Estate planning mistakes are common. Too often, there’s failure to execute a last will and testament or update beneficiary information on life insurance and qualified retirement accounts. Luckily, most estate planning attorneys can ably perform these ordinary estate-planning tasks.
However, the unique and irrevocable choices that members of the military make as they retire are often unfamiliar to civilian attorneys, tax advisors, financial advisors and estate planners. Here are some points of which advisors should be aware.
First, military retired pay is guaranteed income. Therefore, advisors should view their military client’s retirement income as a low risk bond portfolio and allocate the rest of the investment portfolio assets accordingly. In today’s low interest rate environment, a civilian might need a $2 to $3 million bond portfolio to generate a risk-free income stream equivalent to military retired pay.
Second, on retirement, your client can elect the Survivor Benefit Plan (SBP), which provides the surviving spouse continued income up to 55 percent of retirement pay. Based on the percentage the retiring veteran chooses, your client pays a pre-tax premium for that future benefit. Additionally, if your client has an eligible dependent, disabled child, he can elect for them to receive a percentage of the benefit after your client and his spouse die. Careful consideration should be taken when making these elections. Cancelation or termination can only occur during the third year of retirement. Making an election to have the benefit pass to a disabled child could later disqualify that child from public benefits. Drafting and naming a Special Needs Trust for the benefit of the child as the SBP beneficiary may make more sense than naming the child directly as the beneficiary.
Another key decision at military retirement is whether to replace Serviceman’s Group Life Insurance (SGLI) with Veterans Group Life Insurance (VGLI). In most cases, if your client is in reasonably good health, he can find better options for life insurance than VGLI. His specific needs for life insurance after retirement should be considered when making this election. Additionally, your client’s overall health and insurability are important considerations when comparing costs of life insurance. VGLI isn’t an automatic election, so he should explore his options.
Finally, your military client should consider his VA benefits and disability ratings and whether they accurately reflect his current physical condition. VA benefits are tax free and, up to a certain disability rating, offset your client’s military retired pay. There are circumstances in which your client’s spouse can receive a portion of his VA pay at his death. For example, if your client has a 100 percent disability rating for 10 years or more, his spouse will be entitled to Dependent Indemnity Coverage (DIC), which is currently $1,254 per month and adjusted annually for inflation. If DIC offsets the entire SBP, then an SBP premium cost refund is paid to the surviving spouse.
Recognizing the complexity of these decisions, when your client approaches military retirement, he must attend his branch’s transition assistance programs. Furthermore, he should consider working with a Certified Financial Planner (assuming you aren’t one) who has first-hand experience working with DoD elections and VA benefits to create a personal financial plan most suitable for himself and his family.
Wilson Moy is the director of financial planning at AAFMAA Wealth Management & Trust. He can be reached at [email protected].