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Bogleheads on Investing with Ryan Barrett and Mike Piper: Episode 52

Post on: November 29, 2022 by Rick Ferri

For our 52nd Episode of Bogleheads on Investing Podcast, host Rick Ferri interviews  Ryan Barrett, a member of both the State Bar of California and Utah State Bar, and Mike Piper, CPA.

Proper estate planning is one of the most important elements of a complete financial plan and often the most overlooked. Roughly half of my new clients either have no estate plan or an incomplete plan or an outdated plan. We will discuss these issues with our two guests.


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 Rick Ferri: Welcome to Bogleheads on Investing Podcast number 52. Today we're talking about a special topic, estate planning, with estate planning attorney Ryan Barrett and author and CPA Mike Piper.

Thank you. Hi everyone. My name is Rick Ferri and I'm the host of Bogleheads on Investing.  This episode, as with all episodes, is brought to you by the John C Bogle Center for Financial Literacy, a 501(c)(3) non-profit organization, dedicated to helping people make better financial decisions. Visit our newly designed website at boglecenter.net to find valuable information and to make a tax deductible contribution.

Today our discussion is all about estate planning. This is probably one of the most important and the most overlooked aspects of a financial plan. I find that about 50 percent of my new high net worth clients have either no estate plan or have an estate plan that is either out of date or have done some estate planning but have not completed it. And that could create a lot of problems for their heirs.  

And we're going to hear about this today from two guests. My first guest is Ryan Barrett who is a member of the California bar and the Utah bar and he works with clients in both states. Second is Mike Piper. Mike is a CPA and the author of many tax books, as well as investing books. He's also the author of the popular blog obliviousinvestor.com, and he's the creator of the Open Social Security calculator at opensocialsecurity.com.  Mike's latest book is titled "After the Death of Your Spouse: Next Financial Steps for Surviving Spouses".  

Putting a copy of this short paperback book with your estate planning documents will probably save your surviving spouse thousands of hours of time and thousands of tears because Mike

has made this information available in an easy and understandable way.So with no further ado let me introduce Ryan Barrett and Mike Piper. Welcome to the Bogleheads on Investing Podcast.

Mike Piper: Thank you Rick.

Ryan Barrett: Thanks Rick.

Rick Ferri: So let me, before we get started--always like our guests to talk a little bit about themselves. So I'll start with Ryan. You have been an attorney for more than 10 years.  Why specialize in estate planning?

Ryan Barrett: Estate planning. I got actually drawn in through financial planning when I worked with my financial advisor to sort of set up my financial plan. Just the idea of helping somebody plan for their future, and then also the unexpected. But estate planning was a little more my wheelhouse just because I had a law degree in the background in that. So getting out of litigation, out of the adversarial, and into more just working with somebody and helping them prepare for something that's going to benefit them and their beneficiaries.

Rick Ferri: And you say that your goal is to be able to bring estate planning to the masses. Could you explain that a little bit.

Ryan Barrett: Well, I think estate planning can be a little intimidating for a lot of people. They come to a firm that handles estate planning and they don't really know what it's going tocost. A lot of times firms don't have fixed prices up front, they bill hourly. They have retainer agreements. And I like to target the audience that doesn't have the extremely complex estate plans. We're not getting into asset protection. People with that many assets and go that avenue, usually the user already has attorneys.

So the person that thinks maybe they need an estate plan--and I think most people do--sort of a simple approach, fixed prices, let them know what their options are, try and be as unintimidating as possible and as upfront and straightforward as possible. So people know exactly what they're getting into and what it's going to cost them.

Rick Ferri: You are licensed to practice law in California and Utah but unlike other professions like the investment advisory profession  you can't go outside those states, is that correct?

Ryan Barrett: That's correct. Yeah, as long as you reside in California and Utah then I can be more than happy to help you. But outside of that, can't do much.

Rick Ferri: And Mike you're a repeat guest. Thanks for coming back. You are a CPA and your latest endeavor is a great little book called After The Death Of Your Spouse. I mean the title is not appealing, but right, it's not a happy topic, obviously. After The Death Of Your Spouse: The Next Financial Steps For Surviving Spouses, which is a fantastic resource. I mean I really believe that people should just buy the paperback edition of this book, and it's not very much, and just stick it in your estate planning documents because there is so much information in this book.

But why did you decide to go down this path, after a lot of books on taxes, and a lot of books on accounting, and then investing, and now estate taxes. So what caused you to take this pivot .

Mike Piper: Yeah. Mostly it was just seeing these situations where when a person's spouse dies they're suddenly from an emotional and psychological point of view- it's one of the hardest times in their life, if not the very hardest time in their life--and then the way our system is set up at that very same moment they have this huge list of administrative and financial to-do items just dropped in their lap. Basically when they're quite possibly the worst time to have to deal with a whole bunch of things. 

And now they do have to deal with a whole bunch of things. And then in a lot of cases it's made worse by the fact that in a lot of households one of the two spouses will kind of take the lead on financial matters and of course it's a 50/50 chance that it's the other spouse who's the surviving spouse. And so in a lot of cases they now have all these things to deal with and they don't have all of the skills and experience built up over decades that the other spouse would have. So the point of the book is basically just to walk people through it in plain language.

Rick Ferri: Let's start with a simple question about what is an estate plan and why should people have an estate plan. So I'm going to go to Ryan, our attorney expert on this, and Ryan tell me why you even have an estate plan.

Ryan Barrett: Well, an estate to start is just what your assets are at the time of your death. So an estate plan is essentially a plan in place that you make before your death for what will happen with those assets when you do pass. There are a number of reasons to have an estate plan--obviously varies person to person, and complexity of their estate, and the extent of their estate. At the most basic level it's a will which just says where you want what assets to go. Beyond that you have trust and other avenues for distributing assets that will have tax consequences. They'll avoid probate. It's important to plan for your children if you have minor children--not necessarily what assets they'll get--but who will take care of them.

It's one, to ensure that your wishes are carried out upon your passing, but also two, just to make things easier on those that survive you. So that there's no fighting, there's no question what will happen.

Rick Ferri: Well let me ask a question about that because ironically ,the clients that I deal with, I'm rather shocked by the number of high net worth individuals who don't even have a will. They don't have other documents like guardianship instructions for their children. What happens to all of their assets and their children if they don't have an estate plan, if they don't have the documents. What happens separating those, in from assets and your children.

Ryan Barrett: Your assets will be distributed according to what are called intestate laws. So intestate means dying without a will. And so each state has its own intestate laws, although they're fairly similar. So in Utah that would be if you're married and you don't have children from a previous marriage, your wife gets everything. So it's pretty simple. If you do have children from a previous marriage, then your wife would get $75,000 and then half of the remaining assets and so on and so forth. It gets confusing the more time, the more people are either not surviving you, or otherwise. And then your children. Well, guardianship will be determined by the court.

Rick Ferri: Can I ask you a question about that. Let's stop right there. So guardianship will be determined by the court. But it's not like you get in a car wreck with your spouse and your youn children are maybe with a babysitter, and unfortunately you and your spouse pass away and guardianship will be determined by the court. But what happens in the meantime. I mean what happens to these children.

Ryan Barrett: There’s short-term guardianship and then long-term guardianship. So in the short term, if there's no one available to take them, then to be cared for by the state they'd either go to a home or child care services. Long term you go through the process in court. So somebody would begin that process by filing for guardianship, and that can be literally anyone. It can be one of your surviving siblings. It can be your parents. And then the court will review whoever requests to be guardian, and then make a determination based on what's in the best interest of the child. So that can get complicated. When multiple people come forward it can get very emotional. Everyone thinks that they are the best person for the children. But ultimately, yes, it's the court’s decision who will take those children.

Rick Ferri: Well Mike, let me ask you when it comes to financial matters one of the documents that we're told we should have is a durable power of attorney. What does that do?

Mike Piper: Yeah, just in general a power of attorney allows somebody else to make decisions on your behalf. So in this case we're talking about financial decisions .So for instance if you become incapacitated, not death, but something else happens to you, this would allow the person who you name that would give them the ability to make investment decisions or have control over your checking account and things like that so that your bills can still get paid and so on.

Rick Ferri: Ryan, what about a medical power of attorney. Why is that important?

Ryan Barrett: Medical power of attorney is when you're incapacitated, it sets forth who could make decisions when you can't make decisions for yourself. Under what conditions that power transfers, then you have the decision what sort of care can be provided. End of life decisions when somebody's on life support, the situations like that.

Rick Ferri: Okay, let's get into the concept of a trust. A lot of people set up trusts. A lot of people don't set up trusts. What are the main reasons why someone would set up a trust? Very broadly different types of trusts they could set up.

Ryan Barrett: Sure. The idea of a trust is it's a financial arrangement where somebody else has control over your assets for the benefit of a beneficiary. So there are different types of trusts. In a living trust, usually the trustor is the person who sets up the trust will also be the trustee,and the trustee is the person who manages the trust. They'll be the trustee for their lifetime. And then upon death usually that responsibility transfers to somebody else. And the idea of a trust in that situation is you're taking assets technically away from the person that owns them, so when they die there's no transfer of those assets from that trustor to the other party. So they don't have to go through probate. 

So that's one of the biggest advantages of having a trust especially in California where the probate process is really long. Whatever assets are in that trust just transfer automatically so it's much smoother, it's much quicker. You don't need the court to intervene. It's less costly. 

There's a number of different trusts as I mentioned. There's a living trust, there's a testamentary trust, which is a trust that doesn't really come into being until the person is deceased. So that doesn't have the advantage of avoiding probate because the property property doesn't actually fund the trust until you already pass. Revocable trusts are the most common. That's where you can create the trust but you remain the trustee and you can cancel the trust at any time. You can make changes throughout your life and it doesn't really become irrevocable until you pass. 

And then the other end there's irrevocable trusts which completely remove the assets from you, from your control. They're usually managed by a business and that has a lot of advantages for--well it protects you from creditors because you literally don't own the assets anymore so they can't come after the assets if there was a lawsuit--something like that.

Rick Ferri: That's good, I know there's just an infinite, when it seems like an infinite number of ways to write a trust depending on what your needs are. Mike do you see any other common uses for trusts?

Mike Piper: Right. So just like Ryan mentioned, avoiding probate is a very common and important reason to set up a trust. There's also just anybody who wants to exert some sort of control over their assets after their death. For instance, if they're leaving assets to a child who they don't for one reason or another think that the child would not make great decisions with regard to those assets--it could be because the child is disabled or it could just be because the child has a history of making poor financial decisions--and so then you would set up a trust with a trustee. The trustee could be another trusted family member or it could be a CPA or an attorney, somebody like that, who would then be managing those assets for the benefit of the beneficiary..

Rick Ferri: But Mike, one of the advantages or disadvantages of an irrevocable trust is when you put assets into an irrevocable trust you no longer get stepped-up-basis on death. Talk about this from a tax standpoint, the difference between using a revocable trust and an irrevocable trust, when we're talking about just normal assets held in a taxable brokerage account. 

When you die the person who inherits them gets a step-up in cost basis, which means their cost basis will be equal to whatever the market value is on the date that you die. so they could sell those assets right away and not have to pay any capital gains tax.  Whereas in some cases here with an irrevocable trust there wouldn't be a step-up in cost basis, and so that's going to create some additional cost if they sell the assets. There's going to be some capital gains. What is the cost basis? Let's say that I owned a lot of stock and I put it into any revocable trust, a generation skipping trust for the benefit of my grandchildren and the cost basis I had on that stock was a hundred thousand dollars but now it's worth a million dollars. 

Mike Piper: Yeah it's just carryover cost basis.

Rick Ferri: So their cost basis to my grandchildren would be a hundred thousand dollars, right. It could be more, as you know, if the trust is reinvesting dividends and acquiring more shares at higher prices as time goes on. There's going to be no step-up. So although you get the the money out of say, my estate, for the benefit of credit or protection and also for the benefit of potentially estate taxes, what I lose in this transaction is I lose, or they lose, the step-up basis on death,

Mike Piper: Yeah, there's trade-offs involved, certainly. Also there's just the fact about  revocable versus irrevocable. There's the flexibility. You lose the ability to make changes down the line. And so there's trade-offs going on here, definitely.

Rick Ferri: Does everybody need a trust? And the reason I ask that is because a lot of people have beneficiaries on their IRAs and 401-k’s and Roth accounts 403-b’s, whatever. They also now in their personal account have what's called transfer on death [DOD]. So those assets go directly to somebody else. And let's say they didn't own a house. Let's say they were living in an apartment. It seems like you wouldn't need a trust.

Mike Piper: Yeah. Myself as an example, I do not have a trust for that exact reason. More than 90% of our total net worth is retirement accounts, so just pass automatically by designated beneficiary. No, I don't think everybody needs a trust. Ryan might have a different opinion.

Ryan Barrett: I don't know if we'll see---No, no, I would agree with that. You know estate plans vary in complexity, and depending on how complex your estate is and where you want it to go. I mean if you have a spouse and you have accounts of beneficiaries, everything's already kind of accounted for. It's just really the more complex your estate gets and the more detailed you want that distribution to be at your death. The trust will give you that control. But yeah, there are definitely a lot of people that don't need to trust at all.

Rick Ferri: There are a few states that are what are called community property states and the rest of the states are called, I think it's spousal states, is that correct terminology?

Ryan Barrett: Yeah, files of property, or just common law, common law separate property. Yeah they're all kind of the same, but there's very few, there's I think like six states that are community--I think there are seven--because I live in one. Seven, but some of the big states, like Texas and Arizona and California. So even though there's only seven states it's a pretty good sized part of the population that falls under community property.

Rick Ferri: So could you explain what happens in a community property state versus a common law state.

Ryan Barrett: Sure. Well in a community property state, what it says is essentially any assets that are acquired, any money that's earned during the marriage, is community property. So if there's unequal earning capacity, or earnings from the wife and the husband, regardless all those earnings are shared equally. So the wife would own fifty percent, the husband would own fifty. And then on death you can only transfer obviously the property that you own. So if whatever assets are in that community property, you can only transfer half of them. Same goes with property. If there's a home that's acquired during the marriage, even if only one spouse is on the title, that property is still a community property and each spouse owns half.

And common law property. The difference of a community property and a separate property state is just how it determines what you own. So in a community property state if you own half of that property you can only transfer half of that property, and if it was a separate property state and you were the only name on the title then you can transfer the entire property.

Rick Ferri: Okay I'm a little confused. And a community property state, if you've got spouse A and spouse B and there's a pool of community property, essentially it's treated as spouse A already owns half of the property and spouse B already owns half of the property. So if spouse A dies, spouse A's will--doesn't have anything to do with what happens with spouse B's 50%-- spouse B’s 50% is still spouse B's 50%.  But spouses just can determine where spouse A's fifty percent goes. And of course in many cases it would be left to spouse B, and now spouse B would have 100%.  But it could be left to somebody else. Give me another example of a common law.

Ryan Barrett: Sure. So then we have to talk about other ways that property can be owned jointly. The most common would be joint tenants with rights of survivorship. And basically when property is owned that way by two owners, then one spouse, or when joint owner A dies, it automatically goes to joint owner B. But there's other versions as well. So you can have a tenancy in common, where if a spouse, or if two people own property this way, then in that case when one person dies their will controls what happens to their share of the property. So they could leave their share of the property to their kids as opposed to automatically going to the other joint owner. So it depends on the owner, how the property is owned. Basically how it's titled.

Rick Ferri: So obviously titling of property is something you certainly want to discuss with your estate planning attorney, depending on which state you're in. Let me ask about cost basis in a community property state if it's both jointly owned, and one person dies, does it get a step-up on death. 

Ryan Barrett: Yeah. In community property states the surviving spouse gets a full step-up, which is an advantage relative to common law states. So in other states what happens is the surviving spouse will get a half step-up, basically. So if property was purchased for $300,000 and its current market value is $500,000 at the time of death they would get their basis stepped up halfway, be stepped up to $400,000 in a common law state. Whereas if community property, the surviving spouse gets a full step up. So that's an advantage in those states.

Rick Ferri: So I live in Texas which is a community property state. And I understand that here, when I die, all of my assets, my home, mutual funds, all get stepped up when I die fully 100%. The whole account  whether it's she's on the title or not, and then when she dies there is another step-up as well. So in community property states with a couple there are two step- ups during their lifetime which is different than a common law state, correct.

Ryan Barrett: Yeah. It would be two full step-ups then. 

Rick Ferri: That is different exactly, yep. So we get a little bit of a federal tax advantage by living in a community property state. Yeah, that which is fine. Strange because if we're talking about federal taxes, that of state tax, and so yeah, just because we live in community property states we get a federal tax break for as common law states couples don't get the same tax breaks. I find that interesting.

Ryan Barrett: Yeah. I agree. It is uncommon that the federal tax treatment varies from one state to another.

Rick Ferri: All right. So we talked about probate a little bit and this is a mystifying thing for a lot of people who have never been through it. Ryan you said in California it can take a long time to get  the estate through probate. Can you talk us through what happens when an estate goes to probate.

Ryan Barrett: Yeah. Probate is essentially the court process for if there's a will, validating the will, determining what assets the deceased owned and then who those assets should go to. And ensuring that creditors are also taken care of. So assets would avoid probate. Beneficiary designations or trust property, they're not even discussed or considered in that probate proceeding.

Rick Ferri: So in a sense you're saying that because they avoid probate they can be taken care of right away. They don't have to go through the court system, correct.

Ryan Barrett: Yeah. If a house was owned in the name of a trust, the beneficiaries or the heirs to that house can sell it right away. 

Rick Ferri: They don't have to wait until it goes through probate, correct.

Ryan Barrett: If the real estate is titled in the trust, yeah, then it would avoid probate.

Rick Ferri: Isn't that a big thing. I mean look, I see a lot of houses as you drive down the road that are empty and I'm beginning to realize that a lot of those homes are from people who passed away and they can't do anything with them. The family can't do anything with it because the real estate of the house for the last surviving parent was not in a trust. There may have been a will, maybe not, but the house is just sitting there empty and you can't do anything about it until the probate is done. Am I correct on that?

Ryan Barrett: Yeah that's correct. The title of the house is in limbo until the court decides who gets it or how it's to be distributed. That's one of the most frustrating things about probate, is until that probate process is complete, until the estate is closed, it's all kind of up in the air.

Rick Ferri: I can imagine during covid this thing just slowed down to a trickle, you know, getting things through probate court.

Ryan Barrett: Yeah, courts all over the country came to a screeching halt, essentially. I mean anytime something required an in-person court appearance, and it just didn't happen. Everything's still kind of backed up, especially in California. It's going to take a long time before they catch up for certain.

In California I know that technically, on paper, it shouldn't take more than a year but can take two, three, sometimes even more years before that estate is closed and the probate process is complete. You're mentioning houses sort of unoccupied and them being in probate and that's true in a lot of situations. Selling the property or transferring ownership, none of that can happen until these estates close and probate is completed. 

Rick Ferri: So clearly having the least amount of assets, when you die, go through probate is a good idea, with either beneficiaries, or transfer on death, trust, something where it doesn't have to go through a probate would be a beneficial thing for most people who are listening to this podcast.

Ryan Barrett: Yeah that's correct. I mean there's an argument to be made for the probate process if you think there's going to be fighting over the validity of a will, or anything like that. You want the court to be involved and have control, have some level of control over things. But yeah, generally, yeah you want to avoid probate as much as possible.

Rick Ferri: So we've talked about needing a will, power of attorney, durable power of attorney. We need a medical power of attorney, guardianship papers, perhaps a trust depending on your situation, and doing these documents. And go to Mike on this because I don't want a biased opinion, no by an attorney who does documents. I mean why can't we just go to LegalZoom or something online and create these documents. Mike, I mean do we need to hire an attorney. Nothing against you Ryan, I'm just asking Mike.

Ryan Barrett: No, no offense taken, no.

Mike Piper: So I am interested in Ryan's opinion here also. I'll say that from my point of view, is in some cases, yeah go ahead and do LegalZoom if you have a very simple situation. Although the caveat here is that in the field of taxation we have a joke that everyone thinks that their situation is simple because they don't understand all the  complexities that are actually bundled in there. So there are some times where LegalZoom is going to be fine. The less amount of assets in question, the less complicated they are. Not having kids, for instance, would be another thing that makes things simpler, or not having minor children anyway. There are some cases where sure go ahead and go through LegalZoom especially if the alternative is that you wouldn't talk to an attorney, if you just know that the alternative would be no will at all, then okay something like LegalZoom, an attorney.

I mean the main point isn't that they're going to write up these documents for you. It said they're going to give you advice about what should be included in these documents, that it's valuable and it's valuable in ways that people often don't anticipate.

Rick Ferri: What do you think, Ryan. I mean unbiased opinion like Mike said.

Ryan Barrett: There might be an instance where LegalZoom makes sense. For those circumstances where one, your estate is relatively simple and your estate plan should be relatively simple. You'd also have to be like a do-it-yourselfer. If you're pretty confident you can figure out most things on your own and you do a lot of research, and personally, I think the law is at times accessible. So if you think that you can figure that out, again like Mike said, one of the bigger advantages is a lawyer will present options to you that you didn't really know. 

One other thing to consider is the cost of making a mistake. You know, like if you look at LegalZoom I'd imagine it's probably a couple hundred dollars for a will, a couple hundred more for a trust. I mean for a basic estate plan with an attorney you can get will, trust, power of attorney, all that stuff for $2400 - $2500. The cost of making a mistake if something does go through probate that it wouldn't otherwise. I mean the probate process itself is going to cost the very minimum $2,000, and then based on the size, that you say that's going to go up from there.  So it's usually pretty good insurance to go with an attorney. 

Rick Ferri: So let's say I was living in Texas and I moved to Utah. Do I need to get all my estate documents redone in Utah.

Rick Barrett: No. You don't need to if a will or trust is validly created in one state then it's going to be  upheld in the other state. So the state in which it's formed or created, that determines the validity. But as far as the administration of it, that's going to be determined by the state where you reside at the time of dea

There are some reasons to move your estate to another state when you move for tax reasons. Mike probably has more knowledge on that subject.

Rick Ferri: What do you think Mike? Are there tax reasons to go visit an attorney in the new state where you now live?

Mike Piper: Yeah, There can be one big thing. The federal estate tax has a super high exclusion amount right now, a little over 12 million dollars. So obviously the number of people impacted by that is very small,

Rick Ferri:  And that's per person by the way, that's not per couple, right?

Mike Piper: Exactly, yeah. 

Rick Ferri: And if one person dies the other person gets 24 correct?

Mike Piper: Yeah. These surviving spouses can have what we call portability. Now so any unused exclusion amount can be carried over basically to that surviving spouse.

Rick Ferri: Okay, so go on with the state, sorry about that.

Mike Piper: No, you're good. So at the state level, many states don't impose an estate tax but some do. And of the states that do, in many cases that exclusion amount is a much lower threshold, one million dollars for instance. And when you're dealing with that one million dollar threshold obviously that means that a lot more people are going to be impacted.

Rick Ferri: People whose estates exceed 1 million are close to hitting 12 million, right.

Mike Piper: So, and not only that, but in some cases there isn't this portability that we talk about between spouses at the state level. And so you can use certain types of trusts, for instance, to essentially artificially create that portability. So without getting into the details, yes, that would be a reason certainly to to talk to an attorney in the new state so they can help you work through those issues. 

Rick Ferri: I understand. Okay, well thank you for that. Let's get to the second half of this which is Mike's book, After The Death Of Your Spouse: Next Financial Steps For A Surviving Spouse.  Great book--talks about the immediate steps and then it talks about intermediate steps. I'm going to let Mike go ahead and take over from here, and then what should somebody do. What's the first thing they should do?

Mike Piper: Well generally the first thing in this long list of administrative things to be done is getting certified copies of the death certificate. And that's because there are a ton of different entities that you're going to interact with over the next months that will need a copy of that. And sometimes if you're visiting them in person they'll be happy to let you show it to them and then maybe they'll scan it or make a copy, and then you can keep it. But sometimes they want to keep a certified copy of the death certificate, so you'll need several copies.

Rick Ferri: How many are several. I mean twenty, thirty?

Mike Piper: Yeah 20 to 30 is what I often hear recommended. But it's going to depend. Basically the more accounts, the greater the number of accounts that the deceased person owned, then the more financial institutions that you'll be interacting with, and so the more copies you're going to need. So basically the more complex the person's life the more copies you're likely to need.

Rick Ferri: Sure speaks to simplicity which is what we talk about on the Bogleheads all the time. Listen, I'm a veteran. I retired from the Marine Corps after 21 years and I understand that I may be able to get free death certificates. What are the advantages and disadvantages of that?

Mike Piper:  Yeah. Well disadvantages, none really. It's free so how long will it take? Yeah, well so there's a few ways you can get death certificates. Number one is whatever business is handling the deceased person's remains. So the funeral home or the cremation company there will usually arrange to have however many you ask sent to you, and there's going to be a per copy fee for that. You can also request them from your state or from your county. In many cases requesting them from your state is less expensive but it does take longer. Of course how long it takes and how much it costs varies by state and by county. Here in St Louis, for instance, I think it's $11 per copy, and just like you said veterans, many states will provide some number of free copies of certified death certificates for surviving family members of a deceased veteran. In Missouri, for instance, I believe it's three copies. So might as well request them but you're probably going to need more than that.

Rick Ferri: Okay. So now we have the death certificates. We're ready to get going on contacting various people if they haven't already been contacted. So what's the list?

Mike Piper: Yeah, it's a long list, unfortunately. And I just want to back up a step and say that this is the reason why the book, by the way, is broken down into immediate next steps, and intermediate next steps is that there's a lot of things that you're going to have to do that are important but they're not necessarily urgent, and in some cases you can't do them, even in a lot of these cases you can't do them until you have that death certificate in hand. 

So for a lot of these things, yes, it's important to know that it's going to be on your to-do list but you don't have to tackle it right now. And also in many cases it's best to wait before making major decisions. So for instance if there's life insurance proceeds or a death benefit from a variable or any sort of annuity, for instance, you're going to have to decide how you want to invest that money. But you don't have to make that decision immediately it's okay to just leave the money sitting around in cash for a little bit while you work through all these other things you need to get sorted out. So it's important to understand that not all of these things need to be tackled absolutely immediately.

Companies to contact. Obviously one of the first ones would be just who we mentioned. If there's a life insurance policy, contacting that insurance company. giving them the certified copy of the death certificate and so on. Also many people have some level of life insurance through their employer so contacting the deceased person's employer to ask about that, and there's other information you're going to need to cover with the employer as well. Generally the employer will owe the estate some amount of unpaid wages, also unused vacation time.

And then you'll also want to talk to the employer about is there an FSA [Flexible Savings Account] or HSA [Health Savings Account]\  linked to the employer that has some balance in there. You'll want to find out about that if your health insurance is currently through your deceased spouse's employer. Then it's super important to get the details there, as far as how long does that coverage continue, exactly when is it going to terminate. Because obviously you have to start lining up your next source of health insurance.

Rick Ferri: Social Security Administration is important. I know you wrote a whole chapter in the book about how to deal with Social Security, and what do you get, and what you don't get, and there's even a death benefit apparently, that you get from Social Security, which quite frankly I didn't even know. So life insurance, health insurance, your employer, Social Security. Credit cards, loans--oh by the way when I die all my loans go away correct--I mean all my credit card debt, right.

Mike Piper: Unfortunately, not exactly. No.

Rick Ferri: But I thought I wanted to die in debt. I mean you hear that all the time from people,right? 

Mike Piper: Well in a lot of cases if you have debt there's somebody else who it's also their debt. If you're married in many cases you know here's your spouse is on that debt also. So it is their debt also. But as a separate point, even if that's not the case, your estate still owes that debt, and so creditors, if there's some credit card balance or a car loan, or what have you, your estate still owes that debt.

Rick Ferri: So I just want to circle back a little bit to probate then. So between husband and wife, let's say husband dies, this still goes through probate because husband might have an auto loan, for example, that it's in his name and he's paying on it. So the wife gets the car but she still owes what the husband took out as a loan, correct, and this is all done through probate. 

Mike Piper: Yes, yes to both questions. Yes, it's done through probate, and yes the wife would still owe the loan on the car.

Rick Ferri: Okay, so life insurance, health insurance, will get a little bit more to Social Security in a minute, employee loans, credit cards, changing the name on bank accounts. How about deeds? Mike, you talked about in your book, a  personal representative. Instead of somebody doing this themselves they have a personal representative do it, or maybe in a court appointed person or representative. What is that all about?

Mike Piper: Yeah a personal representative is more just a catch-all term. You've probably heard the term executor before. That's the person named in the will to handle the affairs of the estate. If there is no will or if there was nobody named as executor in the will, or if the person named as executor chooses not to be the executor because you don't have to be, then the court's going to appoint an administrator to handle the affairs of the estate, and personal representative is basically just a catch-all term to describe executors and administrators. It's basically just whoever is appointed by the court, ultimately, to handle the affairs of the estate is known as the personal representative. So you can think of it as a synonym for executor, basically. 

Rick Ferri: And Ryan, in your experience, do the court’s appoint a person or representative, who are these people?

Ryan Barrett: Personal representatives are usually  professionals that have done that before. Sometimes the court will appoint a personal representative that is related to the estate, in some way related to the decedent. The court has a lot of discretion as to who to decide to handle that.

Rick Ferri: They get paid for this, these people.

Ryan Barrett: Yes, they can get paid.

Rick Ferri: Yeah, so there's really no difference then between a personal representative and a trustee or an executor. I mean it's all the same, right? it's just the same, just different terminology for the same thing. 

Ryan Barrett: So personal representative and executor, you can think of those as synonyms. But there is an important distinction between those and trustee, right, because the personal representative and the executive, there we're talking about the estate, the assets in the estate, whereas the trustee is dealing with the assets and the trust. 

Rick Ferri: Very good. Mike in your book you talk about an idea that I had never heard of before. That is to open up a separate bank account for all of this and get a separate tax ID number for the deceased, the estate. Can you talk about that?

Mike Piper: Yeah. So in the year of death the surviving spouse can file jointly with the deceased spouse for the year of death. And so that income that's going to be included on that return is all of the surviving spouse's income for the whole year, and for the deceased spouse it's all of their income up until the day that they died. Any income after that is the estate's income and that has to be reported on the estate's income tax return, which is a separate return that has to be filed.

Rick Ferri: I'm married and I died, and so wouldn't we just file a joint return that year.

Mike Piper: Right, exactly. You do file a joint return that year, most likely. I mean you don't have to, just like any other year, your surviving spouse could choose to file separately, but probably she would choose to file jointly. And so that joint return that she would file would include all of her income that year and all of your income up until the date of death. But any income that would be your income, let's say it occurs a month after you die, and let's say it would be your income except you are now deceased. That income is the estates, that come in.The estate is a separate legal entity and so that income, the estate's income, needs to be reported separately. And so having a separate bank account, separate tax ID number is really the way you want to do it.

Rick Ferri: Okay, having everything going into one account and being intermingled, it's going to be, at least from a tax perspective, it's going to be a mess. I assume it's likely, at least potentially going to cause some problems with regard to other legal topics. From a tax perspective it's definitely going to be simpler to have the estate have a separate bank account. Is that estate tax form a 1041? Is that what that's called?

Mike Piper: It's 1041, right. 

Rick Ferri: And that's the estate income tax return, which is separate from the return that you would file with regard to estate taxes, right?  That's a different tax form, and a different form for the joint income tax return, so three tax returns. Because this, I'll tell you what, I thought this was going to be an easy podcast but the more we talk, this is not easy.

Mike Piper: Yeah that's exactly the point of the book.

Rick Ferri: But if there's so much, so many different things you need to do and if you haven't been through it before all of it's new. Let's get into things like selling the house. One spouse dies, the other spouse is still in the house. House is too big, right? Spouse wants to sell the house. Normally if it's after the year after the spouse died that would be a single tax return. So you would think that the free capital gain on that would be $250,000 but it's actually not. There's an exception. So Mike this is a tax question. So I'm going to go back to you.

Mike Piper: Yeah, exactly. To back up a step, generally when you sell your home, if you sell it at a gain, you can exclude up to 250,000 of the capital gain if you lived in the home for at least two years out of the last five years, and you owned the home for at least two years out of the last five years, and you didn't use this exclusion for the last two years. So if you meet those three requirements you can exclude it up to $250 000 of gain and if you're married it would be $500,000 instead of $250,000. 

So to Rick's question. The idea here is that okay well in the following year this person is no longer filing as married, so you would think it would be a $250,000 exclusion. But there's a special rule that allows you to get the $500,000 exclusion if you sell the home specifically within two years of the date of death. And it's important to note that it's two years of the date of death, rather than two calendar years, for instance, and you haven't remarried by the time that you sell the home, and the normal requirement where you haven't used this exclusion for the two years prior, neither you nor the deceased spouse use this exclusion during that two-year period. Then you can use the $500,000 basically married couple exclusion amount rather than the $25, 000. 

Rick Ferri: But aside from that, are there any others like that, any benefits to surviving spouses basically after the year, after the death of the spouse. The surviving spouse has to file as a single taxpayer with all lower income thresholds and Irma thresholds and everything else. 

Mike Piper: In many cases, yes the surviving spouse will now just be a regular single unmarried filer. However there's also the qualifying surviving spouse filing status, used to be known as qualifying whatever filing status. But to qualify for that you need to have a minor child, basically, or a disabled child who lives with you. And you pay their costs of living and so on. That filing status extends for another two years after the year of death. 

Rick Ferri: Ryan, have you been listening to all the information that we've been talking about that's in Mike's book. Would you like to add anything to what you should do as soon as a spouse dies?

Ryan Barrett: Number one thing would be to figure out if they had an estate plan in place. Usually their spouse you do know when you know where those documents are. But step one would be to locate them and make sure things go off in the right direction.

Rick Ferri:  Good point. Know where those documents are. Okay now we're going to get into the Social Security question. But Mike, without getting too deep because this can get very, very deep, what happens to Social Security when one spouse passes.

Mike Piper:  Yeah, so there's three primary types of benefits to be thinking about. There's also, I guess I'll say, a fourth one that we'll cover real quick, which is there's a lump sum death benefit. It's just a flat $255 that you get one time. So it's not a big deal but you will get that amount. 

Other than that there's three primary types of benefits to be concerned with. The first is child benefits. And so that is for if you have a child who is under 18, or under 19 and they're a full-time high school student, or they are disabled with a disability that began before age 22. Then that child can receive benefits on your deceased spouse's work record. It's just called a child benefit, so you'll usually want to file for that as soon as you can. 

And then there's also a similar benefit, it's the same benefit amount. It's called a mother/father benefit and that is if you have a child in care who is under 16. So this one cuts off at an earlier age. So under 16 or disabled then you would get a benefit as well. So your child gets a child benefit and you get this mother/father benefit. So those are if there are minor children.

Then the third type of benefit to be concerned with is a surviving spouse benefit sometimes referred to as a widow or widower benefit. And for that one, it can start as early as age 60 or age 50 if you're disabled. And the super important thing to know about surviving spouse benefits is that you can file for that benefit at age 60. And that doesn't automatically force you to have filed for your retirement benefit which means that you can file for your survivor benefit at age 60 and let your retirement benefit keep growing. 

Rick Ferri: By retirement benefit, you mean my own work. I'm working still so I can get a Social Security benefit based on my spouse dying when I hit 60 but it doesn't affect my Social Security benefit if I'm still working.

Mike Piper: You don't have to still be working, but right, it doesn't affect the retirement benefit based on your own work record. Okay, so you can let your own retirement benefit based on your work record allow that to keep growing till age 70. So you basically get to collect this surviving spouse benefit from 60 until 70 and then file for your retirement benefit at 70. Or you can do the opposite. Basically you can file for your retirement benefit as early as you can at 62. and let your surviving spouse benefit grow until it maxes out. And that max is out at your full retirement age. So you can collect your retirement benefit from basically 62 to 67, or it could be 66 and 10 months or something like that.

So the general idea is you file for whichever of these two benefits is smaller. File for that one immediately, as early as you can, pretty much, and then let the other benefit continue growing until it maxes out, either your full retirement age or at age 70.

Rick Ferri: And where would people be able to get information about this?

Mike Piper: Sure. So the book covers all these topics, After The Death Of Your Spouse--five bucks. Social Security Made Simple also covers it. The Social Security Administration website is great. Frankly it's important to understand with any Social Security topic, just like with any tax topic, that if you're just looking at a “quote” plain English page on the SSA website, like an FAQ page or something like that, they're doing their best to explain it in plain English.

But that doesn't mean that this is precisely what the law says, right. There could be exceptions that aren't mentioned on that page, or maybe they're giving you this is mostly how it works sort of explanation. So that happens sometimes. It's important to understand that. That on those sorts of pages on the SSA website there, it's a very credible source but it might not be precisely, exactly how the math is actually going to work in the real life situation.

Rick Ferri: So the last question, and this will be for both of you, and I'm going to chime in on this because I'm actually involved in this part. One person is doing all the investing and they're the financial person in the relationship and they die. Should the other person go out and hire a financial advisor to help them with all of this, all of the investment side of things now that they've had this portfolio dumped in their lap. What do you think, Ryan? I mean from your perspective, what have you seen?

Ryan Barrett: Yeah. No absolutely. Mike just discussed and there's so many situations where, not necessarily in the media, but financial decisions do need to be made that sort of impact the investments. And if you're not prepared to make those decisions yourself then you should definitely hire a professional, just as you would before the death of your spouse.

Rick Ferri:  What do you think Mike?

Mike Piper:  Yeah, similar answer. Where just like you would before the death of your spouse. So if you're in a situation where you don't feel like you're qualified to make this decision on your own, getting guidance is helpful. Now of course the answer to that question might be different than it was while your spouse was still living because perhaps the two of you collectively were qualified. But now you don't feel qualified on your own. I will also note that it's not something you want to rush. Usually again, just because you have some life insurance proceeds that came in doesn't mean you need to get it invested within the next month. You're going to potentially miss out on some returns and that's okay. It's not a big---it's there is a big, big decision and therefore you do not want to rush it also. 

Just like with when you retire and you have an IRA that you are considering rolling over to a 401-k. That makes you a target for certain financial advisors who just want to collect the commission as that money moves. It's the same thing here. iI you're in a transition period that can make you a target for certain people who want to collect a commission. Now that suddenly there's some money, that either life insurance proceeds or death benefit from an annuity, or simply the portfolio that your spouse had been taken care of and now you're taking care of it. There might be, well not, there might be, there are people who are going to want to try to earn a commission off of that. And so it's important to be careful with regard to who you hire.

Rick Ferri: Now I'll just add my two cents here. I've been doing this investment advising for 35 years, and 25 of those have been basically on my own, with my own company, and people have said to me, ”Rick, my husband or my wife, I've left instructions for him or her to call you if something happens to me. I'm going to be self-managing my own portfolio.” Then they do, and they do a good job, but if something happens to the husband, the wife is going to call you in 25 years. I have never received one of those calls ever. 

And why is that? Because the spouse doesn't know me. They haven't talked with me or been involved with me ever. I don't think it's because nobody has died. I'm pretty sure people have died but the spouses are not going to take that instruction. Someone else is going to get in front of them first, and it's not going to go the way you want. 

So if there's going to be an advisor relationship, if that's what you want your spouse to do that. You need to establish that relationship together first, so that he or she knows this person. And then there's a higher probability things will happen the way that you would like them to happen.

So with that, any closing comments. Ryan, you have any final thoughts?

Ryan Barrett: Yeah. I guess everyone should consider having an estate plan. I guess like we discussed, not everyone needs one, but I think everyone should at least consult an attorney and figure out if they do, and what the advantages of having one are, myself included. There are a lot of attorneys that don't charge for initial consultation. So if you're not in Utah, you're not California, find one that does and and talk to them and see see how you might protect yourself and your loved ones.

Rick Ferri: Mike, what do you have to say?

Mike Piper: Estate planning. So I don't personally do estate planning as I'm not an attorney. It's an area that falls under the broader area of financial planning and I think it is possibly the neatest part of financial planning because it's by definition selfless, right. You're taking care of people who you care about. And a lot of times people don't want to do it because oh gosh you have to, I mean you're thinking about unhappy things. You're thinking about what happens if you become incapacitated or if you die. But it's all about taking care of the people who you care about, the people you love. And that it's important to take some time to do it. It's an important part of financial planning even though you know it's this unhappy topic that  you have to think about. But people feel better after doing it and it really does take care of the people who you love.

Rick Ferri:  Well that's, that's a great way to end. Thank you so much for joining us today. I think I have more questions now than I had when I first started the podcast, but thank you so much for joining us Ryan and Mike. I appreciate it very much, all your insights.

Ryan Barrett: Thanks Rick.

MikePiper: Thank you Rick.

Rick Ferri: This concludes this episode of Bogleheads on Investing. Joinus each month as we interview a new guest on a new topic.  In the meantime visit Boglecenter.net, Bogleheads.org, the Bogleheads Wiki, Bogleheads Twitter. Listen live each week to Bogleheads Live on Twitter Spaces, the Bogleheads Youtube channel, Bogleheads Facebook, Bogleheads Reddit.  Join one of your local Bogleheads chapters and get others to join. Thanks for listening.

About the author 

Rick Ferri

Investment adviser, analyst, author and industry consultant


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