You’ve probably seen online fundraisers when there’s an active-duty death. They’re a lovely gesture, but the fact is that the Department of Defense and Department of Veterans Affairs offer a significant package of lump-sum and ongoing benefits that provide a pretty good level of financial support for surviving families. Friends and family certainly don’t understand that, so their generosity and concern are logical and normal.
But even military families often don’t know what benefits are available to the surviving family of an active-duty service member. I was teaching a survivor benefits class a few weeks ago, and an attendee said to me afterward, “Gosh, we bought way too much life insurance because I didn’t know about any of this stuff.”
Of course, it is better to be overprepared than underprepared, but it’s ideal to know about everything. Military families need to understand the benefits that are included with their military service to make smart decisions about the rest of their estate plans.
The surviving family members of fallen active-duty service members are generally eligible for a wide variety of lump-sum and monthly benefits. I say “generally” because the death must be determined to be “in the line of duty” for the Department of Defense and “service-connected” for the VA.
In this article, we’ll talk about the lump sum or short-term benefits. In the next article, we’ll talk about the monthly payments.
Servicemembers’ Group Life Insurance
The Servicemembers’ Group Life Insurance program is a guaranteed life insurance product administered by the Department of Defense. Every service member is automatically enrolled in SGLI for the maximum coverage, currently $500,000. They may reduce or cancel that coverage, so not every service member has the full amount of SGLI. Knowing the level of SGLI coverage is a key point in a service member’s estate plan.
SGLI is paid to the beneficiary or beneficiaries who are designated in the service member's SGLI Online Enrollment System record. The service member can designate anyone as a beneficiary, so it’s important to check those beneficiary designations regularly, especially when there is a life event such as a marriage, divorce, birth or death.
If no beneficiaries are designated, then benefits are distributed according to the SGLI rules. Under these rules, benefits would be paid first to a surviving spouse. If there is no surviving spouse, benefits are paid to any surviving child(ren). Next in order is parents, then the estate of the deceased. Surviving family members must apply for Survivor Benefit Plan (SBP) benefits, even in the case of an active-duty death. This application process is usually facilitated by the family’s casualty affairs officer.
The SGLI payment is non-taxable and is eligible for preferential treatment under the Heroes Earning Assistance and Relief Tax (HEART) Act rules discussed below.
Death Gratuity
The death gratuity is a $100,000 cash payment from the Department of Defense, usually paid within a few days of the service member's death. It is paid to the beneficiary whom the service member designated on their DD Form 93. If there is no beneficiary designated, then the payment will be distributed based on the underlying law, generally first to a spouse, then to any children, then to parents, or lastly to the service member’s estate.
A death gratuity is also non-taxable and also eligible for preferential treatment under the HEART Act rules discussed below.
Roth or Coverdell Contributions
Under rules created in the HEART Act, both SGLI benefits and the death gratuity may be contributed to a Roth IRA or Coverdell Educational Savings Account under special rules that allow you to contribute more than the usual annual contribution limits. This contribution must be made within one year of the beneficiary receiving the SGLI and death gratuity proceeds.
The contributions of this large lump sum of untaxed benefits into a Roth IRA and/or Coverdell Educational Savings Account can represent a solid financial foundation for the families of active-duty deaths. They can provide for living expenses, education and, if allowed to grow, retirement. Factoring in the tax advantage of the Roth IRA and Coverdell accounts can make a significant difference in the family’s need for other financial products.
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