Bogleheads® on Investing Podcast 052: Ryan Barrett and Mike Piper on estate planning
00:00:00.000 | [MUSIC PLAYING]
00:00:10.460 | Welcome to Bogle Heads on Investing, podcast number 52.
00:00:14.320 | Today we're talking about a special topic, estate planning,
00:00:17.920 | with estate planning attorney Ryan Barrett and author and CPA
00:00:22.080 | Mike Piper.
00:00:23.040 | [MUSIC PLAYING]
00:00:32.600 | Hi, everyone.
00:00:33.400 | My name is Rick Ferry, and I'm the host
00:00:35.040 | of Bogle Heads on Investing.
00:00:36.760 | This episode, as with all episodes,
00:00:38.880 | is brought to you by the John C. Bogle Center
00:00:41.400 | for Financial Literacy, a 501(c)(3) nonprofit organization
00:00:46.080 | dedicated to helping people make better financial decisions.
00:00:49.280 | Visit our newly designed website at boglecenter.net
00:00:53.080 | to find valuable information and to make
00:00:55.720 | a tax-deductible contribution.
00:00:57.800 | Today our discussion is all about estate planning.
00:01:01.040 | This is probably one of the most important and the most
00:01:05.000 | overlooked aspect of a financial plan.
00:01:08.000 | I find that about 50% of my new high net worth clients
00:01:12.760 | have either no estate plan or have an estate plan that
00:01:16.920 | is either out of date or have done some estate planning
00:01:20.320 | but have not completed it.
00:01:22.200 | And that could create a lot of problems for their heirs.
00:01:26.600 | We're going to hear about this today from two guests.
00:01:30.160 | My first guest is Ryan Barrett, who
00:01:33.880 | is a member of the California Bar and the Utah Bar.
00:01:38.560 | He works with clients in both states.
00:01:41.160 | Second is Mike Piper.
00:01:43.680 | Mike is a CPA and the author of many tax books as well as
00:01:48.520 | investing books.
00:01:50.200 | He's also the author of the popular blog
00:01:53.360 | ObliviousInvestor.com.
00:01:55.520 | And he is the creator of the Open Social Security Calculator
00:01:59.400 | at OpenSocialSecurity.com.
00:02:01.880 | Mike's latest book is titled After the Death of Your Spouse,
00:02:06.420 | Next Financial Steps for Surviving Spouses.
00:02:10.200 | Putting a copy of this short paperback book
00:02:13.040 | with your estate planning documents
00:02:15.280 | will probably save your surviving spouse
00:02:17.720 | thousands of hours of time and thousands of tears
00:02:21.480 | because Mike has made this information available
00:02:24.160 | in an easy and understandable way.
00:02:26.560 | So with no further ado, let me introduce
00:02:29.200 | Ryan Barrett and Mike Piper.
00:02:31.480 | Welcome to the Bogleheads on Investing podcast.
00:02:35.000 | Thank you, Rick.
00:02:36.200 | Thanks, Rick.
00:02:37.040 | So before we get started, I always
00:02:40.040 | like our guests to talk a little bit about themselves.
00:02:43.560 | So I'll start with Ryan.
00:02:45.800 | You have been an attorney for more than 10 years.
00:02:49.640 | Why specialize in estate planning?
00:02:52.440 | Estate planning, I got actually drawn in
00:02:54.560 | through financial planning when I
00:02:56.880 | worked with my financial advisor to sort of set up
00:02:59.200 | my financial plan.
00:03:01.000 | Just the idea of helping somebody
00:03:02.400 | plan for their future and then also the unexpected.
00:03:06.280 | But estate planning was a little more my wheelhouse
00:03:09.880 | just because I had a law degree and the background in that.
00:03:12.400 | So getting out of litigation, out of the adversarial,
00:03:15.680 | and into more just working with somebody
00:03:17.600 | and helping them prepare for something that's
00:03:19.520 | going to benefit them and their beneficiaries.
00:03:22.360 | And you say that your goal is to be
00:03:24.200 | able to bring estate planning to the masses.
00:03:26.680 | Could you explain that a little bit?
00:03:28.440 | Well, I think estate planning can be a little intimidating
00:03:30.840 | for a lot of people.
00:03:32.000 | They come to a firm that handles estate planning
00:03:34.320 | and they don't really know what it's going to cost.
00:03:37.080 | A lot of times firms don't have fixed prices up front.
00:03:40.440 | They bill hourly.
00:03:42.040 | They have a retainer agreement.
00:03:43.480 | And I like to target the audience that
00:03:46.160 | doesn't have the extremely complex estate plans.
00:03:48.560 | We're not getting into asset protection.
00:03:51.600 | People with that many assets and go that avenue
00:03:54.480 | are usually-- well, they usually already have attorneys.
00:03:57.240 | So the person that thinks maybe they need an estate plan,
00:04:00.600 | and I think most people do, have a simple approach,
00:04:03.240 | fixed prices, let them know what their options are,
00:04:06.000 | try and be as un-intimidating as possible
00:04:08.640 | and as upfront and straightforward as possible
00:04:10.640 | so people know exactly what they're getting into
00:04:13.400 | and what it's going to cost them.
00:04:15.080 | You are licensed to practice law in California and Utah.
00:04:21.720 | But unlike other professions like the investment advisory
00:04:24.760 | profession, you can't go outside those states.
00:04:27.880 | Is that correct?
00:04:28.920 | That's correct, yeah.
00:04:29.800 | As long as you reside in California and Utah,
00:04:31.640 | then I'm more than happy to help you.
00:04:33.560 | But outside of that, can't do much.
00:04:36.240 | And Mike, you're a repeat guest.
00:04:37.720 | Thanks for coming back.
00:04:39.880 | You are CPA, and your latest endeavor
00:04:45.200 | is a great little book called After the Death of Your Spouse.
00:04:49.400 | I mean, the title is not appealing, but--
00:04:52.640 | Right, right.
00:04:53.280 | It's not a happy topic, obviously.
00:04:55.040 | After the Death of Your Spouse, The Next Financial Steps
00:04:57.400 | for Surviving Spouses, which is a fantastic resource.
00:05:00.600 | I mean, I really believe that people should just
00:05:03.200 | buy the paperback edition of this book,
00:05:05.160 | and it's not very much, and just stick it
00:05:07.360 | in your estate planning documents,
00:05:08.920 | because there's so much information in this book.
00:05:12.040 | But why did you decide to go down this path
00:05:15.640 | after a lot of books on taxes, and a lot of books
00:05:19.560 | on accounting, and then investing,
00:05:22.400 | and now estate taxes?
00:05:24.360 | So what caused you to take this pivot?
00:05:28.920 | Yeah.
00:05:29.920 | Mostly, it was just seeing these situations where
00:05:34.800 | when a person's spouse dies, they're suddenly--
00:05:39.480 | from an emotional and psychological point of view,
00:05:42.280 | it's one of the hardest times in their life,
00:05:45.800 | if not the very hardest time in their life.
00:05:48.800 | And then the way our system is set up,
00:05:51.280 | at that very same moment, they have
00:05:53.560 | this huge list of administrative and financial to-do items
00:05:57.120 | just dropped in their lap, basically when they're quite
00:06:00.480 | possibly the worst time to have to deal
00:06:02.440 | with a whole bunch of things.
00:06:03.680 | And now they do have to deal with a whole bunch of things.
00:06:06.560 | And then in a lot of cases, it's made worse by the fact
00:06:10.040 | that in a lot of households, one of the two spouses
00:06:14.880 | will take the lead on financial matters.
00:06:18.160 | And of course, it's a 50/50 chance
00:06:19.760 | that it's the other spouse who's the surviving spouse.
00:06:22.560 | And so in a lot of cases, they now
00:06:25.280 | have all these things to deal with,
00:06:26.920 | and they don't have all of the skills and experience built up
00:06:31.360 | over decades that the other spouse would have.
00:06:35.200 | So the point of the book is basically
00:06:37.280 | just to walk people through it in plain language.
00:06:41.280 | Let's start with a simple question about what
00:06:44.720 | is an estate plan, and why should people
00:06:47.400 | have an estate plan?
00:06:48.880 | So I'm going to go to Ryan, our attorney expert on this.
00:06:52.080 | And Ryan, tell me why you even have an estate plan.
00:06:57.520 | Well, an estate, to start, is just what your assets are
00:07:01.200 | at the time of your death.
00:07:02.400 | So an estate plan is essentially a plan in place
00:07:04.920 | that you make before your death for what
00:07:07.680 | will happen with those assets when you do pass.
00:07:11.280 | There are a number of reasons to have an estate plan.
00:07:13.240 | It will obviously vary person to person,
00:07:14.900 | complexity of their estate, and the extent of their estate.
00:07:18.160 | At the most basic level, it's a will,
00:07:21.040 | which just says where you want what assets to go.
00:07:25.200 | Beyond that, you have trust and other avenues
00:07:28.320 | for distributing assets that will have tax consequences.
00:07:33.040 | They'll avoid probate.
00:07:35.280 | It's important to plan for your children,
00:07:37.520 | if you have minor children.
00:07:38.880 | Not necessarily what assets they'll get,
00:07:40.560 | but who will take care of them.
00:07:43.000 | It's, one, to ensure that your wishes are carried out
00:07:46.640 | upon your passing, but also, two,
00:07:48.480 | just to make things easier on those that survive you,
00:07:51.280 | so that there's no fighting, there's
00:07:53.760 | no question what will happen.
00:07:56.400 | Well, let me ask a question about that,
00:07:58.020 | because ironically, the clients that I deal with,
00:08:00.960 | I'm rather shocked by the number of high net worth individuals
00:08:07.640 | who don't even have a will.
00:08:10.480 | They don't have other documents, like guardianship instructions
00:08:15.100 | for their children.
00:08:17.000 | What happens to all of their assets and their children
00:08:23.480 | if they don't have an estate plan,
00:08:26.360 | if they don't have the documents?
00:08:28.680 | What happens?
00:08:30.360 | Separating those from the assets and your children,
00:08:33.080 | your assets will be distributed according
00:08:35.400 | to what are called intestate laws.
00:08:37.600 | So intestate means dying without a will,
00:08:40.640 | and so each state has its own intestate laws,
00:08:43.880 | although they're fairly similar.
00:08:45.760 | So in Utah, that would be, if you're married
00:08:49.600 | and you don't have children from a previous marriage,
00:08:52.280 | your wife gets everything.
00:08:53.360 | So it's pretty simple.
00:08:54.800 | If you do have children from a previous marriage,
00:08:57.040 | then your wife would get $75,000,
00:08:59.960 | and then half of the remaining assets, and so on and so forth.
00:09:03.420 | It gets confusing the more people are either not
00:09:07.560 | surviving you or otherwise.
00:09:09.800 | And then your children, well, guardianship
00:09:11.800 | will be determined by the court.
00:09:13.240 | Can I ask you a question about that?
00:09:15.040 | Stop right there.
00:09:16.120 | So guardianship will be determined by the court,
00:09:18.480 | but it's not like you get in a car wreck with your spouse
00:09:22.360 | and your young children are maybe with a babysitter.
00:09:26.640 | And unfortunately, you and your spouse pass away,
00:09:32.320 | and guardianship will be determined by the court.
00:09:34.760 | But what happens in the meantime?
00:09:36.920 | I mean, what happens to these children?
00:09:39.240 | There's short-term guardianship and then
00:09:40.800 | long-term guardianship.
00:09:41.760 | So in the short term, if there's no one
00:09:44.200 | available to take them, then they'd
00:09:46.120 | be cared for by the state.
00:09:47.280 | They'd either go to a home or child care services.
00:09:50.120 | Long term, you go through the process in court.
00:09:52.560 | So somebody would begin that process
00:09:54.480 | by filing a petition for guardianship.
00:09:56.720 | And that can be literally anyone.
00:09:58.720 | It can be one of your surviving siblings.
00:10:01.680 | It can be your parents.
00:10:02.720 | And then the court will review whoever
00:10:05.760 | requests to be guardian and then make a determination based
00:10:08.760 | on what's in the best interest of the child.
00:10:10.560 | So that can get confusing and complicated
00:10:12.840 | when multiple people come forward.
00:10:14.280 | It can get very emotional.
00:10:15.640 | Everyone thinks that they are the best
00:10:18.240 | person for the children.
00:10:19.840 | But ultimately, yes, it's the court's decision
00:10:21.960 | who will take those children.
00:10:23.880 | Well, Malik, let me ask you, when
00:10:25.800 | it comes to financial matters, one of the documents
00:10:29.200 | that we're told we should have is a durable power of attorney.
00:10:33.640 | What does that do?
00:10:35.200 | Yeah, just in general, a power of attorney
00:10:37.680 | allows somebody else to make decisions on your behalf.
00:10:42.400 | So in this case, we're talking about financial decisions.
00:10:45.720 | So for instance, if you become incapacitated, not death,
00:10:50.880 | but something else happens to you,
00:10:53.000 | this would allow the person who you
00:10:55.320 | name that would give them the ability to make investment
00:10:58.320 | decisions or have control over your checking account and things
00:11:01.760 | like that so that your bills can still get paid and so on.
00:11:04.720 | Ryan, what about a medical power of attorney?
00:11:06.640 | Why is that important?
00:11:07.760 | Medical power of attorney is when you're incapacitated,
00:11:10.760 | it sets forth who could make decisions when you can't make
00:11:13.720 | decisions for yourself, under what conditions
00:11:16.040 | that power transfers.
00:11:17.920 | Then you have the decision what sort of care
00:11:20.480 | can be provided, end of life decisions,
00:11:23.320 | when somebody is on life support,
00:11:25.120 | situations like that.
00:11:26.960 | OK, let's get into the concept of a trust.
00:11:30.080 | A lot of people set up trusts.
00:11:31.480 | A lot of people don't set up trusts.
00:11:33.680 | What are the main reasons why someone would set up a trust?
00:11:37.480 | And very broadly, different types
00:11:38.960 | of trusts they could set up.
00:11:40.800 | Sure.
00:11:41.480 | The idea of a trust is it's a financial arrangement
00:11:43.640 | where somebody else has control over your assets
00:11:47.440 | for the benefit of a beneficiary.
00:11:49.520 | So there are different types of trusts.
00:11:51.160 | In a living trust, usually the trustor,
00:11:53.280 | it's the person who sets up the trust, will also be the trustee.
00:11:55.920 | And the trustee is the person who manages the trust.
00:11:58.160 | They'll be the trustee for their lifetime.
00:12:00.280 | And then upon death, usually that responsibility
00:12:03.320 | transfers to somebody else.
00:12:05.160 | And the idea of a trust in that situation
00:12:06.960 | is you're taking the assets technically away
00:12:09.840 | from the person that owns them.
00:12:11.120 | So when they die, there's no transfer of those assets
00:12:15.320 | from that trustor to the other party.
00:12:17.040 | So they don't have to go through probate.
00:12:18.800 | So that's one of the biggest advantages
00:12:20.160 | of having a trust, especially in California
00:12:21.960 | where the probate process is really long.
00:12:25.160 | Whatever assets are in that trust
00:12:26.600 | just get transferred automatically.
00:12:28.840 | So it's much smoother.
00:12:29.720 | It's much quicker.
00:12:30.560 | You don't need the court to intervene.
00:12:32.840 | It's less costly.
00:12:34.600 | There's a number of different trusts.
00:12:36.160 | As I mentioned, there's a living trust.
00:12:38.120 | There's a testamentary trust, which
00:12:40.200 | is a trust that doesn't really come into being
00:12:43.040 | until the person is deceased.
00:12:46.240 | So that doesn't have the advantage of avoiding probate
00:12:49.240 | because the property doesn't actually fund the trust
00:12:53.640 | until you already pass.
00:12:56.080 | Revocable trusts are the most common.
00:12:57.840 | That's where you can create the trust,
00:12:59.680 | but you remain the trustee.
00:13:00.760 | And you can cancel the trust at any time.
00:13:04.120 | You can make changes throughout your life.
00:13:05.840 | And it doesn't really become irrevocable until you pass.
00:13:09.720 | And then the other end, there's irrevocable trusts,
00:13:12.560 | which completely remove the assets from you,
00:13:15.320 | from your control.
00:13:16.640 | They're usually managed by a business.
00:13:18.880 | And that has a lot of advantages for what protects you
00:13:22.520 | from creditors because you literally
00:13:24.760 | don't own the assets anymore.
00:13:26.600 | So they can't come after the assets
00:13:28.840 | if there was a lawsuit, something like that.
00:13:30.880 | That's good.
00:13:31.440 | I know there's just an infinite--
00:13:32.720 | I mean, it seems like an infinite number of ways
00:13:34.720 | to write trust depending on what your needs are.
00:13:37.800 | Mike, do you see any other common uses for trusts?
00:13:40.400 | Right.
00:13:40.880 | So just like Ryan mentioned, avoiding probate
00:13:42.960 | is a very common and important reason to set up a trust.
00:13:47.800 | There's also just anybody who wants
00:13:50.160 | to exert some sort of control over their assets
00:13:52.680 | after their death.
00:13:54.040 | For instance, if they're leaving assets
00:13:56.800 | to a child who they don't--
00:13:59.680 | for one reason or another, they think
00:14:01.280 | the child would not make great decisions
00:14:04.400 | with regard to those assets.
00:14:06.560 | It could be because the child is disabled,
00:14:08.680 | or it could just be because the child has a history of making
00:14:11.640 | poor financial decisions.
00:14:13.360 | And so then you would set up a trust with a trustee.
00:14:17.040 | The trustee could be another trusted family member,
00:14:19.160 | or it could be a CPA or an attorney, somebody like that,
00:14:22.640 | who would then be managing those assets for the benefit
00:14:25.800 | of the beneficiary.
00:14:27.960 | But Mike, one of the advantages or disadvantages
00:14:32.880 | of an irrevocable trust is when you put assets
00:14:37.680 | into an irrevocable trust, you no longer
00:14:40.880 | get stepped up basis on death.
00:14:43.600 | Could you talk about this from a tax standpoint,
00:14:46.720 | the difference between using a revocable trust
00:14:50.360 | and an irrevocable trust?
00:14:53.120 | When we're talking about just normal assets held
00:14:55.680 | in a taxable brokerage account, when you die,
00:14:58.080 | the person who inherits them gets a step up
00:15:00.440 | in cost basis, which means their cost basis will
00:15:02.800 | be equal to whatever the market value is on the date
00:15:06.000 | that you die.
00:15:06.560 | So they could sell those assets right away
00:15:08.760 | and not have to pay any capital gains tax.
00:15:12.120 | Whereas in some cases here with an irrevocable trust,
00:15:16.600 | there wouldn't be a step up in cost basis.
00:15:20.240 | And so that's going to create some additional cost.
00:15:22.600 | If they sell the assets, there's going
00:15:24.160 | to be some capital gains.
00:15:26.600 | What is the cost basis?
00:15:28.080 | Let's say that I owned a lot of stock
00:15:29.960 | and I put it into an irrevocable trust, a generation
00:15:33.600 | skipping trust for the benefit of my grandchildren.
00:15:37.160 | And the cost basis I had on that stock was $100,000,
00:15:41.760 | but now it's worth a million dollars.
00:15:44.520 | Yeah, it's just carry over cost basis.
00:15:46.600 | So their cost basis to my grandchildren
00:15:48.480 | would be $100,000.
00:15:50.280 | Right.
00:15:50.800 | It could be more as if the trust is reinvesting dividends
00:15:55.160 | and acquiring more shares at higher prices as time goes on.
00:15:58.120 | There's going to be no step up.
00:15:59.600 | So although you get the money out of, say,
00:16:03.520 | my estate for the benefit of creditor protection
00:16:07.560 | and also for the benefit of potentially estate taxes,
00:16:10.960 | what I lose in this transaction is I lose,
00:16:14.440 | or they lose, the step up basis on death.
00:16:17.840 | Yeah, there's trade-offs involved, certainly.
00:16:20.640 | Also there's just the fact about revocable versus irrevocable.
00:16:25.640 | There's the flexibility.
00:16:28.080 | You lose the ability to make changes down the line.
00:16:30.440 | And so there's trade-offs going on here, definitely.
00:16:33.600 | Does everybody need a trust?
00:16:35.320 | And the reason I ask that is because a lot of people
00:16:37.760 | have beneficiaries on their IRAs and 401(k)s and Roth
00:16:41.680 | accounts, 403(b)s, whatever.
00:16:45.080 | They also now, in their personal account,
00:16:46.920 | have what's called transfer on death, TOD.
00:16:49.600 | So those assets go directly to somebody else.
00:16:52.240 | And let's say they didn't own a house.
00:16:55.040 | Let's say they were living in an apartment.
00:16:57.120 | It seems like you wouldn't need a trust.
00:16:59.280 | Yeah, myself as an example, I do not
00:17:01.960 | have a trust for that exact reason.
00:17:03.760 | More than 90% of our total net worth
00:17:06.080 | is retirement accounts that will just pass automatically
00:17:08.720 | by designated beneficiary.
00:17:11.040 | No, I don't think everybody needs a trust.
00:17:13.400 | Ryan might have a different opinion.
00:17:14.960 | I don't know.
00:17:15.520 | We'll see.
00:17:16.720 | No, I would agree with that.
00:17:18.800 | Estate plans vary in complexity depending
00:17:21.440 | on how complex your estate is and where you want it to go.
00:17:24.840 | I mean, if you have a spouse and you have accounts
00:17:27.280 | of beneficiaries, everything's already kind of accounted for.
00:17:30.440 | It's just really the more complex your estate gets
00:17:32.840 | and the more detailed you want that distribution to be
00:17:35.560 | at your death, the trust will give you that control.
00:17:38.280 | But yeah, there are definitely a lot
00:17:39.800 | of people that don't need a trust at all.
00:17:42.080 | There are a few states that are what
00:17:44.880 | are called community property states.
00:17:48.320 | And the rest of the states are called--
00:17:50.240 | I think it's spousal states.
00:17:51.840 | Is that correct terminology?
00:17:53.720 | Yeah, spousal property or just common law.
00:17:57.120 | Common law.
00:17:58.320 | Separate property, yeah.
00:17:59.600 | They're all kind of the same.
00:18:02.120 | But there's very few-- there's, I think, like six states that
00:18:04.160 | are common community properties.
00:18:05.520 | I think there are seven, because I live in one.
00:18:07.520 | Seven.
00:18:08.560 | But some of the big states, like Texas and Arizona
00:18:12.440 | and California, so even though there's only seven states,
00:18:15.480 | it's a pretty good-sized part of the population that falls
00:18:18.560 | under community property.
00:18:20.360 | So could you explain what happens in a community property
00:18:25.480 | state versus a common law state?
00:18:30.240 | Sure, well, in a community property state, what it says
00:18:33.480 | is essentially any assets that are acquired,
00:18:35.960 | any money that's earned during the marriage
00:18:38.960 | is community property.
00:18:40.200 | So if there's unequal earning capacity or earnings
00:18:44.840 | from the wife and the husband, regardless,
00:18:48.480 | all those earnings are shared equally.
00:18:50.080 | So the wife would own 50%.
00:18:51.920 | The husband would own 50%.
00:18:54.480 | And then on death, you can only transfer, obviously,
00:18:58.360 | that property that you own.
00:18:59.800 | So if whatever assets are in that community property,
00:19:03.560 | you can only transfer half of them.
00:19:05.480 | Same goes with property.
00:19:07.080 | If there's a home that's acquired during the marriage,
00:19:09.640 | even if only one spouse is on the title,
00:19:12.960 | that property is still community property,
00:19:15.920 | and each spouse owns half.
00:19:18.400 | In common law property, the difference
00:19:21.240 | between community property and a separate property state
00:19:23.440 | is just how it determines what you own.
00:19:26.280 | So in a community property state,
00:19:28.280 | if you own half of that property,
00:19:30.080 | you can only transfer half of that property.
00:19:32.080 | And if it was a separate property state
00:19:34.600 | and you were the only name on the title,
00:19:39.120 | then you can transfer the entire property.
00:19:41.840 | - Okay, I'm a little confused.
00:19:43.720 | - In a community property state,
00:19:45.280 | if you've got spouse A and spouse B,
00:19:48.080 | and there's a pool of community property,
00:19:51.280 | essentially it's treated as if spouse A
00:19:53.920 | already owns half of the property
00:19:55.960 | and spouse B already owns half of the property.
00:19:58.680 | So if spouse A dies, spouse A's will
00:20:03.680 | doesn't have anything to do with what happens
00:20:06.320 | with spouse B's 50%.
00:20:08.400 | Spouse B's 50% is still spouse B's 50%,
00:20:11.640 | but spouse A's will can determine
00:20:13.880 | where spouse A's 50% goes.
00:20:16.440 | And of course, in many cases it would be left to spouse B,
00:20:19.360 | and now spouse B would have 100%,
00:20:21.560 | but it could be left to somebody else.
00:20:24.240 | - Give me another example of common law.
00:20:27.120 | - Sure, so then we have to talk about
00:20:31.120 | other ways that property can be owned jointly.
00:20:34.960 | The most common would be joint tenants
00:20:38.840 | with rights of survivorship.
00:20:41.000 | And basically when property is owned that way
00:20:43.840 | by two owners, then when spouse,
00:20:47.080 | or when joint owner A dies,
00:20:48.760 | it automatically goes to joint owner B.
00:20:52.200 | But there's other versions as well.
00:20:53.960 | So you can have tenancy in common,
00:20:58.240 | where if spouse A, or if two people own property this way,
00:21:02.880 | then in that case, when one person dies,
00:21:07.160 | their will controls what happens
00:21:10.040 | to their share of the property.
00:21:11.720 | So they could leave their share of the property
00:21:13.320 | to their kids, as opposed to it automatically
00:21:15.280 | going to the other joint owner.
00:21:17.080 | So it depends how the property is owned,
00:21:20.520 | basically how it's titled.
00:21:21.840 | - So obviously titling of property
00:21:26.520 | is something you certainly wanna discuss
00:21:28.320 | with your estate planning attorney,
00:21:29.560 | depending on which state you're in.
00:21:31.800 | Let me ask about cost basis in a community property state.
00:21:36.800 | If it's both jointly owned and one person dies,
00:21:43.160 | does it get a step up on death?
00:21:46.480 | - Yeah, in community property states,
00:21:48.440 | the surviving spouse gets a full step up,
00:21:51.080 | which is an advantage relative to common law states.
00:21:56.080 | So in other states, what happens is
00:21:59.000 | the surviving spouse would get a half step up, basically.
00:22:02.400 | So if property was purchased for $300,000
00:22:06.120 | and its current market value is 500,000
00:22:08.800 | at the time of death,
00:22:09.920 | they would get their basis stepped up halfway.
00:22:12.280 | So it'd be stepped up to 400,000 in a common law state,
00:22:16.120 | whereas a community property,
00:22:17.480 | the surviving spouse gets a full step up.
00:22:19.560 | So that's an advantage in those states.
00:22:21.920 | - So I live in Texas, which is a community property state.
00:22:25.160 | And I understand that here, when I die,
00:22:29.480 | all of my assets, my home, mutual funds,
00:22:34.480 | all get stepped up when I die fully, 100%.
00:22:39.280 | The whole account, whether she's on the title or not.
00:22:44.280 | And then when she dies, there is another step up as well.
00:22:49.240 | So in community property states with a couple,
00:22:54.000 | there are two step ups during their lifetime,
00:22:59.000 | which is different than common law state, correct?
00:23:02.280 | - Yeah, it would be two full step ups.
00:23:04.520 | And that is different, exactly, yep.
00:23:06.760 | - So we get a little bit of a federal tax advantage
00:23:09.000 | by living in a community property state.
00:23:11.480 | Yeah, which is kind of strange
00:23:12.760 | because we're talking about federal tax
00:23:15.200 | instead of state tax.
00:23:16.400 | And so just because we live in community property states,
00:23:19.880 | we get a federal tax break,
00:23:21.880 | whereas common law states,
00:23:24.080 | couples don't get the same tax break.
00:23:25.640 | So I find that interesting.
00:23:26.800 | - Yeah, I agree.
00:23:27.640 | It is uncommon that the federal tax treatment
00:23:30.280 | varies from one state to another.
00:23:32.160 | - All right, so we talked about probate a little bit,
00:23:37.640 | and this is a mystifying thing for a lot of people
00:23:41.520 | who have never been through it.
00:23:43.560 | Ryan, you said in California it can take a long time
00:23:47.640 | to get an estate through probate.
00:23:49.440 | Can you talk us through what happens
00:23:52.840 | when an estate goes to probate?
00:23:55.920 | - Yeah, probate is essentially the court process
00:23:59.880 | for if there's a will, validating the will,
00:24:02.320 | determining what assets the deceased owned,
00:24:05.400 | and then who those assets should go to,
00:24:07.280 | and ensuring that creditors are also taken care of.
00:24:10.720 | So assets that avoid probate,
00:24:12.920 | beneficiary designations or trust property,
00:24:16.800 | they're not even discussed or considered
00:24:18.680 | in that probate proceeding.
00:24:20.000 | - So in a sense, you're saying that
00:24:21.240 | because they avoid probate,
00:24:23.400 | they can be taken care of right away.
00:24:24.920 | They don't have to go through the court system.
00:24:26.480 | - Correct, yeah.
00:24:27.320 | - If a house was owned in the name of a trust,
00:24:29.840 | the beneficiaries or the heirs to that house
00:24:34.720 | can sell it right away.
00:24:36.640 | They don't have to wait until it goes through probate,
00:24:38.840 | correct?
00:24:39.680 | - If the real estate is titled in the trust, yeah,
00:24:42.280 | then it would avoid probate.
00:24:44.240 | - Isn't that a big thing?
00:24:45.200 | I mean, look, I see a lot of houses
00:24:47.040 | as you drive down the road that are empty.
00:24:50.080 | And I'm beginning to realize that a lot of those homes
00:24:54.720 | are from people who passed away
00:24:57.200 | and they can't do anything with them.
00:24:59.520 | The family can't do anything with it
00:25:01.040 | because the real estate of the house
00:25:03.720 | for the last surviving parent was not in a trust.
00:25:08.720 | There may have been a will, maybe not,
00:25:12.960 | but the house is just sitting there empty
00:25:15.680 | and you can't do anything about it
00:25:17.520 | until the probate is done.
00:25:20.080 | Am I correct on that?
00:25:21.320 | - Yeah, that's correct.
00:25:22.640 | The title of the house is in limbo
00:25:24.240 | until the court decides who gets it
00:25:27.120 | or how it's to be distributed.
00:25:28.600 | That's one of the most frustrating things about probate
00:25:30.560 | is until that probate process is complete,
00:25:33.120 | until the estate is closed, it's all kind of up in the air.
00:25:37.560 | - I can imagine during COVID,
00:25:38.920 | this thing just slowed down to a trickle,
00:25:42.680 | getting things through probate court.
00:25:45.600 | - Yeah, courts all over the country
00:25:48.280 | came to a screeching halt, essentially.
00:25:50.280 | I mean, anytime something required
00:25:51.960 | an in-person court appearance, it just didn't happen.
00:25:54.640 | Everything's still kind of backed up,
00:25:56.800 | especially in California.
00:25:58.320 | It's gonna take a long time
00:25:59.520 | before they catch up for certain.
00:26:01.280 | California, I know that technically on paper,
00:26:03.720 | it shouldn't take more than a year,
00:26:05.080 | but it can take two, three, sometimes even more years
00:26:08.520 | before that estate is closed
00:26:10.160 | and the probate process is complete.
00:26:11.760 | You were mentioning houses sort of unoccupied
00:26:14.080 | and them being in probate.
00:26:15.360 | And that's true in a lot of situations.
00:26:18.000 | Selling the property or transferring ownership,
00:26:20.280 | none of that can happen until the estate's closed
00:26:22.480 | and probate is completed.
00:26:24.280 | - So clearly, having the least amount of assets
00:26:29.160 | when you die go through probate is a good idea
00:26:33.120 | with either beneficiaries or transfer on debt.
00:26:37.160 | Trust something where it doesn't have to go through a probate
00:26:43.400 | would be a beneficial thing for most people
00:26:46.720 | who are listening to this podcast.
00:26:49.160 | - Yeah, that's correct.
00:26:50.000 | I mean, there's an argument to be made
00:26:51.320 | for the probate process.
00:26:53.160 | If you think there's gonna be fighting
00:26:54.760 | over the validity of a will or anything like that,
00:26:57.120 | you want the court to be involved
00:26:58.640 | and have some level of control over things.
00:27:02.200 | But generally, yeah, you want to avoid probate
00:27:04.920 | as much as possible.
00:27:06.520 | - So we've talked about needing a will,
00:27:09.120 | power of attorney, durable power of attorney.
00:27:11.200 | We need a medical power of attorney,
00:27:13.600 | guardianship papers, perhaps a trust,
00:27:16.640 | depending on your situation and doing these documents.
00:27:20.200 | And go to Mike on this because I don't want
00:27:23.440 | a biased opinion by an attorney who does documents.
00:27:27.680 | I mean, why can't we just go to LegalZoom
00:27:29.720 | or something online and create these documents, Mike?
00:27:32.600 | I mean, do we need to hire an attorney?
00:27:35.160 | Nothing against you, Ryan, I'm just asking Mike.
00:27:37.880 | - No offense taken.
00:27:40.320 | No, so I am interested in Ryan's opinion here also.
00:27:42.760 | I'll say that from my point of view is in some cases,
00:27:47.680 | yeah, go ahead and do LegalZoom.
00:27:50.040 | If you have a very simple situation,
00:27:54.360 | although the caveat here is that in the field of taxation,
00:27:58.200 | we have a joke that everyone thinks
00:27:59.360 | that their situation is simple
00:28:00.960 | because they don't understand all the complexities
00:28:04.160 | that are actually bundled in there.
00:28:06.040 | So there are some times where LegalZoom is gonna be fine.
00:28:10.280 | The less amount of assets in question,
00:28:11.800 | the less complicated they are.
00:28:13.920 | Not having kids, for instance,
00:28:15.800 | would be another thing that makes things simpler
00:28:17.960 | or not having minor children anyway.
00:28:20.400 | There are some cases where, sure,
00:28:22.120 | go ahead and go through LegalZoom,
00:28:24.160 | especially if the alternative is that you wouldn't,
00:28:27.080 | you wouldn't talk to an attorney.
00:28:28.320 | If you just know that the alternative
00:28:30.200 | would be no will at all, then okay,
00:28:33.400 | something like LegalZoom.
00:28:35.400 | An attorney, I mean, the main point
00:28:38.720 | isn't that they're going to, you know,
00:28:42.080 | write up these documents for you.
00:28:43.760 | It's that they're going to give you advice
00:28:46.120 | about what should be included in these documents.
00:28:49.240 | That's, it's valuable.
00:28:51.600 | And it's valuable in ways that people often don't anticipate.
00:28:54.600 | - What do you think, Ryan?
00:28:56.520 | I mean, unbiased opinion.
00:28:58.920 | - Unbiased opinion?
00:29:01.200 | Like Mike said, there might be an instance
00:29:04.000 | where LegalZoom makes sense for those circumstances
00:29:07.520 | where one, your estate is relatively simple
00:29:09.600 | and your estate plan should be relatively simple.
00:29:12.360 | You'd also have to be like a do-it-yourselfer,
00:29:14.880 | if you're pretty confident you can figure out
00:29:16.960 | most things on your own and you do a lot of research.
00:29:19.080 | And personally, I think the law is at times accessible.
00:29:22.960 | So if you think that you can figure that out,
00:29:25.160 | again, like Mike said, one of the bigger advantages
00:29:27.280 | is a lawyer will present options to you
00:29:29.480 | that you didn't really know.
00:29:31.320 | One other thing to consider
00:29:32.440 | is the cost of making a mistake.
00:29:34.480 | You know, like if you look at LegalZoom,
00:29:37.080 | I'd imagine it's probably a couple hundred dollars
00:29:38.800 | for a will, couple hundred more for a trust.
00:29:41.720 | I mean, for a basic estate plan with an attorney,
00:29:45.040 | you can get will, trust, power of attorney,
00:29:47.120 | all that stuff for 24, $2,500.
00:29:50.160 | The cost of making a mistake,
00:29:51.200 | if something does go through probate,
00:29:53.160 | that it wouldn't otherwise.
00:29:54.640 | I mean, the probate process itself
00:29:56.000 | is gonna cost the very minimum $2,000.
00:29:58.960 | And then based on the size of the estate,
00:30:00.520 | it's gonna go up from there.
00:30:01.720 | So it's usually pretty good insurance
00:30:04.360 | to go with an attorney.
00:30:05.720 | - So let's say I was living in Texas and I moved to Utah.
00:30:10.720 | Do I need to get all my estate documents redone in Utah?
00:30:17.320 | - No, you don't need to.
00:30:18.720 | If a will or a trust is validly created in one state,
00:30:22.240 | then it's gonna be upheld in the other state.
00:30:24.880 | So the state in which it's formed or created,
00:30:29.120 | that determines the validity of it
00:30:31.120 | as far as the administration of it.
00:30:32.440 | That's gonna be determined by the state
00:30:33.880 | where you reside at the time of death.
00:30:36.080 | There are some reasons to move your estate
00:30:39.280 | to another state when you move for tax reasons.
00:30:41.680 | Mike probably has more knowledge on that subject.
00:30:44.160 | - What do you think, Mike?
00:30:45.000 | Are there tax reasons to go visit an attorney
00:30:47.520 | in the new state where you now live?
00:30:49.600 | - Yeah, there can be.
00:30:50.720 | One big thing, the federal estate tax
00:30:54.320 | has a super high exclusion amount right now,
00:30:57.200 | a little over $12 million.
00:30:58.800 | So obviously, the number of people impacted
00:31:01.480 | by that is very small.
00:31:03.360 | - And that's per person, by the way.
00:31:04.920 | That's not per couple.
00:31:06.440 | - Right, exactly, yeah.
00:31:07.880 | - And if one person dies,
00:31:10.600 | the other person gets 24, correct?
00:31:13.280 | - Yeah, the surviving spouse can,
00:31:18.280 | we have what we call portability now.
00:31:19.800 | So any unused exclusion amount can be carried over,
00:31:23.840 | basically, to that surviving spouse.
00:31:25.920 | - Okay, so go on with the state.
00:31:27.440 | Sorry about that.
00:31:28.400 | - No, you're good.
00:31:29.240 | So at the state level,
00:31:30.400 | many states don't impose an estate tax, but some do.
00:31:33.720 | And of the states that do,
00:31:35.480 | in many cases, that exclusion amount
00:31:38.640 | is a much lower threshold, $1 million, for instance.
00:31:43.320 | And when you're dealing with that $1 million threshold,
00:31:46.480 | obviously, that means that a lot more people
00:31:48.400 | are going to be impacted.
00:31:50.640 | People whose estates exceed $1 million
00:31:53.360 | are close to hitting 12 million, right?
00:31:55.880 | So, and not only that, but in some cases,
00:31:59.520 | there isn't this portability that we talk about
00:32:03.080 | between spouses at the state level.
00:32:05.200 | And so you can use certain types of trusts, for instance,
00:32:09.480 | to essentially artificially create that portability.
00:32:13.560 | So without getting into the details,
00:32:16.040 | yes, that would be a reason, certainly,
00:32:18.360 | to talk to an attorney in the new state
00:32:21.040 | so they can help you work through those issues.
00:32:24.200 | - I understand.
00:32:25.040 | Okay, well, thank you for that.
00:32:27.080 | Let's get to the second half of this,
00:32:28.640 | which is Mike's book, "After the Death of Your Spouse,
00:32:33.360 | Next Financial Steps for a Surviving Spouse."
00:32:36.240 | Great book.
00:32:37.520 | Talks about the immediate steps,
00:32:40.480 | and then it talks about intermediate steps.
00:32:42.520 | I'm gonna let Mike go ahead and take over from here.
00:32:46.280 | And then what should somebody do?
00:32:48.480 | What's the first thing they should do?
00:32:51.040 | - Well, generally, the first thing
00:32:53.240 | in this long list of administrative things to be done
00:32:56.240 | is getting certified copies of the death certificate.
00:32:59.920 | And that's because there are a ton of different entities
00:33:06.760 | that you're going to interact with over the next months
00:33:10.080 | that will need a copy of that.
00:33:11.960 | And sometimes if you're visiting them in person,
00:33:15.280 | they'll be happy to let you show it to them,
00:33:17.640 | and then maybe they'll scan it or make a copy,
00:33:19.200 | and then you can keep it.
00:33:20.440 | But sometimes they want to keep a certified copy
00:33:23.560 | of the death certificate, so you'll need several copies.
00:33:26.920 | - How many is several?
00:33:28.240 | I mean, 20, 30?
00:33:30.120 | - Yeah, 20 to 30 is what I often hear recommended,
00:33:33.880 | but it's going to depend.
00:33:35.480 | Basically, the more accounts,
00:33:38.160 | the greater the number of accounts
00:33:39.480 | that the deceased person owned,
00:33:42.560 | then the more financial institutions
00:33:45.960 | that you'll be interacting with.
00:33:47.760 | And so the more copies you're going to need.
00:33:49.280 | So basically, the more complex the person's life,
00:33:52.240 | the more copies you're likely to need.
00:33:54.160 | - Sure speaks to simplicity,
00:33:57.040 | which is what we talk about on the Bogleheads all the time.
00:34:00.120 | Listen, I'm a veteran.
00:34:01.200 | You know, I retired from the Marine Corps after 21 years,
00:34:05.440 | and I understand that I may be able
00:34:08.120 | to get free death certificates.
00:34:11.400 | What are the advantages and disadvantages of that?
00:34:14.320 | - Yeah, well, disadvantages, none, really.
00:34:16.920 | It's free.
00:34:17.760 | - Well, how long will it take?
00:34:20.160 | - Yeah, well, so there's a few ways
00:34:22.080 | you can get death certificates.
00:34:23.520 | Number one is whatever business
00:34:27.160 | is handling the deceased person's remains.
00:34:30.840 | So the funeral home or the cremation company,
00:34:34.760 | they will usually arrange to have
00:34:37.200 | however many you ask sent to you,
00:34:38.560 | and there's going to be a per copy fee for that.
00:34:41.600 | You can also request them from your state
00:34:43.520 | or from your county.
00:34:45.240 | In many cases, requesting them from your state
00:34:47.320 | is less expensive, but it does take longer.
00:34:50.160 | Of course, how long it takes and how much it costs
00:34:53.200 | varies by state and by county.
00:34:54.920 | Here in St. Louis, for instance,
00:34:58.680 | I think it's $11 per copy.
00:35:00.960 | And just like you said, veterans,
00:35:04.600 | many states will provide some number of free copies
00:35:08.200 | of certified death certificates
00:35:10.520 | for surviving family members of a deceased veteran.
00:35:14.560 | In Missouri, for instance, I believe it's three copies.
00:35:17.760 | So you might as well request them,
00:35:19.120 | but you're probably going to need more than that.
00:35:21.120 | - Okay, so now we have the death certificates.
00:35:24.840 | We're ready to get going on contacting various people
00:35:29.840 | if they haven't already been contacted.
00:35:32.080 | So what's the list?
00:35:34.880 | - The list, yeah.
00:35:36.440 | It's a long list, unfortunately.
00:35:38.560 | And I just want to back up a step
00:35:41.080 | and say that this is the reason why the book, by the way,
00:35:43.280 | is broken down into immediate next steps
00:35:46.560 | and intermediate next steps,
00:35:48.520 | is that there's a lot of things
00:35:49.960 | that you're going to have to do that are important,
00:35:53.160 | but they're not necessarily urgent.
00:35:55.240 | And in some cases, you can't do them even.
00:35:59.160 | In a lot of these cases, you can't do them
00:36:00.880 | until you have that death certificate in hand.
00:36:03.640 | So for a lot of these things,
00:36:06.600 | yes, it's important to know
00:36:07.720 | that it's going to be on your to-do list,
00:36:09.000 | but you don't have to tackle it right now.
00:36:10.920 | And also in many cases,
00:36:13.720 | it's best to wait before making major decisions.
00:36:17.000 | So for instance, if there's life insurance proceeds
00:36:20.480 | or a death benefit from a variable
00:36:22.320 | or any sort of annuity, for instance,
00:36:25.080 | you're going to have to decide
00:36:26.560 | how you want to invest that money,
00:36:28.480 | but you don't have to make that decision immediately.
00:36:30.360 | It's okay to just leave the money sitting around
00:36:32.360 | in cash for a little bit
00:36:33.800 | while you work through all these other things
00:36:36.040 | you need to get sorted out.
00:36:37.960 | So just, it's important to understand
00:36:39.800 | that not all of these things
00:36:40.800 | need to be tackled absolutely immediately.
00:36:44.200 | Companies to contact,
00:36:46.240 | obviously one of the first ones
00:36:47.440 | would be just who we mentioned.
00:36:48.600 | If there's a life insurance policy,
00:36:50.640 | contacting that insurance company,
00:36:53.000 | giving them the certified copy
00:36:54.760 | of the death certificate and so on.
00:36:56.680 | Also, many people have some level of life insurance
00:37:00.400 | through their employer.
00:37:01.240 | So contacting the deceased person's employer
00:37:04.240 | to ask about that.
00:37:06.520 | There's other information you're going to need
00:37:08.040 | to cover with the employer as well.
00:37:09.800 | Generally, the employer will owe the estate
00:37:12.960 | some amount of unpaid wages, also unused vacation time.
00:37:17.200 | And then you'll also want to talk to the employer about,
00:37:21.360 | is there an FSA or HSA linked to the employer
00:37:24.960 | that has some balance in there?
00:37:26.560 | You'll want to find out about that.
00:37:28.400 | If your health insurance is currently
00:37:32.280 | through your deceased spouse's employer,
00:37:35.800 | then it's super important to get the details there
00:37:38.160 | as far as how long does that coverage continue?
00:37:43.000 | Exactly when is it going to terminate?
00:37:45.360 | Because obviously you have to start lining up
00:37:47.320 | your next source of health insurance.
00:37:50.200 | Social Security Administration is important.
00:37:53.360 | - I know you wrote a whole chapter in the book
00:37:55.840 | about how to deal with Social Security
00:37:57.920 | and what do you get and what do you don't get.
00:37:59.920 | And there's even a death benefit apparently
00:38:02.360 | that you get from Social Security,
00:38:03.640 | which quite frankly, I didn't even know.
00:38:05.920 | So life insurance, health insurance,
00:38:08.200 | your employer, Social Security, credit cards, loans.
00:38:12.640 | Oh, by the way, when I die, all my loans go away, correct?
00:38:16.280 | I mean, all my credit card debt, right?
00:38:18.880 | - Unfortunately, not exactly, no.
00:38:21.840 | - But I thought I wanted to die in debt.
00:38:25.120 | I mean, you hear that all the time from people, right?
00:38:26.880 | - Well, in a lot of cases, if you have debt,
00:38:30.040 | there's somebody else who it's also their debt
00:38:33.120 | if you're married.
00:38:34.600 | In many cases, your spouse is on that debt also,
00:38:37.800 | so it is their debt also.
00:38:39.480 | But as a separate point, even if that's not the case,
00:38:42.520 | your estate still owes that debt.
00:38:44.960 | And so creditors, if there's some credit card balance
00:38:48.800 | or a car loan or what have you,
00:38:51.160 | your estate still owes that debt.
00:38:53.800 | - So I just wanna circle back a little bit to probate then.
00:38:56.320 | So between husband and wife, let's say husband dies,
00:39:02.920 | this still goes through probate
00:39:05.240 | because husband might have auto loan, for example,
00:39:08.680 | that it's in his name and he's paying on it.
00:39:12.440 | So wife gets the car,
00:39:15.160 | but she still owes what the husband took out as a loan,
00:39:18.640 | correct?
00:39:19.480 | And this is all done through probate?
00:39:21.280 | - Yes, yes to both questions.
00:39:23.400 | Yes, it's done through probate,
00:39:24.400 | and yes, the wife would still owe the loan on the car.
00:39:28.240 | - Okay, so life insurance, health insurance,
00:39:31.040 | we'll get a little bit more to social security in a minute,
00:39:33.480 | old employer, loans, credit cards,
00:39:36.760 | changing the name on bank accounts.
00:39:39.120 | How about deeds?
00:39:41.920 | Mike, you talked about in your book,
00:39:45.680 | a personal representative,
00:39:47.280 | instead of somebody doing this themselves,
00:39:51.720 | they have a personal representative do it,
00:39:55.920 | or maybe a court appointed personal representative.
00:40:00.480 | What is that all about?
00:40:02.120 | - Yeah, personal representative
00:40:03.840 | is more just a catch-all term.
00:40:05.440 | You've probably heard the term executor before.
00:40:07.240 | That's the person named in the will
00:40:08.520 | to handle the affairs of the estate.
00:40:10.840 | If there is no will,
00:40:14.160 | or if there was nobody named as executor in the will,
00:40:17.960 | or if the person named as executor
00:40:20.000 | chooses not to be the executor,
00:40:21.640 | because you don't have to be,
00:40:23.120 | then the court's going to appoint an administrator
00:40:25.920 | to handle the affairs of the estate.
00:40:28.400 | And personal representative is basically
00:40:30.120 | just a catch-all term
00:40:31.560 | to describe executors and administrators.
00:40:34.560 | It's basically just whoever is appointed by the court,
00:40:38.560 | ultimately, to handle the affairs of the estate
00:40:41.320 | is known as the personal representative.
00:40:42.920 | So you can think of it
00:40:43.760 | as a synonym for executor, basically.
00:40:46.360 | - And Ryan, in your experience,
00:40:47.920 | does the courts appoint a personal representative?
00:40:50.960 | Who are these people?
00:40:52.480 | - Personal representatives are usually the professionals
00:40:54.600 | that have done that before.
00:40:55.680 | Sometimes the court will appoint a personal representative
00:40:58.000 | that is related to the estate
00:40:59.440 | in some way related to the decedent.
00:41:01.720 | Court has a lot of discretion
00:41:03.200 | as to who to decide to handle that.
00:41:05.800 | - And they get paid for this, these people?
00:41:07.840 | - Yes, they can get paid, yeah.
00:41:09.200 | - So there's really no difference then
00:41:10.800 | between a personal representative
00:41:12.080 | and a trustee or an executor.
00:41:14.240 | I mean, it's all the same, right?
00:41:15.320 | It's just the same,
00:41:16.160 | just different terminology for the same thing.
00:41:18.600 | - So personal representative and executor,
00:41:20.480 | you can think of those as synonyms,
00:41:21.640 | but there is an important distinction
00:41:23.080 | between those and trustee, right?
00:41:26.320 | Because the personal representative and the executor,
00:41:28.800 | they were talking about the estate,
00:41:30.480 | the assets in the estate,
00:41:31.760 | whereas trustee is dealing with the assets in the trust.
00:41:33.920 | - Very good.
00:41:34.960 | Mike, in your book,
00:41:35.800 | you talk about an idea that I had never heard of before,
00:41:38.400 | that is to open up a separate bank account for all of this
00:41:42.520 | and get a separate tax ID number for the deceased,
00:41:47.520 | the estate.
00:41:48.600 | Can you talk about that?
00:41:50.240 | - Yeah, so in the year of death,
00:41:53.440 | the surviving spouse can file jointly
00:41:57.560 | with the deceased spouse for the year of death.
00:42:01.760 | And so that income that's gonna be included on that return
00:42:04.680 | is all of the surviving spouse's income for the whole year.
00:42:08.600 | And for the deceased spouse,
00:42:10.720 | it's all of their income up until the day that they died.
00:42:14.560 | Any income after that is the estate's income.
00:42:19.160 | And that has to be reported
00:42:20.400 | on the estate's income tax return,
00:42:22.600 | which is a separate return that has to be filed.
00:42:25.080 | - I'm married and I died.
00:42:27.520 | And so wouldn't we just file a joint return that year?
00:42:31.200 | - Right, exactly.
00:42:32.040 | You do file a joint return that year, most likely.
00:42:34.240 | I mean, you don't have to, just like any other year,
00:42:35.800 | your surviving spouse could choose to file separately,
00:42:37.880 | but probably she would choose to file jointly.
00:42:40.640 | And so that joint return that she would file
00:42:43.920 | would include all of her income that year
00:42:46.040 | and all of your income up until the date of death.
00:42:48.600 | But any income that would be your income,
00:42:51.920 | let's say it occurs a month after you die,
00:42:53.840 | and let's say it would be your income,
00:42:55.480 | except you are now deceased,
00:42:57.200 | that income is the estate's income.
00:42:58.920 | And the estate is a separate legal entity.
00:43:01.560 | And so that income, the estate's income,
00:43:05.120 | needs to be reported separately.
00:43:07.560 | And so having a separate bank account,
00:43:09.280 | separate tax ID number is really the way you wanna do it.
00:43:13.240 | - Okay.
00:43:14.080 | - Having everything going into one account
00:43:15.840 | and being intermingled, it's gonna be,
00:43:17.840 | at least from a tax perspective, it's gonna be a mess.
00:43:20.160 | I assume it's likely, at least potentially,
00:43:23.280 | gonna cause some problems
00:43:24.320 | with regard to other legal topics.
00:43:26.720 | From a tax perspective, it's definitely gonna be simpler
00:43:29.320 | to have the estate have a separate bank account.
00:43:32.400 | - Is that estate tax form a 1041?
00:43:36.120 | Is that what that's called?
00:43:37.760 | - It's 1041, right?
00:43:38.960 | And that's the estate income tax return,
00:43:41.680 | which is separate from the return that you would file
00:43:44.840 | with regard to estate taxes.
00:43:47.200 | - Right, that's a different tax form
00:43:49.520 | and a different form for the joint income tax return.
00:43:52.520 | So three tax returns.
00:43:54.720 | I tell you what, I thought this was gonna be an easy podcast
00:43:57.800 | but the more we talk, this is not easy.
00:44:00.840 | - Yeah, that's exactly the point of the book.
00:44:04.280 | There's so much, so many different things you need to do.
00:44:09.800 | And if you haven't been through it before, all of it's new.
00:44:13.920 | - Let's get into things like selling the house.
00:44:17.000 | One spouse dies, the other spouse is still in the house,
00:44:20.760 | house is too big, spouse wants to sell the house.
00:44:25.000 | Normally, if it's after the year after the spouse died,
00:44:29.600 | that would be a single tax return.
00:44:31.880 | So you would think that the free capital gain
00:44:35.760 | on that would be 250,000, but it's actually not.
00:44:39.840 | There's an exception.
00:44:40.880 | So Mike, this is a tax question,
00:44:42.440 | so I'm gonna go back to you.
00:44:44.040 | - Yeah, exactly.
00:44:45.160 | To back up a step, generally, when you sell your home,
00:44:48.800 | if you sell it at a gain,
00:44:50.320 | you can exclude up to $250,000 of the capital gain
00:44:53.440 | if you lived in the home for at least two years
00:44:57.080 | out of the last five years and you owned the home
00:45:01.120 | for at least two years out of the last five years
00:45:04.920 | and you didn't use this exclusion for the last two years.
00:45:07.320 | So if you meet those three requirements,
00:45:08.520 | you can exclude up to $250,000 of gain.
00:45:11.520 | And if you're married, it would be 500,000.
00:45:15.040 | Instead of 250,000.
00:45:16.760 | So to Rick's question, the idea here is that,
00:45:19.800 | okay, well, in the following year,
00:45:21.000 | this person is no longer filing as married.
00:45:23.120 | So you would think it would be a $250,000 exclusion,
00:45:27.120 | but there's a special rule that allows you
00:45:29.720 | to get the $500,000 exclusion.
00:45:31.840 | If you sell the home specifically
00:45:34.720 | within two years of the date of death,
00:45:37.400 | and it's important to note that it's two years
00:45:39.120 | of the date of death rather than two calendar years,
00:45:42.320 | for instance, and you haven't remarried
00:45:46.240 | by the time that you sell the home
00:45:48.080 | and the normal requirement where you haven't used
00:45:51.120 | this exclusion for the two years prior,
00:45:52.800 | neither you nor the deceased spouse used this exclusion
00:45:55.040 | during that two-year period,
00:45:56.080 | then you can use the $500,000 basically married couple
00:46:00.280 | exclusion amount rather than the 250,000.
00:46:02.880 | - But aside from that, are there any others like that,
00:46:05.160 | any benefits to surviving spouses
00:46:08.000 | or basically the year after the death of a spouse,
00:46:12.920 | the surviving spouse has to file as a single taxpayer
00:46:17.920 | with all lower income thresholds
00:46:20.680 | and IRMA thresholds and everything else?
00:46:24.400 | - In many cases, yes, the surviving spouse
00:46:27.720 | will now just be a regular single unmarried filer.
00:46:31.640 | However, there's also the qualifying
00:46:34.760 | surviving spouse filing status,
00:46:36.120 | used to be known as qualifying widower filing status.
00:46:39.120 | But to qualify for that,
00:46:40.800 | you need to have a minor child basically,
00:46:43.520 | or a disabled child who lives with you
00:46:45.440 | and you pay their costs of living and so on.
00:46:48.320 | That filing status works extends for another two years
00:46:53.120 | after the year of death.
00:46:54.800 | - Brian, you've been listening to all the information
00:46:57.680 | that we've been talking about that's in Mike's book.
00:47:00.160 | Would you like to add anything to what you should do
00:47:03.720 | as soon as a spouse dies?
00:47:05.640 | - Number one thing would be figure out
00:47:07.600 | if they had an estate plan in place.
00:47:09.240 | Usually, you're their spouse,
00:47:11.080 | you do know and you know where those documents are,
00:47:13.080 | but step one would be locate them
00:47:16.560 | and make sure things go off in the right direction.
00:47:19.840 | - Good point, know where those documents are.
00:47:23.240 | Okay, now we're gonna get into the social security question.
00:47:27.240 | But Mike, without getting too deep,
00:47:29.000 | because this can get very, very deep.
00:47:32.280 | What happens to social security when one spouse passes?
00:47:36.880 | - Yeah, so there's three primary types of benefits
00:47:41.880 | to be thinking about.
00:47:42.840 | There's also, I guess I'll say a fourth one
00:47:44.320 | that we'll cover real quick,
00:47:45.120 | which is there's a lump sum death benefit.
00:47:47.280 | It's just the flat $255 that you get one time,
00:47:51.560 | so it's not a big deal, but you will get that amount.
00:47:54.800 | Other than that, there's three primary types of benefits
00:47:57.280 | to be concerned with.
00:47:58.880 | The first is child benefits.
00:48:01.800 | And so that is for,
00:48:03.720 | if you have a child who is under 18 or under 19
00:48:10.280 | and they're a full-time high school student,
00:48:12.920 | or they are disabled with a disability
00:48:15.200 | that began before age 22,
00:48:17.640 | then that child can receive benefits
00:48:20.680 | on your deceased spouse's work record.
00:48:22.960 | And that's just called a child benefit.
00:48:25.800 | So you'll usually wanna file for that as soon as you can.
00:48:30.560 | And then there's also a similar benefit.
00:48:33.640 | It's the same benefit amount.
00:48:35.160 | It's called a mother/father benefit.
00:48:38.400 | And that is if you have a child in care who is under 16.
00:48:41.680 | So this one cuts off at an earlier age.
00:48:43.640 | So under 16 or disabled,
00:48:46.800 | then you would get a benefit as well.
00:48:48.480 | So your child gets a child benefit
00:48:50.320 | and you get this mother/father benefit.
00:48:52.920 | So those are if there are minor children.
00:48:58.280 | Then the third type of benefit to be concerned with
00:49:00.880 | is a surviving spouse benefit,
00:49:03.280 | sometimes referred to as a widow or widower benefit.
00:49:06.120 | And for that one, it can start as early as age 60
00:49:11.640 | or age 50 if you're disabled.
00:49:13.240 | And the super important thing to know
00:49:16.920 | about surviving spouse benefits
00:49:19.760 | is that you can file for that benefit at age 60
00:49:26.200 | and that doesn't automatically force you
00:49:28.400 | to have filed for your retirement benefit,
00:49:31.240 | which means that you can file for your survivor benefit
00:49:33.960 | at age 60 and let your retirement benefit keep growing.
00:49:37.680 | - By retirement benefit, you mean my own work.
00:49:41.360 | I'm working still.
00:49:42.600 | So I can get a social security benefit
00:49:44.720 | based on my spouse dying when I hit 60,
00:49:48.880 | but it doesn't affect my social security benefit
00:49:52.800 | if I'm still working.
00:49:54.240 | - You don't have to still be working,
00:49:55.600 | but right, it doesn't affect the retirement benefit
00:49:57.600 | based on your own work record.
00:49:59.120 | - Okay.
00:49:59.960 | - So you can let your own retirement benefit
00:50:02.160 | based on your work record,
00:50:03.240 | allow that to keep growing till age 70.
00:50:05.400 | So you basically get to collect this surviving spouse benefit
00:50:09.080 | from 60 until 70,
00:50:11.040 | and then file for your retirement benefit at 70.
00:50:13.960 | Or you can do the opposite.
00:50:15.360 | Basically, you can file for your retirement benefit
00:50:17.400 | as early as you can at 62
00:50:19.680 | and let your surviving spouse benefit grow
00:50:22.440 | until it maxes out and that maxes out
00:50:24.040 | at your full retirement age.
00:50:25.480 | So you can collect your retirement benefit
00:50:27.960 | from basically 62 to 67,
00:50:31.120 | or it could be 66 in 10 months or something like that.
00:50:34.000 | But so the general idea is you file
00:50:36.320 | for whichever of these two benefits is smaller,
00:50:39.040 | file for that one immediately,
00:50:40.400 | as early as you can pretty much,
00:50:42.160 | and then let the other benefit continue growing
00:50:45.160 | until it maxes out either at your full retirement age
00:50:47.280 | or at age 70.
00:50:48.520 | - And where will people be able
00:50:49.480 | to get information about this?
00:50:52.120 | - Sure, so the book covers all of these topics
00:50:54.360 | after the death of your spouse.
00:50:55.760 | My book, "Social Security Made Simple," also covers it.
00:50:58.520 | Social Security Administration website is great, frankly.
00:51:02.200 | It's important to understand with any social security topic,
00:51:07.000 | just like with any tax topic,
00:51:08.600 | that if you're just looking at a, quote,
00:51:11.120 | plain English page on the SSA website,
00:51:13.480 | like an FAQ page or something like that,
00:51:15.920 | they're doing their best to explain it in plain English,
00:51:18.080 | but that doesn't mean that this is precisely
00:51:20.400 | what the law says, right?
00:51:21.920 | There can be exceptions that aren't mentioned on that page,
00:51:24.280 | or maybe they're giving you,
00:51:27.560 | "This is mostly how it works," sort of explanation.
00:51:30.920 | So that happens sometimes.
00:51:31.880 | It's important to understand that on those sorts of pages
00:51:34.480 | on the SSA website, it's a very credible source,
00:51:37.800 | but it might not be precisely exactly how the math
00:51:41.360 | is actually going to work in the real life situation.
00:51:44.840 | - So the last question, and this'll be for both of you,
00:51:47.080 | and I'm gonna chime in on this
00:51:48.560 | because I'm actually involved in this part.
00:51:51.720 | You know, one person is doing all the investing
00:51:54.000 | and they're the financial person in the relationship,
00:51:56.920 | and they die.
00:51:59.000 | Should the other person go out and hire a financial advisor
00:52:04.000 | to help them with their, all of this,
00:52:09.400 | all of the investment side of things,
00:52:12.880 | now that they've had this portfolio dumped in their lap?
00:52:16.720 | What do you think, Ryan?
00:52:18.600 | I mean, from your perspective,
00:52:20.480 | what have you seen?
00:52:21.680 | - Yeah, no, absolutely.
00:52:23.080 | Mike just discussed, I mean, there's so many situations
00:52:25.280 | where not necessarily in the immediate,
00:52:26.760 | but financial decisions do need to be made
00:52:29.000 | that sort of impact investments,
00:52:30.720 | and if you're not prepared to make those decisions yourself,
00:52:33.680 | then you should definitely hire a professional,
00:52:35.200 | just as you would before the death of your spouse.
00:52:37.840 | - What do you think, Mike?
00:52:39.520 | - Yeah, similar answer where,
00:52:42.320 | just like you would before the death of your spouse.
00:52:43.960 | So if you're in a situation where you don't feel
00:52:46.120 | like you're qualified to make this decision on your own,
00:52:49.600 | getting guidance is helpful.
00:52:51.200 | Now, of course, the answer to that question
00:52:54.800 | might be different than it was
00:52:56.360 | while your spouse was still living,
00:52:57.520 | 'cause perhaps the two of you collectively were qualified,
00:52:59.920 | but now you don't feel qualified on your own.
00:53:02.600 | I will also note that it's not something
00:53:05.840 | you want to rush, usually.
00:53:08.200 | Again, just 'cause you have some life insurance proceeds
00:53:11.520 | that came in doesn't mean you need to get it invested
00:53:14.080 | within the next month.
00:53:15.000 | You're gonna potentially miss out on some returns,
00:53:17.840 | and that's okay.
00:53:19.600 | It's not a big, or it is a big decision,
00:53:22.160 | and therefore you do not want to rush it.
00:53:23.880 | Also, just like with when you retire and you have an IRA
00:53:28.880 | that you are considering rolling over to a 401(k),
00:53:32.480 | that makes you a target for certain financial advisors
00:53:36.200 | who just want to collect a commission as that money moves.
00:53:39.280 | It's the same thing here.
00:53:40.560 | If you're in a transition period,
00:53:42.760 | that can make you a target for certain people
00:53:45.120 | who want to collect a commission.
00:53:47.640 | Now that suddenly there's some money
00:53:50.040 | that either life insurance proceeds
00:53:52.800 | or death benefit from an annuity,
00:53:54.720 | or simply the portfolio that your spouse
00:53:56.560 | had been taken care of, and now you're taking care of it,
00:53:59.120 | there might be, well, not there might be,
00:54:01.080 | there are people who are going to want to try
00:54:03.360 | to earn a commission off of that.
00:54:05.280 | And so it's important to be careful
00:54:07.520 | with regard to who you hire.
00:54:09.240 | - I'll just add my two cents here.
00:54:13.320 | I've been doing this investment advising for 35 years,
00:54:17.880 | and 25 of those have been basically on my own
00:54:20.600 | with my own company.
00:54:21.520 | And people have said to me, "Rick, my husband or my wife,
00:54:26.520 | "I've left instructions for him or her to call you
00:54:32.440 | "if something happens to me.
00:54:34.000 | "I'm going to be self-managing my own portfolio."
00:54:36.680 | And then they do, and they do a good job.
00:54:39.680 | But if something happens to be my husband, wife,
00:54:43.920 | is going to call you.
00:54:46.040 | In 25 years, I have never received one of those calls, ever.
00:54:51.040 | And why is that?
00:54:52.840 | Because the spouse doesn't know me.
00:54:57.840 | They haven't talked with me or been involved with me, ever.
00:55:02.640 | I don't think it's because nobody has died.
00:55:05.720 | I'm pretty sure people have died.
00:55:07.720 | But the spouses are not going to take that instruction.
00:55:10.720 | Someone else is going to get in front of them first.
00:55:14.320 | And it's not going to go the way you want.
00:55:16.400 | So if there's going to be an advisor relationship,
00:55:20.440 | if that's what you want your spouse to do,
00:55:23.440 | that you need to establish that relationship together first
00:55:28.440 | so that he or she knows this person.
00:55:34.640 | And then there's a higher probability
00:55:37.200 | things will happen the way that
00:55:38.800 | you would like them to happen.
00:55:40.280 | - So with that, any closing comments, Ryan?
00:55:45.920 | You have any final thoughts?
00:55:47.520 | - Yeah, I guess everyone should consider
00:55:50.880 | having an estate plan.
00:55:52.680 | I guess, like we discussed, not everyone needs one.
00:55:55.560 | But I think everyone should at least
00:55:57.640 | consult an attorney and figure out if they do
00:56:01.480 | and what the advantages of having one are.
00:56:04.600 | Myself included, there are a lot of attorneys
00:56:06.560 | that don't charge for a consultation.
00:56:09.200 | So if you're not in Utah, you're not in California,
00:56:11.280 | find one that does and talk to them
00:56:13.680 | and see how you might protect yourself and your loved ones.
00:56:17.720 | - Mike, what do you have to say?
00:56:21.200 | - Estate planning, so I don't personally do estate planning
00:56:24.120 | as I'm not an attorney.
00:56:26.600 | It's an area that falls under
00:56:28.400 | the broader area of financial planning.
00:56:30.120 | And I think it is possibly the neatest part
00:56:34.240 | of financial planning because it's by definition selfless.
00:56:39.120 | You're taking care of people who you care about.
00:56:41.680 | And a lot of times people don't wanna do it
00:56:44.600 | 'cause oh gosh, you have to, I mean,
00:56:46.720 | you're thinking about unhappy things.
00:56:48.120 | You're thinking about what happens
00:56:49.000 | if you become incapacitated or if you die.
00:56:52.200 | But it's all about taking care of the people
00:56:54.920 | who you care about, the people you love.
00:56:56.640 | And it's important to take some time to do it.
00:56:59.160 | It's an important part of financial planning,
00:57:00.760 | even though it's this unhappy topic
00:57:02.880 | that you have to think about.
00:57:04.960 | But people feel better after doing it.
00:57:07.920 | And it really does take care of the people who you love.
00:57:12.800 | - Well, that's a great way to end.
00:57:14.440 | Thank you so much for joining us today.
00:57:16.840 | I think I have more questions now
00:57:18.840 | than I had when I first started the podcast.
00:57:21.240 | But thank you so much for joining us, Ryan and Mike.
00:57:26.240 | I appreciate very much all your insights.
00:57:28.680 | - Thanks, Rick.
00:57:29.600 | - Thank you, Rick.
00:57:30.560 | This concludes this episode of "Bogleheads on Investing."
00:57:34.680 | Join us each month as we interview a new guest
00:57:37.400 | on a new topic.
00:57:38.480 | In the meantime, visit boglecenter.net, bogleheads.org,
00:57:42.720 | the Bogleheads Wiki, Bogleheads Twitter.
00:57:45.200 | Listen live each week to Bogleheads Live on Twitter Spaces,
00:57:48.640 | the Bogleheads YouTube channel, Bogleheads Facebook,
00:57:51.440 | Bogleheads Reddit.
00:57:53.120 | Join one of your local Bogleheads chapters
00:57:56.000 | and get others to join.
00:57:57.360 | Thanks for listening.
00:57:58.560 | (upbeat music)
00:58:01.160 | (upbeat music)
00:58:03.760 | (upbeat music)
00:58:06.340 | you