Estate Planning Basics for Military Members

One of the most common questions I get from military members related to estate planning is along the lines of “but I already have a will from the JAG – what else is there to do?” Estate Planning isn’t just for the independently wealthy. It’s for anyone who is loved and wishes to make the inevitable path of loss and grief easier for loved ones—including protecting underage children. 

It can also feel daunting, but we’ve broken it down for you into the basics. Because everyone’s circumstances differ, you may want to discuss the best way to apply these steps with the JAG or estate attorney. None of the following is considered legal advice and is for your education only. Consider the steps to put your estate plan in order.  

What is Estate Planning?

Estate planning is the process of establishing and maintaining a plan that outlines who will receive your assets after you pass away. There are many important documents required, some legal and some that are simply for the benefit of your loved ones. It’s a stressful time when a family member dies—having a solid estate plan can go a long way toward easing burdens.

An estate plan also helps when an individual is incapacitated, too. Moreover, estate planning includes not only your financial assets but also other items and general last wishes.

Why Is Estate Planning Important?

Estate planning is important because it puts in writing how your assets will transfer after your death. Common documents and products include a will, trust, insurance policies, and healthcare-related forms. Estate planning is simple for those with relatively few assets, but it quickly turns complex for high-net-worth individuals and families. Creating an estate plan with an experienced financial planner and estate attorney is thus important to avoid headaches after you pass away. New laws, regulations, and financial products make estate planning a complex area of long-term planning.

Assets Considered Part of an Estate

You might wonder what is included under the term “estate.” Just about everything you own. Writing down a list of all your assets is a good first step toward crafting a basic estate plan. Note everything, including retirement and investment accounts like your TSP, properties, cars, jewelry, collectibles, cash, and insurance policies. The list goes on! Knowing what you own along with the total value of your assets helps a financial planner strategize the optimal estate plan for you.

What’s ideal about financial accounts, though, is that you can generally name a beneficiary to whom a specific account will go upon your passing. That makes executing an estate plan simpler. Other non-financial assets pass through to your heirs based on how your will is constructed.

1. Inventory and estimate the value of your stuff

You may think you don’t have enough to justify estate planning, but once you start looking around, you might be surprised by all the tangible and intangible assets you have.

The tangible assets in an estate may include:

Homes, land or other real estate

Vehicles, including cars, motorcycles or boats

Collectibles such as coins, art, antiques or trading cards

Other personal possessions

The intangible assets in an estate may include:

Checking and savings accounts and certificates of deposit

Stocks, bonds and mutual funds

Life insurance policies

Retirement plans such as workplace 401(k) plans and individual retirement accounts

Health savings accounts

Ownership in a business

Once you’ve listed your tangible and intangible possessions, you need to estimate their total value. Consider the following:

Home values: If you don’t have a recent appraisal, write down a ballpark figure of your home’s value using online tools such as Zillow, Trulia or Realtor.com. 

Bank and investment totals: Statements from your financial accounts

Sentimental possessions and family heirlooms

2. Account for your family’s future

What future needs will your family members have in your absence? Consider income needs, medical care, and who will raise your kids if you’re not there.

Do you have enough life insurance beyond SGLI? If your assets cannot provide for the care and raising of your children, including future educational needs, consider including term life insurance to bridge the gap for those who depend on you.

Name a guardian for your children — and a backup guardian, just in case. This can help sidestep costly family court fights that could drain your estate’s assets.

Document your wishes for your children’s care. Don’t presume that certain family members will be there or that they share your child-rearing ideas and goals. Don’t assume a judge will abide by your wishes if the issue goes to court.

3. Establish your directives

A complete estate plan includes necessary legal directives or instructions. If your estate is small and your wishes are simple, the JAG documents may generally suit your needs. These programs typically account for IRS and state-specific requirements. However, with increasingly complex estate needs like blended families, special-needs considerations, multiple properties across various states, or higher net worth estates, there is often a need for an estate planning attorney to go beyond the basics that JAGs usually cover. 

These directives include most or all the following:  

1. Last Will and Testament: This is the most well-known document in estate planning. Most people know they should have a will, but the majority of Americans do not have one. According to a 2020 Gallup survey, just 45% of U.S. adults reported they had a will. A will is the foundation of an estate plan. The document outlines to whom your assets will go upon your death. Assets mentioned in a will still must go through the probate process, however. A will can be inexpensive and simple to make online, but they are often costly and elaborate for high-net-worth families. Moreover, a will is not a ‘set it and forget it’ estate planning document – it must be maintained just as a financial plan is updated as life events happen. Naming an executor (as well as backup names) of an estate is a critical component of your last will and testament, too. Finally, individuals should be aware that the will is made public through the probate process, so be thoughtful about what is included in the document.
2. A durable financial Power of Attorney (POA) allows someone else to manage your financial affairs if you’re medically unable to do so as it is “durable” even through your incapacity. This includes paying your bills and taxes and accessing and managing your assets. A limited power of attorney can be helpful if the idea of turning over everything to someone else concerns you. Be careful about who you give power of attorney. They may have your financial well-being — and even your life — in their hands. 
3. Advanced Healthcare Directive (AHCD), Medical Care Directive, or Living Will: An AHCD outlines what healthcare-related actions should be taken if you are unable to make decisions. You can also give a trusted person medical power of attorney to make medical decisions if you are unable to do so (in a coma for example).
4. HIPAA Authorization: This document can save a lot of time and anxiety since it gives consent to share your medical records with third parties.
5. Trust documents: Trusts allow you (the Grantor) to give someone else (a Trustee) control over how assets are controlled and held for the benefit of a third party (a Beneficiary). When constructed properly, assets in a trust avoid both probate and estate tax liability. A living trust, sometimes called a revocable trust, enables you to designate portions of your estate toward certain things while you’re alive. If you become ill or incapacitated, your selected trustee can take over. Upon your death, the trust assets transfer to your designated beneficiaries, bypassing the court process (probate) that may otherwise distribute your property. Those with minor children may especially want to consider a trust to provide financial protection for them so they don’t otherwise inherit large sums of money at age 18.
6. Beneficiary forms: You might be overwhelmed by all that goes into making and maintaining an estate plan. One thing you can do today that is quick and easy is complete beneficiary designation forms on all your financial accounts. IRAs, 401(k)s like the TSP, and brokerage accounts often offer short forms to accomplish this estate-planning task. Financial accounts with a named beneficiary efficiently transfer upon your passing. Bank accounts have a “transfer on death” option as well. Don’t leave any beneficiary sections blank. In that case, when an account goes through probate, it may be distributed based on the state’s rules for who gets the property. Name contingent beneficiaries. These backup beneficiaries are critical if your primary beneficiary dies before you do and you forget to update the primary beneficiary designation.
7. Guardianship: More important than money is what happens with your children and other dependents. No estate plan is complete without a directive on who will care for your loved ones when you pass away. Guardianship is commonly outlined in a will.
8. Letter of Intent. A letter of intent is a document left to your executor or a beneficiary. The purpose is to define what you want to be done with a particular asset after your death or incapacitation. Some letters of intent also provide funeral details or other special requests. While not legally binding, letters of intent can inform a probate judge of your wishes if the will is deemed invalid or more importantly, give guidance to your loved ones with more information about your wishes. 

Estate Taxes

Although this generally doesn’t apply to most military families, avoiding estate tax is among the primary goals of crafting and strategizing an estate plan for wealthy individuals. For these people with a net worth above the federal estate tax exemption, the so-called “death tax” can run into the millions of dollars. Ultimately, you want to ensure your heirs receive as much of your assets as possible. A savvy financial advisor helps individuals and couples create an optimal estate plan—that includes taking tax minimization actions years in advance of retirement.

The top federal estate tax rate is 40% for 2023. The estate tax exemption amount, also called the exclusion, is $12.92 million per individual and $25.84 million per couple. That means if the cumulative value of your assets exceeds those amounts, you could face substantial estate tax liability. The good news is that there are strategies you can act enact to reduce what you might owe. In general, the higher your net worth, the more value a financial advisor knowledgeable in estate planning brings.

Another key amount is the annual gift tax exclusion, which is $17,000 per donor, per donee ($33,000 per couple). For example, I can give anyone $17K and my spouse could give that same person another $17K.  This is commonly misunderstood that if you want to give (or receive) an amount above that annual exclusion amount that you have to pay tax. That is not correct! There is just some paperwork (IRS form 709) that needs to be filled out come tax-time that reports using a portion of your lifetime exclusion (the $12.92M figure earlier) for the gift. Thus, no gift tax is owed unless you use all of that up. 

Get Started Today

Everyone needs an estate plan even if the value of your assets is significantly below the federal estate tax exemption. If so, you can simply visit the JAG to update or create a plan. In addition, any number of online sites like Trust and Will offer ways to draft and formalize your estate plan document. If you get out of active duty and work in a civilian company, many employers offer estate planning services in their benefits packages—check with your Human Resources department at work to see if that’s the case for you.

But here’s the thing: While your net worth might be well under the exclusion amount today, decades from now that might not be the case. Consider that compounding investment returns, business growth, and even tweaks to the federal tax code might change your situation. Getting started today with certain estate minimization techniques can prepare you for an easier tomorrow.

Conclusion

Taking time today to craft an estate plan helps ease your loved ones’ burdens after you pass away. A solid estate plan outlines who will receive what after you die and this important piece of financial planning includes directives on what actions to take if you become unable to act on your own. Whether you should hire an attorney or an estate planning professional to help you create your estate plan depends on your situation. 

If you have doubts about the process, consulting an advisor to help you take the best steps for your situation might be worthwhile. The advisors in MFAA can help you determine whether this is a process you can tackle yourself or one for which you should hire a professional. We’re here to help!