If we have learned anything from what has happened over the past 15 months, it is fair to say that we are living in a new age of uncertainty as a result of the COVID-19 pandemic. No individual wants to experience a severe illness or to face the prospect of a potentially fatal viral infection.
But there are concrete steps individuals can and should take to relieve some of the uncertainty and exert more control over their future.
In particular, every individual should have a proper estate plan in place to designate who will make decisions about their medical care, finances or, potentially, the distribution of their assets if they become incapacitated or die and cannot make those decisions. This is true no matter the age of the individual.
As we saw over the last 15 months, the COVID-19 pandemic affected individuals of all ages – young, middle-aged, close to retirement, just retired and senior citizens in their 80’s and 90’s.
Although the Tax Cuts and Jobs Act of 2017 (TCJA) effectively eliminated potential federal estate and gift tax liabilities for most Americans, there is still a vital need for every individual to have an estate plan. Contrary to what some individuals may believe, not every task associated with estate planning is financially oriented.
The mere creation of an estate plan is not enough. An estate plan has to be reviewed and updated every few years as personal circumstances change, and significant economic events occur.
There are several things that every individual should perform in order to have a complete and proper estate plan. Among the most important tasks:
(1) Making sure to have specific wishes that are followed after death;
(2) planning for one’s incapacity and the inability to conduct one’s financial affairs and making medical decisions;
(3) arranging to transfer upon death any assets owned to designated beneficiaries and to pay upon any state inheritance or estate taxes; and (4) planning in advance how to pay for any estate settlement costs.
Every federal employee has an estate. Included in their estate are their personal residences, vacation homes, life insurance policies, the Thrift Savings Plan, IRAs and personal items. The question an employee should ask himself or herself: What would happen at this very minute to the employee’s family if the employee were to die? How would the employee’s assets be disposed of? If the employee does not have any formal estate plan, then the employee’s legal state of residence has already determined which individuals will inherit the deceased employee’s or deceased annuitant’s assets. The size of the estate and whether any estate and/or inheritance taxes are due has no effect on who will receive these assets.
The other consideration for estate planning is that of non-monetary concerns, in particular “planning for incapacity”. How many employees have considered the consequences of being incapacitated due to an accident or prolonged illness such as COVID-19? Who will handle paying their bills and other financial affairs while they are incapacitated?
For those employees who do not have an estate plan, in order to get started on developing an estate plan, an employee should first do an inventory of the financial assets they currently own. They should think about how the employee’s financial assets would be disposed of at the employee’s death. Financial assets include the TSP, IRA funds, non-retirement brokerage accounts, checking and savings accounts, real estate and personal items. An employee should make sure that any beneficiary forms that can be filled out should be filled out; the beneficiary forms are current and submitted to the correct agency, department, or private office. A list of the most common beneficiary forms that federal employees fill out is presented below.
After establishing a list of financial assets currently owned, an employee should answer the following questions regarding their financial assets:
- Who should inherit these financial assets and for what purpose?
- What and/or how much should they inherit?
- When or at what age should they inherit?
- In the meantime before the assets are distributed, who should control the financial assets?
As employees review their existing estate plan or prepare a new estate plan, it is important to understand some of the essential terminology and concepts along with definitions and explanations.
Financial Asset Ownership
Of the many possible ways an individual can own financial assets; it is useful to recognize three ownership categories for estate planning purposes, namely:
- Assets an individual owns solely, with no designated beneficiary or one’s beneficiary is his or her estate;
- Assets that an individual owns jointly; and
- Assets for which an individual has named a beneficiary
Solely Owned Assets
Assets that an individual owns himself or herself may pose the biggest challenge for surviving family members when trying to determine who is going to inherit the assets from one’s estate. If written instructions have not been provided in the form of a legal will or a living trust, then surviving family members of the deceased will have to rely on the “intestate” laws of the deceased’s legal state residence in order to determine how the solely owned assets will be distributed. It will also have to be decided which assets will be used – perhaps sold to generate cash – to pay any estate or inheritance taxes due as well as to pay other expenses of settling the estate.
Jointly Owned Assets
To increase the ease and the need of transferring at death, certain financial assets (such as checking and savings accounts and non-retirement brokerage accounts (in which stocks, bonds and other investments assets are held), it may be helpful and beneficial to have these assets titled or designated as jointly owned with rights of survivorship (JOWROS). When a married couple – either a same-sex or an opposite sex couple – own an asset as joint owners with rights of survivorship, it is called tenancy by the entirety – joint tenants with rights of survivorship (JTWROS).
When one of the owners of a JOWROS or JTWROS held-asset dies, the surviving owner in most states will present a death certificate to the financial institution holding the asset in order to retitle the asset solely in the surviving owner’s name. No probate required, thereby saving money and time for transferring title to the asset.
Jointly owned assets may also be held as tenants in common. In these situations, a deceased owner’s portion of the jointly owned asset will eventually pass to beneficiaries or heirs, according to one’s will or according to the laws of the deceased’s legal state of residence. This means that disposition of the deceased’s portion of any asset titled as tenants in common can be subject to potential complications at one’s death if one does have a will and designates beneficiaries through the will.
Assets in which a beneficiary is can be designated
Naming a specific beneficiary (an individual or an institution) other than one’s estate is another way to transfer assets conveniently and efficiently to one’s beneficiaries. Just as with assets owned as JOWROS and JTWROS, transfers of assets named through a beneficiary form avoid probate. Probate is a legal process after one’s death for the distribution of one’s assets.
The following is a list of assets that federal employees own in which beneficiary forms can be filled out and submitted to the right agency or office:
- Unpaid Compensation of Deceased Civilian Employee. Form SF 1152 (may be downloaded atwww.opm.gov/forms) is used to designate the beneficiary or beneficiaries of a deceased employee’s last paycheck and unused annual leave in the event that the employee dies while still in federal service. This form should be submitted to the employee’s Personnel Office.
- Federal Employee Group Life Insurance Program. Form Sf 2823 (may be downloaded at www.opm.gov/forms). This form is used to designate the beneficiary or beneficiaries of a deceased employee’s FEGLI life insurance and should be submitted to the Office of FEGLI.
- Thrift Savings Plan). Form TSP-3 (may be downloaded at www.tsp.gov). This form is used to designate the beneficiary or beneficiaries of a deceased TSP participant’s traditional and Roth TSP accounts and should be submitted to the TSP Service Office.
- Employee CSRS contributions. Form SF 2808 (may be downloaded at www.opm.gov/forms). This form is used to designate the beneficiary or beneficiaries of a deceased CSRS or CSRS-Offset individual’s CSRS contributions upon the later of the death of the CSRS annuitant or CSRS survivor annuitant and should be submitted to OPM.
- Employees FERS contributions. Form SF 3102 (may be downloaded at www.opm.gov/forms). This form is used to designate the beneficiary or beneficiaries of a deceased FERS individual’s FERS contributions upon the later of the death of the FERS annuitant or FERS survivor annuitant and should be submitted to OPM.
Other assets that Federal employees own in which a beneficiary can and should be made:
(1) Individual Retirement Accounts (IRAs) (both traditional and Roth)
(2) individual held life Insurance policies;
(3) checking and savings accounts through a “Payable on Death” (POD) designation;
(4) United States Savings Bonds (E, EE, or I series) through POD designations; and
(5) brokerage investment accounts through a “Transfer on Death” (TOD) designation.
Basic Estate Planning Documents
Will or a Revocable Living Trust. Perhaps one of the most convenient estate planning tools is a will – a legal document in which an individual names a beneficiary, guardians for minor children and identifies the executor of the estate. Also included in the will are strategies to save taxes and to control distribution of assets. Assets that are to be distributed according to one’s will are subject to probate.
Also known as a living trust, a revocable living trust allows the trust creator or “grantor” of the trust to maintain full control of the creator’s assets during his or her lifetime. Upon the grantor’s death, the assets will be disposed of privately and without court filings (in most states) according to the trust instructions. Usually, the trust grantor serves as the trustee. The trustee can also enter an agreement with a bank or other fiduciary to keep records, to pay bills, to distribute money, or to make investment decisions, all subject to the trustee’s approval. All earnings, gains and losses on the trust assets are reported on the grantor’s personal income tax returns. Since the trust is revocable, the grantor can amend its provisions or cancel the trust altogether.
In summary, the following are the benefits of a will and/or a revocable living trust:
▪ An individual, and not the individual’s legal state of residence, will control the disposition of the solely owned assets in the individual’s estate or included in the trust.
▪ By creating a revocable living trust, the grantor will:
(1) Ensure privacy for the family, friends and charities about the trust creator’s final wishes;
(2) minimize required oversight by the courts in the estate settlement process;
(3) minimize potential hassles involved in distributing assets to beneficiaries; and
(4) avoid the expense and inconvenience of possible probate proceedings in a second state in which the grantor owns real estate. To accomplish this, the grantor may need to transfer title of this real estate to the revocable living trust.
Financial (Durable) Power of Attorney
With a written document called a financial durable power of attorney, an individual called the “principal” grants another person – the “agent” – to manage the principal’s financial affairs even in the event of the principal’s incapacity. The agent can be a member of the principal’s family, a trusted friend, or an attorney. Since the agent may have financial authority that is quite broad in scope, the principal must be certain that the agent is a completely trustworthy person.
The idea behind “durable” is that the agent can do things on behalf of the principal without the principal’s formal approval, as opposed to a “general” power of attorney in which the agent needs formal approval from the principal to perform certain actions on behalf of the principle. These actions would include, for example, signing the principal’s tax return or representing the principal at a real estate settlement.
A living trust ideally should be combined with a special type of will called a “pour-over” will. The “pour-over” will instructs those assets not already in the trust at the time of the grantor’s death be “poured-over” into the trust by the executor of the estate and disposed of by the trustee as directed in the trust agreement.
What Needs to be Considered When Creating a Will or a Revocable Living Trust
The following are some considerations when deciding to have a will or a living trust:
▪ Simplicity and cost. Assuming an individual has named beneficiaries for financial assets in which beneficiaries can be named – pension plans, bank accounts, IRAs, brokerage accounts and life insurance – and has named joint owners with right of survivorship with other accounts, a single will is necessary for other financial assets including personal items and real estate. This will result in reduced costs.
▪ Complexity. With some individuals, the services of an experienced estate attorney is the most expeditious way to ensure that one’s assets will ultimately be transferred to heirs, according to one’s wishes. For example, if one owns rental properties located in multiple states or one has multiple brokerage accounts.
Other advantages of a trust include: (1) The grantor and not the truster’s legal state of residence, controls the disposition of solely owned assets included in the trust; (2) minimization of required oversight by the courts in the estate settlement process, (3) minimization of potential hassles involved in distributing assets to beneficiaries; and (4) avoidance of expenses and inconvenience of possible probate proceedings.
Unfortunately assets, added to a trust after the grantor’s death via a “pour-over” will not avoid probate. But the “pour-over” will/living trust combination still affords increased privacy since the most detailed information about the disposition of trust creator’s estates resides in the trust agreement. Trust agreements in most state do not have to be filed with a court.
A will or a revocable living trust, a “pour-over” will, a durable financial power of attorney and other estate-related documents should be prepared only by a qualified estate attorney in the employee’s legal state of residence.
There are non-financial parts to a proper estate plan. This planning comes under the category of “planning for incapacity:”
Given the unpredictability of the COVID-19 pandemic, a durable health care power of attorney is one of the most important legal documents everyone should own. In general, a power of attorney is a document that an individual (the “principal”) that legally assigns authority to another person (the “agent”) to act as the principal’s surrogate and make decisions on the principal’s behalf.
- (Durable) Health Care Power of Attorney. A (durable) health care power of attorney empowers someone (the “agent”) to make medical and health care decisions on an individual’s (the “principal”) behalf while the individual is incapacitated and unable to make or communicate his or her own decisions. It also provides authority to access the individual’s medical information to make decisions, known as a Health Insurance Portability and Accountability Act (HIPAA waiver). Note for example that COVID-19 is a respiratory disease that often requires intubation. An individual’s ability to communicate may be extremely limited, so having a health care power of attorney is extremely advisable. Health care power of attorney is recognized in most states and the District of Columbia.
- Living Will. In the event an individual goes into a coma or has a terminal condition, what types of medical treatment will the individual want and do not want? The purpose of a living will is to state in writing the types of medical treatments the individua does and does not want.
- Advance Health Care Directive. An advance health care directive is a broader instrument that may include a health care power of attorney, and other end-of-life specifics. It is a witnessed legal document that provides written instructions about an individual’s health care wishes if an individual become incapacitated and is unable to speak. It can be drafted to specify whether an individual would want to be placed on a ventilator and any life-prolonging, extraordinary measures that an individual would not want doctors to perform. An advance health care directive leaves no question as to an individual’s stated wishes, and no burden on anyone to decide for you.
Other questions and issues that may needed to be considered and discussed when meeting with an estate attorney:
- Who will care for minor children and other dependents? If neither parent were living, who would raise minor children (generally, children under age 18) or take care of other dependents such as elderly parents? This includes managing their assets. A guardian or conservator needs to be named.
- Letter of Instruction. A “Letter of Instruction” is an informal document in which an individual gives specific instructions that cannot be altered. It is usually left with the person’s executor or immediate relative. Typical items that may be included with a “Letter of Instruction” are:
Where key documents (including a will) are located.
A list of digital assets
A list of up-to-date passwords for computers, laptops, i-phones, security systems
Funeral and burial directions.
Personal matters that are not chosen to be included in a will or trust but maybe useful to an executor.
The information presented is not intended to be a substitute for specific individual legal or tax advice as individual situations will vary. Because individual legal or tax situations vary, it is suggested that individuals discuss any legal or tax issues with a qualified legal or tax advisor.