Ensuring Perfect Estate Planning For Members of the Military
Too often, estate planning mistakes happen—failure to execute the last will and testament, someone forgets to update beneficiary information on life insurance or qualified retirement accounts, etc. Fortunately, skilled estate planning attorneys are more than capable of performing these basic estate planning tasks.
This does not always apply to members of the military, as they have to make unique and irrevocable decisions as they retire. These are usually unfamiliar to civilian attorneys, tax advisors, financial planners, and estate planners. Let’s go over a few points that financial advisors should be aware of in these situations.
The first major thing to take note of is that military retired pay is guaranteed income. Advisors should view the retired military client’s retirement income as a low-risk bond portfolio and use that in their estate planning to plan the asset allocation of the rest of the investment portfolio accordingly. The current low-interest rate environment, for example, would cause a civilian to need a $2-$3 million bond portfolio to generate the risk-free income stream that is equivalent to military retired income pay.
During retirement, the client can elect to have the Survivor Benefit Plan—providing the surviving spouse with a continued income that is equivalent to up to 55% of retirement pay. Based on the percentage that the retiring vet chooses, the client would pay a pre-tax premium for this future benefit. Also, if the veteran has an eligible dependent or a disabled child, they can opt for the dependent to receive a percentage of this benefit after the client and their spouse die. These decisions need to be made with careful consideration—termination can only occur before or during the 3rd year of retirement. If the vet elects to pass benefits to a disabled child, which could later disqualify that child from public benefits. As their advisor, you may find that drafting and naming a Special Needs Trust for the child’s benefit—naming them as the beneficiary, may make more sense than naming the child directly as a beneficiary for military retirement benefits in estate planning efforts.
Finally, another key decision facing a retiring veteran is whether they would like to replace their Serviceman’s Group Life Insurance with the offered Veteran’s Group Life Insurance (VGLI). Financial planners will find that in most cases, as long as the client is in reasonably good health, they can find better options for life insurance than VGLI. However, the client’s specific needs for life insurance after retirement should be taken into consideration when making this decision.
And finally, your retiring veteran client should consider their VA benefits—as well as their disability ratings and whether they are accurate in reflecting your client’s current physical condition and factor these circumstances into their estate planning. The VA benefits are tax-free, and can offset the client’s military retired pay. There’s also circumstances where the client’s spouse can receive a portion of VA benefits at death.
These decisions are complex, but it’s important to keep your client well-informed of all possible decisions when they approach military retirement. The client must attend their branch’s transition assistance programs. More so, they should also consider working with a Certified Financial Planner (only assuming that you aren’t one) who has experience working with these decisions and VA benefits to creating a personal financial plan that is suitable for your client’s situation.