At death, several types of assets do not have to go through probate. Instead, they pass directly to one or more named beneficiaries. This includes things such as retirement accounts, insurance policies, and assets held in trust. It also includes any assets titled as “payable on death” or “transfer on death.”

Having assets pass outside of probate can save time/hassle, as well as money. (Note: how long probate takes, as well as how much it costs, varies meaningfully by state. Go get the applicable details for yourself before making decisions based on a desire to have assets pass outside of probate.)

When many people learn about the simpler nature of assets passing via ToD/PoD designations, they put such designations on as many of their assets as possible. And in some cases, that does indeed make perfect sense.

But there can also be ways for ToD/PoD designations to backfire.

Not Enough Assets for the Estate to Pay Its Bills

One way in which ToD/PoD designations can backfire is that they can create a situation in which the estate is left with insufficient assets to pay its own bills and “preresiduary bequests.” (In a case in which the will states, “I leave $50,000 to my brother and the remainder of the estate to my daughter,” the bequest to the daughter is a residuary bequest — a bequest of the residual balance — and the bequest to the brother is a preresiduary bequest.)

Ideally, the estate should be left with enough assets to pay preresiduary bequests, the estate’s various tax liabilities (income tax, estate tax if applicable, and property tax), burial/cremation/funeral costs, tax preparation fees, fees to anybody administering the estate, and whatever other expenses the estate is likely to incur. Otherwise disputes may occur, and those disputes may cause permanent damage to family relationships.

Example: Gina’s will indicates that $20,000 is to be left to each of her three nieces, and the remainder of the estate is to be divided between her two children. If too large a portion of Gina’s assets pass via ToD/PoD designations to her two kids, the estate won’t have the $60,000 to pay the intended bequests to her nieces.

Assets Going to the Wrong Person

In some cases, people forget about the ToD/PoD designation on a particular account and thereby end up making decisions that circumvent their own intentions.

Example: Clara’s will indicates that her estate is to be divided equally among her son and two daughters. Clara’s son lives in town with her and is involved in helping her with various day-to-day concerns, whereas her two daughters live elsewhere. Clara has a bank account that represents about 5% of her total assets. The account is payable on death to her son, with the idea being that he’ll ultimately get somewhat more than his siblings, because of the additional help he has provided.

Later in life, Clara sells her home and begins renting a smaller apartment. The proceeds from the sale end up in her bank account and are never redeployed elsewhere. When Clara dies, the bank account represents more than half of her total assets, and her son ends up inheriting a much greater percentage than she had intended.

ToD/PoD designations may cause similar problems in which one of the designated beneficiaries predeceases the original owner (i.e., the assets are ultimately split in a way that is not in keeping with the original owner’s wishes).

Circumventing a Trust

It’s common for an estate plan to involve leaving assets to beneficiaries in trust (i.e., rather than leaving the assets outright, they are left to a trust for the benefit of the person in question). That’s often done for the sake of creditor protection (because the assets in the trust would not be available in a lawsuit against the beneficiary, whereas assets left outright to that person would be). Sometimes it’s done to prevent the assets from being lost to a spouse in a divorce. And sometimes it’s done for estate tax planning reasons (e.g., so that the assets in the trust are not in the beneficiary’s own estate when he/she dies).

Unfortunately, it’s also common for people to pay an attorney to prepare a thoughtful estate plan which includes one or more trusts, and then (without discussing with the attorney) they designate PoD/ToD beneficiaries on accounts rather than leaving the assets to the trust(s) as intended in the estate plan.

Make Sure It’s a Cohesive Plan

Transfer on death and payable on death designations can be helpful. In the right cases, they can avoid considerable hassle and sometimes financial costs as well. But as with any aspect of an estate plan, such designations should be:

• Carefully thought through before being made,
• Considered in light of the overall estate plan, and
• Revisited regularly or whenever the household experiences a major change in circumstances.

Among people who read personal finance books, many save a high percentage of their income through most of their careers. One thing that eventually happens for some such people is that they reach a point at which they realize they have not only saved "enough," they have saved "more than enough." Their desired standard of living in retirement is well secured, and it’s likely that a major part of the portfolio is eventually going to be left to loved ones and/or charity. And that realization raises a whole list of new questions and concerns.

This book’s goal is to help you answer those questions.

Pets create certain distinct challenges with respect to estate planning. At its core, the issue is that pets, legally speaking, are property.

In your mind, your beloved terrier Marty is a member of the family. But as far as the law is concerned, Marty is no different from a piece of furniture. Marty cannot own property. Marty cannot be named as a beneficiary. If no specific provision is made in your will, Marty will go to your remainder beneficiary. If there are multiple remainder beneficiaries, the executor will have to choose to whom Marty will go.

Option 1:  Your Will

One option is, in your will, to specifically leave your pet to a named beneficiary as well as leaving a specific amount of assets to that beneficiary for the care of your pet. That’s an easy solution but not a perfect one, because there’s no requirement that the assets be used to care for the pet. There’s no requirement that the beneficiary not get rid of the pet.

And a will doesn’t kick in until you die, so it provides no assistance in a case in which you become incapacitated and can no longer care for your pet.

Option 2: Pet Trust

Another option is to create a pet trust. (Here’s a refresher on basic trust terminology in case that’s helpful.) The pet, as well as a certain amount of assets, are left to the trust. And the trustee is required to manage and use the assets in keeping with the terms of the trust — one requirement of which could be that the assets be used for the care of the pet.

In addition, a pet trust allows you to name somebody to be the pet guardian, which is the person tasked with providing the actual care to your pet (while the trustee would be the person tasked with managing the assets).

And finally a beneficiary (or multiple beneficiaries) would be named, to whom the assets would be distributed after the death of the pet.

You can name separate people for each of the three roles: trustee, pet guardian, and beneficiary. Or one person can be named to fill two or even all three of those roles.

A trust also has the benefit of being applicable in situations in which you become incapacitated, if you choose to have the trust drafted that way.

This all sounds lovely, and indeed, a pet trust may be the best solution, but remember that trusts can be complicated entities. And pet trusts especially are unique little creatures.

Option 3: Pet Protection Agreement

A pet protection agreement is a legally enforceable agreement between a pet owner and a named pet guardian. The guardian agrees to care for the pet under certain circumstances, such as the death or incapacitation of the pet owner. The pet owner may provide funds as a part of the pet protection agreement, but it is not mandatory. The pet protection agreement generally includes instructions as to the pet’s daily care as well.

A pet protection agreement may be simpler than a pet trust, and it may allow you to achieve all of the desired goals. On the other hand, a pet trust can allow for a greater level of control.

Finally, I just want to note that whenever I discuss estate planning, I encourage people to consult with an estate planning attorney licensed in their own state, and this sub-topic (i.e., the tricky circumstance of dealing with a pet) is no exception. And to be clear, this is not just a legalese “CYA” sort of disclaimer. I really, sincerely mean it. Estate planning is complicated, and the rules vary meaningfully from one state to another. Guidance from an experienced professional is valuable.

Among people who read personal finance books, many save a high percentage of their income through most of their careers. One thing that eventually happens for some such people is that they reach a point at which they realize they have not only saved "enough," they have saved "more than enough." Their desired standard of living in retirement is well secured, and it’s likely that a major part of the portfolio is eventually going to be left to loved ones and/or charity. And that realization raises a whole list of new questions and concerns.

This book’s goal is to help you answer those questions.

A general principle in financial planning is that if nobody would be financially in trouble if you were to die tomorrow, you don’t need life insurance. The most common example of this principle is that an unmarried person with no children probably does not need life insurance.

A less discussed but still very common application of this principle is that, after you have retired (or reached financial independence), you probably do not need life insurance anymore. (I say “probably” because one noteworthy exception is that if you have a pension/annuity with a small (or no) survivor benefit, you might still need life insurance to support your spouse after your death.)

But once nobody other than you is dependent upon your income, you no longer need life insurance.

But that doesn’t necessarily mean you should let an existing life insurance policy lapse.

If your own retirement security would be meaningfully improved by no longer paying the premium, then you should probably let it lapse. Why put your own well-being at risk, simply to pay for a policy that’s no longer needed?

But if your own retirement security is not really at risk at all (i.e., your assets and other sources of income, relative to your desired level of spending, are such that you’re extremely unlikely to run out of money during retirement), it often makes sense to keep paying the premiums.

In general, if you reach a point where your own retirement security isn’t at risk, then the impacts of the various financial decisions you make will primarily be felt by your heirs rather than yourself. The metric of interest is no longer “probability of portfolio depletion” (or other similar metrics) but rather “after-tax expected bequest” (or other giving/bequest-related metrics).

And when measured in that way, continuing to pay the premium on an unneeded life insurance policy can still look pretty good, in many cases.

Let’s Look at an Example

Bob is a 50 year old male who has never smoked. He’s in good health. Based on a quote from term4sale.com, Bob could buy a $1 million 15-year level premium term policy for a premium of $1,175 per year.

If we use the most recent (2017) CSO non-smoker super preferred mortality table, Bob has just a 0.18% chance of dying this year. This tells us that the probability-weighted payout for the policy this year (i.e., the “expected value”) is $1,000,000 x 0.0018 = $1,800. Right from the start, that’s more than the $1,175 annual premium.

Granted, Bob’s chance of dying in a given year is probably not exactly the same as the probability shown in any given mortality table. But we’re already looking at a table that reflects longer than average life expectancies. And with an $1,800 expected value for this year and a $1,175 annual premium, Bob’s chance of dying would have to be much lower (about 35% lower) than that shown in the table in order for the policy to be a “bad” deal.

And the policy only becomes a better deal each year, because the premium stays the same while Bob’s chance of dying grows as he ages.

For instance, let’s imagine that by age 60, Bob is financially independent and no longer needs the insurance. His premium will still be $1,175 each year for the last 5 years of the policy, if he chooses to pay it. If we again use the same mortality table:

• Bob’s chance of dying between age 60 and 61 is ~0.36%. (Expected value of $3,610.)
• From age 61 to 62 it’s ~0.40%. (Expected value of $4,010.)
• From 62 to 63 it’s ~0.45%. (Expected value of $4,470.)
• From 63-64 it’s ~0.50%. (Expected value of $4,980.)
• And in the last year of the policy, from 64-64, it’s ~0.55%. (Expected value of $5,540.)

Those values are way above the $1,175 annual premium.

If paying the $1,175 premium would put Bob’s financial well-being at risk in any way, he should let the policy lapse. But if 1) he can comfortably afford to pay the premium and 2) he has even a modest degree of bequest motive, he should keep paying that premium.

A level premium term policy that you have already held for some years is kind of like a lottery ticket in that it offers a high probability of no payout, with a low probability of a high payout — but the critical difference is that in this case the odds are often weighted in your favor. The expected value each year can be quite a bit more than the premium being paid, whereas with a lottery ticket the expected value is generally considerably less than the cost of the ticket.

Another point in favor of continuing to pay the premium is that the death benefit is not taxable as income to the beneficiary. And, if estate taxes are a concern at all, if the policy is owned by an irrevocable trust, it may be excluded from your gross estate as well.

Among people who read personal finance books, many save a high percentage of their income through most of their careers. One thing that eventually happens for some such people is that they reach a point at which they realize they have not only saved "enough," they have saved "more than enough." Their desired standard of living in retirement is well secured, and it’s likely that a major part of the portfolio is eventually going to be left to loved ones and/or charity. And that realization raises a whole list of new questions and concerns.

This book’s goal is to help you answer those questions.

Today I want to share with you a brief “estate planning gone wrong” story. The story is real, but of course the names have been changed. If you are not up-to-speed on basic trust terminology, please read “What’s the Point of a Trust?” first.

Here’s the basic sequence of events:

• Hank and Wanda (a married couple) had their attorney, Adam, create a trust for them.
• Hank was named as trustee of the trust.
• Adam was named as successor trustee.
• Hank and Wanda were co-beneficiaries of the trust, with their adult children named as secondary beneficiaries.
• Hank and Wanda moved essentially all of their assets into the trust. (Retirement accounts, which cannot go into the trust, made up only a very small portion of their assets.)
• Adam died before Hank or Wanda. The trust was not modified to add a new successor trustee.
• Hank died.

The result: the trust had no trustee — nobody who was authorized to make decisions about how to use the assets. Wanda was beneficiary of the trust, but because she was not the trustee, she had no control over the assets. This resulted in two problems:

1. Wanda could not spend from the money that she naturally thought of as “her” money.
2. There was nobody who could make any portfolio management decisions.

Wanda petitioned the applicable court to appoint a new trustee for the trust, and the court eventually did so. But the process took several months. And in the meantime, there was very little other than her monthly Social Security check that she had access to.

Fortunately, her adult children were able to step in and provide some needed funds. And, fortunately, the portfolio being left on autopilot did not result in any bad outcome. But you can easily imagine situations where either of those two problems could have resulted in very real damage to Wanda’s well-being.

Why wasn’t Wanda named as co-trustee along with Hank? Frankly, I don’t know. There are various cases in which it would make sense for only one of two spouses to be named as a trustee (e.g., the other spouse has a gambling problem or cannot be trusted to make sound financial decisions for some reason). I could not see any obvious reason in this case, but maybe the husband and the attorney really did have a good reason.

Regardless, this is an easily avoided situation. Make sure your trust has multiple successor trustees. Even if you like the idea of naming a family member or a trusted individual professional as the trustee, naming a business entity, such as a well-established law firm that’s likely to outlive any one person, as a final successor trustee can prevent the situation described here.

In addition, estate plans should be updated periodically. In the example above, the situation would have been avoided if the couple had reviewed their estate plan after the first attorney’s death, as they (or the attorney doing the review) would have realized that the trust no longer had a successor trustee.

Among people who read personal finance books, many save a high percentage of their income through most of their careers. One thing that eventually happens for some such people is that they reach a point at which they realize they have not only saved "enough," they have saved "more than enough." Their desired standard of living in retirement is well secured, and it’s likely that a major part of the portfolio is eventually going to be left to loved ones and/or charity. And that realization raises a whole list of new questions and concerns.

This book’s goal is to help you answer those questions.

In financial planning we talk a lot about asset allocation — what portion of your portfolio is allocated to US stocks, international stocks, bonds, etc. And we talk about asset location as well, which is the idea that you can achieve tax savings by making sure your least tax-efficient assets are in retirement accounts rather than in taxable accounts where they’ll generate considerable tax costs each year. (For example, if you own a high-yield bond fund or actively managed stock funds with high turnover, it’s best not to own them in taxable accounts.)

I would like to propose the terms bequest allocation and bequest location as well.

Your bequest allocation is what portion of your assets will go to which parties, upon your death (or upon the second death of you and your spouse).

And the bequest location concept is analogous to asset location. That is, after deciding your bequest allocation, it’s wise to take some time to think about which assets should be used to satisfy which parts of your bequest allocation.

For example, imagine that you are a grandparent and you have decided that you want your bequest allocation to be 40% to your children, 10% to your grandchildren, 50% to charity.

And imagine that your assets are roughly broken down as: 40% tax-deferred accounts, 25% taxable accounts, 15% Roth IRA, 20% real estate (your home).

How should you divvy up those accounts to meet the desired bequest allocation? Many people might default to simply taking a pro-rata approach, but there’s a much better solution.

First things first: tax-deferred accounts are the ideal asset for giving to charity, because the charity doesn’t have to pay any tax on the money, whereas any individual would have to pay tax as distributions are taken from the account.

And for the opposite reason, the Roth accounts should go to a human rather than to charity. That is, a charity has no reason to prefer Roth dollars over tax-deferred dollars, whereas your kids (or grandkids) definitely would prefer Roth dollars.

So should the Roth IRA go to your kids or grandkids? Back when Roth IRAs could be stretched over a beneficiary’s lifetime, it often made sense to leave them to the youngest people, to get tax-free growth for as long as possible. Today though, they often have to be distributed over 10 years regardless of whether they’re going to kids or grandkids. So now it often makes sense to leave the Roth dollars to the generation that has the highest marginal tax rate. (Note though that if the grandkids are under 18 or under 24 and full-time students, the kiddie tax could cause your grandkids to have a marginal tax rate that’s the same as their parents’ rate anyway.)

Taxable assets work well for either party. Again, any assets are tax-free to a tax-exempt charity. And any humans who inherit taxable assets will receive a step-up in cost basis, thereby allowing them to sell the assets immediately (if desired) and incur little to no tax.

So in the above example, the ideal bequest location would probably be:

• The tax-deferred assets (40% of the total assets) go to charity,
• A portion of the taxable assets (10% of the total assets) goes to charity,
• Another portion of the taxable assets (10% of the total assets) goes to your grandkids,
• The rest of the taxable assets (including the home) as well as the Roth IRA go to your kids (40% of the total assets).

In short, the idea is: prioritize Roth for humans, prioritize tax-deferred for charity. And to the extent possible, especially prioritize Roth assets for humans with the highest tax rates.

Among people who read personal finance books, many save a high percentage of their income through most of their careers. One thing that eventually happens for some such people is that they reach a point at which they realize they have not only saved "enough," they have saved "more than enough." Their desired standard of living in retirement is well secured, and it’s likely that a major part of the portfolio is eventually going to be left to loved ones and/or charity. And that realization raises a whole list of new questions and concerns.

This book’s goal is to help you answer those questions.

When I recently asked for suggestions of specific estate-planning-related topics to write about, one thing that immediately became clear is that many people aren’t entirely sure what estate planning is — and whether it’s something they should be thinking about.

To put it bluntly, estate planning is planning for your incapacitation or death — choosing, for example, what will happen to your financial assets, your minor children, and your health care in such situations. As you can imagine, that’s a pretty broad field, and almost everybody has at least some degree of estate planning that they should be doing.

At the simplest level, estate planning would include making sure that the beneficiary designations on your retirement accounts and insurance policies are up-to-date. (Remember, it’s the beneficiary designation that controls where the money goes, regardless of what you say in your will.)

A very basic level of estate planning would also include making sure that you have a will that accurately reflects your wishes for any other assets (i.e., assets that do not pass directly to a named beneficiary outside of the will).

At a more advanced level of estate planning, some people will benefit from creating a trust to serve any of several different purposes. In short, a trust is a legal entity to which you would give some of your assets. Those assets are then managed by a person or entity whom you name (the “trustee”), for the benefit of some other person(s) or entity.

A trust can be helpful, for example, if there is somebody to whom you wish to leave assets, yet who you do not think should be put in charge of managing those assets (e.g., because of a disability or because of a well-established history of poor financial decisions).

Alternatively, trusts can be helpful for people on their second marriage. For example, imagine that you want to leave your assets to your new spouse, but you want to be sure that any assets remaining after that spouse dies go to your children from your first marriage (rather than to that spouse’s children from his/her first marriage). In such a case, you could put the assets in a trust, naming your spouse as a beneficiary to receive income from those assets for the duration of his/her life, and naming your children as beneficiaries who will receive those assets after your spouse’s death.

For some people, estate planning involves engaging in various activities to minimize the effect of estate taxes. This is, however, not a concern for most people these days, given the size of the federal estate tax exemption: $5.43 million in 2015, twice that for married couples.

Estate planning also includes several topics that are not strictly of a financial nature, such as choosing a guardian who will care for your children in the event of your death, or granting a medical power of attorney to a trusted family member or friend, so that he/she can make health care decisions on your behalf if you become incapacitated.

Among people who read personal finance books, many save a high percentage of their income through most of their careers. One thing that eventually happens for some such people is that they reach a point at which they realize they have not only saved "enough," they have saved "more than enough." Their desired standard of living in retirement is well secured, and it’s likely that a major part of the portfolio is eventually going to be left to loved ones and/or charity. And that realization raises a whole list of new questions and concerns.

This book’s goal is to help you answer those questions.