competency test in questions. Where they’re sitting alone with your parent and going through and asking them questions and they’re documenting their state of competency. So then later we can say, “Okay, is this still a competent individual who can make these decisions or not?” So again, anytime we have aging parents, really important, to think about that.
Tammy Flanagan: Right. All right.
Micah Shilanski: All right. The third document you brought up was the will. And the will is a really important document because this is what’s going to govern probate. So probate is the process that is dispensing your assets. Now, before things get to probate, there’s an order of operations that needs to take place.
Micah Shilanski: Things first, when you pass away, they first transfer by title. So my house, if it’s owned in mine and my wife’s name as joint tenants. If I pass away, God forbid, but now the house automatically goes to my wife, Kelly. She automatically inherits that because title always takes precedent. So a title could be on a house, it could be on a motor home, could be on a boat, it could be registration. Whatever is on that, title is going to take precedent. Now, if there’s not a title or the title is just one person, then there’s a beneficiary, is the next order of operation. Easy example for our federal employees is the TSP, right? The TSP, you can’t have your spouse’s name on it. It is an individual retirement program. So it’s just you, but you can name a beneficiary. So if you die, title was just you, then it goes to your beneficiaries, named beneficiaries get paid out.
Micah Shilanski: If there’s no title, if there’s no beneficiary, then it goes to probate. And probate is the court sponsored process for dispersing your assets, and the will is the document which is going to help govern probate. It’s going to say, where do you want your stuff to go? So most of the time by title and beneficiary, not much is going to be left in probate, which is going to be a nice thing. It’s going to be a faster way of dispensing things without having to go through a court process.
Tammy Flanagan: But on federal benefits, Micah, we have four different beneficiaries, right? We have one for retirement, FERS or CSRS, whichever system. You have one for life insurance in FEGLI, one for TSP. And then there’s a fourth one for employees called unpaid compensation. But my understanding, and tell me if I’m wrong, that if I die and I don’t have a designated beneficiary, I never filled out the form, but there’s a standard precedent. So everything in that account, my TSP or my life insurance would go to my spouse, if I have one. If I don’t have a spouse, then it goes to my children. If I have children that equal shares. If there’s no children in the family, then it goes to my parents, if they’re living. Now, my parents may both be deceased, so then it goes to my will. So will comes after spouse, children, and parents, right?
Micah Shilanski: Oh, I want to clarify if I may.
Tammy Flanagan: Sure.
Micah Shilanski: It goes title, beneficiary, will. But in beneficiary, what do we have there? The government, in this case, your employer, has dictated who your beneficiaries are going to be. That’s still a beneficiary designation.
Tammy Flanagan: I don’t want to confuse that with the actual form. Okay.
Micah Shilanski: Yes. So the TSP, all these other forms that you mentioned, you’re a hundred percent correct. Your employer can put default beneficiaries in place and they have those. That’s still goes by beneficiary though.
Tammy Flanagan: Yeah. My understanding is that, that’s the federal order of precedence as opposed to following state law.
Micah Shilanski: Correct. Now, even though that’s there and you might be thinking, “Well, sweet, I’m covered. I want my spouse to get everything.” I am going to encourage everyone Tammy, and I think you agree, go update your beneficiary forms. I don’t care if you think it is correct. I don’t care if you want your spouse to get everything and by default, that’s what happened. We have horror story after horror story, after horror story that’s been out there. And the court system is riddled with these, with money, going to people, that didn’t go to the spouse, that didn’t go to the correct person. Because there was an old form in place. There was something misconstrued. So you have to be on top of these beneficiary designation. Yeah.
Tammy Flanagan: And you have to also be careful too, when it comes to a former spouse, because I had a story recently with a woman whose ex-husband passed away. And in the court order, he was told that he had to keep his life insurance in the government and keep her as the beneficiary. Well, I think the day after the divorce, he canceled his fakery policy and now he’s dead and there’s nothing she can do to get him, to put it back into place. So what people do now of days, and I don’t know if this was even in effect back then, when they got their divorce, but you can assign your life insurance. And then through a court process, you could be required to assign the life insurance. In other words, you’re changing ownership of that policy from yourself, who’s the insured, to somebody else, which would be the ex-spouse.
Tammy Flanagan: So now you can’t change it, because it’s no longer your policy. So unfortunately in that case, he didn’t do that. He wasn’t required to do that. So she was kind of left hoping, not hoping necessarily, but thinking that upon his death, she would at least have that money. And of course there was nothing there.
Micah Shilanski: Yep. And with that case too, let’s say he did assign the policy to his ex, but what if he quit paying on the policy, then what happens to it? It’s an insurance policy, it still lapses, right?
Tammy Flanagan: Right.
Micah Shilanski: So in that divorce case, I think two things have to happen. One is the assignment. And two, guess what the beneficiary, in this case, the ex-spouse, needs to pay for that policy. That’s the only way you know, it’s going to get paid. Yeah. And a lot of doors just don’t want to hear that. They don’t want to feel that they have to buy that policy, but do you want the money or not? And if you do, you need to be the one paying for it because then you know, it’s going to be there.
Tammy Flanagan: I always wonder when somebody else is paying for my life insurance, that’s not necessarily a good thing. But remember, I used to have employees when I was in the government, as a retirement specialist. And they’d bring in their beneficiary form, and they said, “Hey, I’m going to sign up for five multiples of option B, because my son’s going to pay the premiums.” I’m like, “Oh, I don’t know if that’s such a good thing.”
Micah Shilanski: Whose cooking dinner next week?
Tammy Flanagan: Exactly.
Micah Shilanski: So those are the three basic forms that we need. And then we talked about our order of operations, that’s there. And it really comes down to what is best to you, is what are your wishes? So when we’re sitting down and chatting with people about estate planning, one of the first things we asked is, okay, if something happens to one of you and you pass away, what do you want to see take place? Or maybe if you’re just single, what do you want to see take place? Or if you’re married or in a relationship, great. If both of you pass away, what do you want to see take place? And this is where Tammy, I like to put dollar amounts in here, because sometimes people are like, “I’m going to make my math. It’s super easy. Two kids, so they have a million dollars.” Right? Between their house, their TSP account, all of those other things, all the sudden, they have a million dollars right there.
Micah Shilanski: They pass away and now it’s going to be split. And so now they’re going to get roughly each kid, $500,000 each. One of the things, whenever that’s the case, I always ask… All my clients are Bob and Sue. Bob, if you and Sue both passed away and your son got a check for $500,000, do you think he’d make good decisions with it? And there’s a pause. And generally, like, “I’m not sure about that.” Then okay. Well, if you’re not sure about that, maybe we need to think about something else. And this is where a trust may come in. Right?
Tammy Flanagan: Yeah. Trust documents can give instructions to tell your estate, I guess you could call it, what you want done with this money. So it doesn’t all go at one time, you may have a spend thrift in the family. You may have somebody with mental impairment or a drug addiction. And those cases that could be disaster to leave that person with a large sum of money. So these documents are really helpful to put out your instructions, as you said, to rule that money from the grave, because you know, that’s going to be in the person’s best interest.
Micah Shilanski: Yeah. There’s two main reasons that people do trust, Tammy. Now there used to be a reason. People are concerned about estate taxes. And so they’re like, “Oh my gosh, estate taxes, I need to do a trust.” Every state can be different, but the federal estate tax limit is around $11.7 million is the exemption. So if you’re married, you have about a $23 million exemption. So as long as your a worth less than 23 million, we’re good. If it’s worth more than 23 million, you really need to call me. So we really don’t have estate tax reasons, which is really nice. Now, some states are lower, the main reason is privacy and control from the grave. These are the two things that trust gives us that we don’t have inside of a will. A will is a public form. It’s a public document. When you file it, anybody can read it. They can see what you had and where did it go.
Micah Shilanski: A trust is a private document, so that’s really nice. But also, and again, I’m going to take my kids as an example, I got young kids. I want to control from the grave. I love them dearly, but at 18 they may not be making the best financial decisions. So we’re pretty controlling in how they get money. I’m parenting from the grave. I got a carrot and a stick and it’s a dollar sign on each way. If you listen, you get money. If you don’t listen, you don’t get money.
Tammy Flanagan: And that’s a hard decision to make too, because when you set up that document, even if something did happen, and even if you have a trust, you’re still not going to have your children control their own money. So now you have to name a guardian and find who is that person who can act on my behalf for my kids. And in some families, it’s hard to find someone because they could be in another state. And do you want to uproot your kids? Or it could be that brother-in-law that your husband loves, but you might not love him. So that’s something. Yeah. And I think that might be one of the reasons why some people delay these things because they just don’t know what they’re going to put down. So you’ve got to sit down and really get thought.
Micah Shilanski: You do. And the biggest thing, I’m going to tell people, Tammy, plan for today. Don’t plan for the next 20 years and say, “Well, I don’t want to name my parents on here. I don’t want to name my brother in here because he’s older.” And in 20 years, he won’t be able to do it. Well, we’re not solving for that. We’re solving for today. God forbid, if something happened, guess what? In five years you can update this, in one year, you can update this, so go through. And the other kind of little hack, if you will, that I do with clients is, we’re having a hard time filling things in, go through the process of creating these forms. And if we don’t know who is there, put a blank line. And then when you read the documents, it’s amazing. You start reading what their powers are, of the trustee, what they can do, all of a sudden, your mind just automatically fills in who should be there. Great. That’s a great way to it.
Tammy Flanagan: That is. That’s a good thing. The other thing I was going to say, when we were talking about beneficiary forms, I always get the question about the retirement beneficiary form. Where sometimes people think that, that’s governing who’s going to get a survivor annuity, which it has nothing to do with that. The only thing that government beneficiary forms do, is tell who’s going to get a one-time payment, a lump sum. So when you’re deciding about survivor annuity benefits, if it’s an employee who dies and you’re married, your spouse gets the survivor annuity. And the only exception would be, if you have a former spouse with a court order. And I have had people say, “How do I prevent my spouse from getting the annuity?” I say, “Oh my goodness.”
Micah Shilanski: You have bigger issues.
Tammy Flanagan: Yeah. Get a divorce. Get a divorce and put it in a court order. And the other thing I found, that’s kind of along these lines, that’s related to the retirement elections is, I had a case one time, where there was a court case one time, of a married couple where the husband was the federal employee. The wife was the stay at home mom, the housekeeper, she didn’t work outside the home. She didn’t have anything to support herself with. She supported her husband’s career all those years. And they ended up getting a divorce in retirement. Well, before retirement, he elected her to be the surviving spouse, that’s the default election on the application. So when they went through the divorce, he didn’t want to have any bad will towards her. They just wanted to go their separate ways. So in the court order, she was left with 50% of his retirement.
Tammy Flanagan: So the court order said she gets half. He gets the other half. And they went their separate ways. Well, the year after the divorce, the man died. And she went to OPM to get her survivor benefit that he provided in his retirement papers. And guess what? She gets nothing, because there was nothing about a survivor annuity in the divorce decree.
Micah Shilanski: Right. Just 50% of the pension.
Tammy Flanagan: Yeah. Once your marriage ends, the election you make at retirement ends. You have to put that in the court order. So I’m sure he would have wanted her to get the survivor benefit. He probably had no idea that, that wasn’t part of the agreement.
Micah Shilanski: And this is such a key benefit. And this is not designed to be a selfish plug. So sorry, it’s going to come out this way. But this is really Tammy, the key when you’re going through difficult times, even really well-educated people, you’re too close to the emotional thing. You got to step back and you got to get someone who understands federal benefits. This gets complicated, and I’m going to pick on attorneys out there. They don’t know federal benefits. Can’t tell you how many times we’ve gone there in front of courts and judges and talk with people and whatnot. And how they think the pension works, is not actually how it works, including federal judges. Just because it’s their benefits too, doesn’t mean they understand how it works. So you really got to bring someone in on your corner, to miss things like this. And guess what happened to health insurance at the same time. Guess what happens to all of these other things that can happen when we lose that survivor benefits.
Tammy Flanagan: Yeah. She had nothing, she had no health insurance, she had no retirement, nothing. And it was unintentional. It was unfortunately like you said, Micah, it was an attorney they used who didn’t understand what had to go into that divorce court order. And like you said, find someone who understands federal benefits because there are quirks in the law.
Micah Shilanski: Yeah, yeah. Very much so. Okay. So really important on these estate planning things, that we go through. One of the things on the trusts that I really would like to mention, children with special needs, really important. Now this is goes from a trust, as maybe in my world, to trust is a must. If you have a family member that has special needs, you need to create a special needs trust, or the parent of the children need to, and never leave them money directly. You can really inhibit a lot of aid, a lot of benefits they could be getting from the state because a lot of those benefits are means testing. And you have to very special language set up to make sure that they’re taken care of, but also you don’t jeopardize their health insurance. Because that’s another thing, but very common mistake. I will spend an hour just talking about what has to happen just on that one alone. So just something to watch out for.
Tammy Flanagan: Yeah. There are attorneys who specialize in both elder care as well as special needs. And it’s not the same as an estate planning attorney, estate planning attorney is going to help you draft your will, draft your trust. An elder law or a special needs attorney understands the tax laws. They understand the laws of the state that provide these valuable benefits. So sometimes you need both.
Micah Shilanski: You absolutely. All right. One other aspects on trust that I want to talk about. Because something that almost every federal employee has is your TSP, your thrift and savings plan. So there’s a different when it comes, and this is a little bit of TSP quirks, who your beneficiary is affects how that money is going to be taxed. So let’s just talk real quick, just about the TSP. Then I want to talk about retirement accounts as a whole and add a trust component to it. Just for fun, like sprinkles on top.
Tammy Flanagan: Well, yeah. So what happens when a TSP participant, that’s you, the person that owns the TSP account. When that person passes away, the beneficiary gets the money, right? Whether it’s $50,000 or whether it’s 1 million, $500,000, the beneficiary inherits that money as a lump sum. Now, if your spouse is the beneficiary, so if you’re married and you’ve left everything to your spouse, that is the only person in the whole world who can keep that money in the thrift. And it’s put into what’s called a beneficiary participant account. They should just call it a spousal account, but call it a beneficiary participant account. And the spouse has the right, just like you did, to move the money between the different funds, to elect an annuity, to collect a monthly payment stream, do all the same things you would have done.
Tammy Flanagan: They also have the right to move the money out of the thrift and put it into their own IRA if they want to, or into their own TSP account. And there are reasons why they might want to do that. Now, if it’s not a spouse who inherits your account, let’s say, it’s your kids or your sister or somebody else. They can move it into an inherited IRA, but those rules have changed recently. So can you help us understand what those rules are? If somebody inherits that big lump sum of money and they don’t want to pay tax on it all at once?
Micah Shilanski: Absolutely. So now under the new rules that we have for the SECURE Retirement Act that went through, they’ve changed required distributions, and they’ve changed inherited IRA accounts. Now you have two types of beneficiaries. You have a spousal beneficiary and everybody else. So spousal beneficiaries. Now this isn’t just TSP. This is going to be all retirement accounts, the way they’re set up. Your spouse can inherit your account. And that works out really well. Now let’s just say, for example, that you passed away at a young age, both you and your spouse are 50 years young. God forbid the federal employee passes away and leaves the accounts to the spouse. The spouse has a couple of different options. One, Tammy, as you said, they could leave an account set up, is what’s called an inherited IRA, or an inherited beneficiary account, or they could put it in their own name.
Micah Shilanski: And this has different tax consequences with it. One of the things the spouse may want to do is leave it as an inherited account. And the reason for this is now the surviving spouse can access that money without a 10% penalty. Because keep in mind retirement accounts. Normal retirement account rules is you can’t access the money till your 59 and a half. Otherwise you have a 10% penalty. Well, if you die, that penalty is waived. It’s a steep to get it right. Don’t die just for this. Sorry, bad joke. All right. But if you pass away that penalty is waived. If it’s an inherited account, but let’s say the spouse decides to move it into their TSP or move it into their IRA account. It’s no longer inherited. Now their retirement rules apply, which means they can’t touch that money until they’re 59 and a half or potentially 55 with your TSP.
Micah Shilanski: So you really got to be careful. Again, this is where you need to step back and say, Hey, some rules are different. That’s only for a spouse. Everybody else has called a non-spouse beneficiary and a non-spouse beneficiary. They can get an inherited IRA. They can not do a rollover. You cannot roll over inherited accounts. You can transfer them from one place to another, but you cannot roll over. Which means take that inherited IRA and put it in your name, not as a non-spouse. You have to leave it in this inherited account, then you have 10 years after the date of death to distribute that account. You get to choose within that 10 years, how you’re taking money out, but it’s no longer based on your life expectancy. It’s no longer what’s called a stretch IRA. Those have gone away. So now if somebody passes away, you have 10 years to distribute that money. And it’s a bit of a tax question. When does it make the most sense to take how much out.
Tammy Flanagan: Yeah. So you wouldn’t necessarily have to take it out in 10 equal shares. You could wait until the 10th year and take it all out, which I don’t necessarily think is a good idea. But you have the option within that 10 years of how often you want to take payments.
Micah Shilanski: Yep. So it’s really flexible. You just got to sit back and again, play the tax game and what’s the best way to use that money. And the good news is there’s no penalty with taking it out, but it is taxable income.
Tammy Flanagan: And there’s one quirk with that beneficiary participant account. So my husband passes away. He leaves me his TSP account. Oh great, it’s in the thrift. This is simple. This is inexpensive. I’m going to leave it in my beneficiary account. Well then the day comes and I pass away, and now my two sons inherit, what’s now a million dollars. So can they put that from my beneficiary account into an inherited IRA? Or do they have to pay the tax on it and take it as a lump sum?
Micah Shilanski: This is a quirk of the TSP. They have to take a distribution out as a lump sum. You cannot have a second string beneficiary. So again, if your husband passed away, money goes to Tammy. God forbid, Tammy passes away. It goes to those other beneficiaries. They don’t get to keep that inherited IRA. TSP forces that distribution. Now they get to pay taxes on example, $500,000. This is one of those times, Tammy. I tell people it’s a hands down. You got to transfer money out of the TSP, although it’s a really hamstring in your beneficiaries.
Tammy Flanagan: Right. And that’s a lot of taxes going to push you probably into the highest tax bracket. If it’s some of these higher TSP accounts that we’re now seeing where it’s not unusual anymore, to see a $750,000, a million dollar account.
Micah Shilanski: Then again, we have a big national deficits. So if you want to contribute and to be able to help pay that off, this is a proactive way to do it. So there you go.
Tammy Flanagan: Yeah. Then less baby boomers are going to take care of that in just about 30 years.
Micah Shilanski: Joking aside. Really important nuances of your federal benefits. Now, Tammy, we’ve gone a little bit longer. This has been great information and we might have to do a part two because it’s just a ton of stuff we still didn’t get to, but let’s transition to some action items. So our listeners can take this and say, great. What information do they need to take and work on right away?
Tammy Flanagan: Well, one would be update those beneficiary forms and there’s four of them. You can find three of them @opm.gov. You can find your retirement one for FERS or CSRS. You can find FEGLI life insurance and you can find unpaid compensation all at opm.gov/forms. Now the one for TSP is a little different. If you go to the TSP website, go into your account on TSP and you can fill out the TSP three right there. You still have to print it out. Have it witnessed, none of these forms get notarized. They just get witnessed to show that somebody saw that it’s you making these elections. And if you do get them notarized, they’re going to come right back to you. So don’t go through the bother. So update those beneficiary forms. Even if you think you filed one 30 years ago, it could have gotten lost. It might not be valid. Who knows? So update the forms, but don’t worry about it. If the person moved, you don’t necessarily have to update their address.
Micah Shilanski: Yeah. If you want to think of a reason of why to do it, Tammy, and I have a story for just about everything that could possibly happen, probably not. There’s probably more we haven’t seen yet, but there’s tons of reasons. Now, if you need to, you can always jump on our website, which is planyourfederalretirement.com/22. Because this is 22nd episode. And we’re going to have all of those forms on the website for you to make it a little easier. Tammy, the second thing I’m going to say, everybody needs to go and do is, get these documents. The will, the healthcare directive, the durable power of attorney. Now get all three of these in place really, really important. And if you’ve done these, great, in the last five years, awesome, that’s wonderful. If they’re more than five years, get them out, dust them off, look at them, read them. Make sure they’re still what you want. It’s amazing how fast time flies after we put these in place.
Tammy Flanagan: Right. Exactly. Make that call to that attorney, if you have one that you want to work with, because then you know that at least they’re following the precedents of your estate. So if you’re not sure, call a professional, there’s nothing wrong with that. It’s money well spent.
Micah Shilanski: Amen. And the pain and hassle it’s going to save you. And then the last action item after you get these done, it’s not just enough to have them. You’ve got to share them. Who do you put on there? Who is your agent? Who is your personal representative? Who’s your trustee? Whatever roles these are. They need copies of these documents, because if you have them in a safe place and you don’t tell anybody, and you die, it’s just like not having them. Nobody knows where to get them.
Tammy Flanagan: And you will forget where you put them too.
Micah Shilanski: That’s happened more than once. Perfect. Well, Tammy, as always, it’s been a pleasure and to our listeners. Thank you guys so much.
Tammy Flanagan: Thank you, Micah. It’s been fun.
Micah Shilanski: It’s been great. And until next time. Happy planning.
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