Last year Vanguard released the following paper and accompanying calculator:

• A ‘BETR’ [Break-Even Tax Rate] Approach to Roth Conversions by James Passman, Boris Wong, and Joel Dickson
• Roth Conversion Break-even Tax Rate Calculator

The paper is excellent. The gist of the paper is essentially:

• People often think of the Roth conversion decision as a comparison of the tax rate they’d pay on the conversion, as compared to the future tax rate that would be paid on those dollars later.
• But there’s more to the analysis than that, because Roth conversions also have other effects, such as the beneficial effects of using taxable-account dollars (rather than dollars from the IRA) to pay the tax on the conversion.
• And when you account for those other factors, it reduces the “future tax rate” that would be necessary in order for a conversion to ultimately be advantageous. That is, a conversion might actually be advantageous even if the “future tax rate” is actually somewhat lower than the tax rate you end up paying on the conversion.

That’s absolutely true. I agree with all of the above. (You can find me saying similar things in The 4 Effects of a Roth Conversion or in my Roth Conversion Deep Dive presentation from the 2024 Bogleheads Conference.)

The calculator is essentially an implementation of the examples the authors provide in the paper. I think the calculator is interesting — worth experimenting with — but frankly I don’t think this is the best way to do a Roth conversion analysis. Rather, I think it’s preferable to look at Roth conversions as part of a much broader analysis, modeling projected cash flows through retirement.

For example, in Figure 2 in the paper (or using the calculator with the same set of assumptions), they show a very low break-even tax rate if the tax on the conversion is paid with cash. But a critical assumption being made here is that, in the no-conversion scenario, the calculator is assuming that the cash sits there for the duration of the 20-year calculation.

More comprehensive planning software would be able to calculate whether (based on the household’s other projected cashflows), that cash is likely to be spent elsewhere in the near future. In other words, if we spend the cash on the conversion tax, but now (because we no longer have that cash available) we have to liquidate a bunch of appreciated taxable account assets to pay the bills for the next 12 months, it’s essentially as if we liquidated those appreciated taxable assets, rather than the cash, to do the conversion.

And, when considering liquidating taxable assets to pay the tax on the conversion, the calculator assumes that there’s no capital gain tax to pay. In real life, of course we have to bring that into the analysis as well. (In some cases, for instance, if the taxable assets are highly appreciated, it might be better to aim to preserve them for heirs who would receive a step-up in cost basis.)

To be clear, I don’t think that the above constitute flaws with the paper. The paper is excellent in raising important ways in which the analysis is affected by more than just the “current and future tax rate.” And the assumptions the authors use are reasonable for the examples given. But actually doing the analysis in exactly the way they discuss (or using the calculator that does exactly that) is in my opinion not as helpful as more comprehensive planning software that is going to account for much more.

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.

Some of the most common questions I receive relate to the timing of RMDs. They’re each small enough topics that they don’t merit articles individually, so here they are as a brief collection instead.

RMD Starting Age

Due to legislation over the last several years, the starting age for RMDs based on year of birth is now as follows:

• 1950 or earlier: 72 (or 70.5 for anybody who turned 70.5 prior to 2020)
• 1951-1959: 73
• 1960 or later: 75

RMDs Work on a Calendar Year Basis (For the Most Part)

As with distributions from retirement accounts in general, RMDs work on calendar year basis. That is, unlike with contributions, you don’t have the option to wait until some time in the following year to take your RMD.

There is one exception to the above rule though. Specifically, for the first year for which you’re required to take an RMD, you can wait until April 1 of the following year. But in most cases, taking advantage of this exception is not advantageous, because it means you’d be taking two RMDs that year, which can result in a higher tax rate on those distributions. For example, if you turn 73 in 2025, you’d have until April 1, 2026 to take your first RMD. But then you’d have to take that RMD (i.e., the RMD for 2025) and the RMD for 2026, in 2026.

When Is the Best Time to Take an RMD?

Another common question is, within a given year, when is the best time to take an RMD (i.e., earlier or later in the year).

If the money for the RMD is needed for spending, then just take the money out of the IRA as you need it.

If the money isn’t going to be needed for spending (i.e., after being distributed from the IRA, it would just be reinvested in a taxable brokerage account), then we generally want to leave it in the IRA for most of the year. That is, we want to put off the “tax drag” (i.e., the tax on interest/dividends/capital gains, that occurs in a taxable account) for as long as is practical. Don’t wait until December 31st though, because we don’t want any administrative issues to cause a late RMD. October-November is usually what I’m aiming for.

And really, this preference for waiting until later in the year is a minor one. We’re talking about the tax, on a few months of interest, from a small percentage of an account, which is itself probably only a portion of your portfolio. If there’s ever any other reason that points in favor of taking the RMD earlier in the year, just take it earlier in the year.

The First Dollars Out Are the RMD

Another important rule is that, in any given year, the first dollars out of the IRA are considered to be part of the RMD, until the RMD is satisfied. This has two primary takeaways:

1. Because RMDs cannot be converted to Roth, if you’re intending to do a Roth conversion in a year in which you have to take an RMD (not super common, but it does happen), you have to take the RMD first. The RMD must be satisfied before the conversion, otherwise you converted your RMD, which you aren’t allowed to do.
2. If you want to use a qualified charitable distribution (QCD) to satisfy part or all of your RMD, don’t fully satisfy the RMD before taking the QCD. (If you take a QCD after taking the RMD, the QCD will still be nontaxable. But if you want to use the QCD to satisfy the RMD — so that you don’t have a taxable distribution for the year — don’t take any distributions other than the QCD.)

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.

Broadly speaking, cognitive decline (whether dementia or mild cognitive impairment) presents three financial risks:

1. The increased risk that you’ll fall victim to fraud.
2. The increased risk that you’ll make poor decisions that will be costly. (Not the result of fraud, just something along the lines of investment or spending decisions that make no sense.) Let’s call this “mismanagement.”
3. The risk that you’ll need expensive care.

The risk of expensive care is obviously important, but that’s not what I want to focus on today. (There are many articles discussing the pros and cons of long-term care insurance, budgeting to pay for care out of pocket, and so on.) Today I want to focus on those first two risks: fraud and mismanagement.

And as far as things we can do to minimize those risks, two of the most important categories of action steps are:

1. The health stuff. Exercise, proper diet, social contacts, mental stimulation, and (according to recent research) hearing aids for anybody with hearing loss can all reduce the probability of cognitive decline. So it’s hard to imagine any better action steps than those.
2. Estate planning. Please, get your basic estate planning documents in place if you haven’t yet done so. (Will, health care power of attorney, living will, financial power of attorney, and in some cases a trust.)

But I’m not a health care professional or an attorney, so those aren’t what I’ll be covering here either.

What follows is a CPA’s perspective on minimizing the financial risk of fraud or mismanagement due to cognitive decline.

Internal Controls/Oversight

Many people think of CPAs as “tax people.” And taxation is a major area of practice for CPAs. But another major area of CPA practice is audit, which can include developing or testing internal controls and oversight within an organization. (I promise this is relevant to personal financial planning and cognitive decline, so please stick with me.)

In case you haven’t encountered the term before, internal controls are policies implemented by an organization to try to provide assurance as to the effectiveness of the organization’s operations and compliance with the applicable laws and regulations.

For example, imagine a small business that has insufficient internal controls. The firm has one accountant, and that person has sole responsibility for paying bills and doing all of the bookkeeping. In such a scenario, the accountant could create his own external LLC, set it up within the firm’s accounting software as a vendor, send fake invoices from the LLC to his employer’s business, pay those invoices using the employer’s credit card or checking account, and record the expenses as if they were legitimate business costs. The accountant might be able to steal money from the employer every month, for years, with nobody noticing.

A common internal control that would prevent something like this is separation of duties. The business could set things up so that one employee has the ability to disburse funds (i.e., pay invoices) and a separate employee does the bookkeeping. In this way, if either of the two employees tried to perpetrate a fraud such as the one above, the other employee would likely catch it. Each person provides some oversight over the other.

Internal controls can be broadly grouped into two categories:

• Preventive controls (i.e., things that reduce the likelihood of fraud or mismanagement occurring), and
• Detective controls (i.e., things that detect fraud or mismanagement quickly if it occurs, so that it can at least be stopped going forward).

Application to Households

As we age, and the risk of cognitive decline increases, implementing various forms of internal controls within our own households can reduce the risk that we’ll be the victims of fraud or our own financial mismanagement.

I would encourage you to have controls in at least three categories:

1. Spending,
2. Investments, and
3. Information security.

I’ll provide some suggestions of such controls below. Some are preventive controls, and others are detective controls. And if you spend some time thinking creatively about it, I’m sure you could come up with a whole list of additional options. Most internal controls do come with a cost though, whether it’s time to implement them or a financial cost if you’re hiring a professional to help with the implementation. So you’ll need to make your own assessment to determine where your biggest risks are, which controls would be most effective, and which controls would have the best cost/benefit ratio.

Spending-Related Controls

A common practice is to go through the credit card statement(s) every month and look at every charge, confirming that it is money that you spent on purpose (i.e., it’s not a fraudulent charge, it’s not a subscription that you thought you canceled a year ago, etc.). That’s a great internal control. And I’d encourage you to do the same thing with the checking account(s).

At some point though, in order for this to be an effective control in the context of potential cognitive decline, this needs to become a multiple-person job, so that there is meaningful oversight. If you have a significant other, you both go through and look at every charge on the credit card. If you are single, I would encourage you to enlist a trusted family member or professional. And more specifically, for this to function as an effective internal control, we want two people who we believe are of sound mind to be able to explain any spending transaction. That means that, if at some point it becomes clear for a couple that only one person is of sound mind, then we need to enlist a third person. And for a single person, if that person is no longer of sound mind, then ideally we want two other people.

Example: for one reader of this blog, the clear “we have a problem” moment came from just such an exercise. She and her husband had agreed they would make a sizeable donation to one of their favorite charities. Later, when reviewing their credit card statement for the month, the donation was there as expected. But there was also an identical transaction a few days later. Apparently the husband had put the donation on his to-do list. He made the donation. And then he completely forgot that he had done it. So he did it again a few days later.

If you haven’t done it before, this may sound like a super labor-intensive job. In my experience, it’s not so bad. For our household, it’s usually less than 10 minutes per month.

If you’re super concerned though about it being too laborious, you could implement a dollar threshold: for example, checking all the transactions that are over $X.

A missing expense can also be important information (e.g., an annual insurance premium not being paid), though it’s much harder to notice. For this, a basic version of what accountants call “variance analysis” may be helpful. Essentially, if you compare the month in question to the previous month as well as to the same month from the previous year, are any big expenses missing? (For example, if you’re looking at February 2025, you’d compare to January 2025 as well as February 2024.)

Two last spending-related controls, both of which are easy to implement:

• Automate bill payment whenever possible. The fewer things you have to remember to do and the fewer the number of decisions you have to make, the less damaging it will be if things do start to go south from a cognitive function point of view.
• Pay with credit card rather than debit card. (It’s generally easier to get fraudulent credit card transactions reversed.)

Investment-Related Controls

Similar to the above two-person-review policy with spending, I’d encourage you at some point to implement the same periodic review policy for investment accounts. If any changes were made by anybody, why? Two parties, both of sound mind, should each be able to answer that question.

With respect to such a review policy, having a written investment policy statement (IPS) is helpful, as it gives you (and whoever else is involved) a clear metric against which actions can be judged. (“We have a plan. Was this action in keeping with the plan?”)

Simplification is also quite beneficial here. (And it’s a rare internal control that may have no cost at all!) The fewer the number of accounts, and the fewer the number of holdings within each account, the easier it is for you (and whoever else is on our multiple-person “investment oversight committee”) to keep tabs on everything.

Information-Related Controls

The IRS requires tax professionals to have a Written Information Security Plan (WISP), given that we are in possession of many people’s personal information. While you are probably not subject to any similar regulatory requirement, the principles are similar. Per IRS Publication 5708, a good information security plan should focus on three areas:

• Physical safeguards: keep your data safe from physical threats. (Examples: don’t use just a 4-digit passcode for your smart phone. And if you use your tablet or laptop in public places, set it to lock the screen after a very short delay.)
• Technical safeguards: ensure that your device(s) and network are not compromised. (Example: use complex passwords and multi-factor authentication, ideally via an authenticator app rather than SMS.)
• Administrative safeguards: manage and train your staff. (In this context, “staff” means household members. It’s important that you, and anybody else in your household, stay up to date on the latest fraud schemes. For example, in addition to being alert to phishing scams, you should be alert to pig-butchering scams and other forms of social engineering.)

Note that none of the above are specific to concerns about cognitive decline. They’re good policies regardless of circumstances. (Publication 5708 linked above also provides a sample information security plan if you want to take a look, though it would require some adaptation for a household context.)

Maximizing Policy Effectiveness

Any internal control policies should be written — ideally in a way that is explicit and concise, with a minimum of jargon. And these written policies need to be shared with anybody who is going to be involved with their implementation.

Controls also need to be reviewed and reassessed on a regular basis. Sometimes a well-intentioned control will turn out to have gaps that don’t become clear until it’s put into action. Sometimes controls need to be updated due to changes in technology. And we also need to check periodically that controls are actually being being implemented as designed. (If you have a policy to check over your spending every month with somebody, but you don’t actually do that, well then the policy isn’t doing much good.)

With respect to the entire area of cognitive decline, whenever a clear mistake or a dubious decision is made, we not only want to try to correct it if possible, we also want to keep records of it. If it becomes clear that questionable decisions are occurring more and more often, we want to see that pattern as early as possible, so we can take action as needed. As much as it doesn’t sound fun to keep records regarding our own potential mental decline, it’s better to know than to not know.

Relatedly, it’s likely a good idea to make sure that any financial professionals with whom you work (e.g., tax professional, financial planner, attorney) know of somebody (or ideally even a few people) to whom they can report when something seems “off” — and give them the authority to do that.

Sooner Rather Than Later

It’s easy to say, “well I’m obviously fine now, so I’ll worry about this later.” But we want to create these policies and put them into action at a time when you know that you are of sound mind. That’s the whole point. We don’t want somebody of questionable mental capacity to be charged with the jobs of creating and implementing important policies. If you’re of an age where potential cognitive decline is even on your radar at all, I think it’s a good idea to get started.

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.

Sometimes I receive questions from people who are doing a qualified charitable distribution (QCD) for the first time and something doesn’t go the way they expected. Most often:

• “The brokerage firm didn’t report the distribution as a QCD. I just got a regular Form 1099-R which included the distribution.”
• “The receipt from the charity did not confirm that the distribution was a QCD.”
• “The brokerage firm made the check out to the charity but sent it to me.”

The good news is: none of those are problems. The first two are in fact explicitly what you should expect. The third is also normal and in fact often desirable, relative to having the check mailed directly to the charity.

The Brokerage Firm Doesn’t Know It’s a QCD

Your brokerage firm does not report that a distribution is a qualified charitable distribution, because they don’t know. The brokerage firm does not confirm whether the payee on the check is a qualified charity. And the brokerage firm has no way to know if you already made other QCDs for the year (i.e., from a traditional IRA with another brokerage firm) and have thus already reached the annual limit.

So the brokerage firm is just going to send you a regular Form 1099-R for the year that includes all your distributions, QCD and otherwise. Here’s how the IRS explains it:

“In early 2024, the IRA owner will receive Form 1099-R from their IRA trustee that shows any IRA distributions made during calendar year 2023, including both regular distributions and QCDs. The total distribution is shown in Box 1 on that form. There is no special code for a QCD.”

The Charity Doesn’t Know It’s a QCD

Similarly, the charity isn’t going to confirm for you that the distribution is a QCD, because they also have no way to know. They likely don’t know your age, but even if they do, they (like the brokerage firm) have no way of knowing whether you’ve already exceeded the annual limit by other QCDs earlier in the year.

So the charity is just going to send you a receipt that says, “thanks for your donation of $X. You did not receive any goods or services in exchange for this donation.”

So, in short, it’s up to you to know whether the distribution is a QCD and report it accordingly. The brokerage firm doesn’t know. The charity doesn’t know.

Check Delivered to You

The IRC section that defines qualified charitable distributions (§ 408(d)(8)(B)) explicitly states that the distribution must be made “directly” by the trustee to the qualifying non-profit organization. So I understand why people might be concerned if the check arrives in their own mailbox. But, to be clear:

• It’s OK if the check is made out to the charity but delivered to you and you forward it to the charity.
• It’s not OK for the check to be made out to you (or for the funds to be electronically distributed from the IRA to your own account). In that case it’s not a QCD. It’s just a regular distribution.

In fact, that’s often preferable to have the check made out to the charity but mailed to you, because it gives you a chance to scan the check for your records.

One Last Tip

Don’t wait until the last minute to execute a QCD. We want to make sure that the charity has plenty of time to cash the check this year.

If it’s a check that you write from the IRA (as some brokerages offer check-writing privileges with their IRAs), and it doesn’t get cashed, then it would not be a distribution for the year in question. That could be a problem if you were relying on the QCD to count toward your RMD for the year, or if you were planning on making the maximum QCD next year. If the check was written by the custodian, then it will have been a distribution for the year in question. (But even then there’s still a possibility that the check gets lost/stolen in the mail and never deposited, in which case the funds may be refunded to your account.)

Better to do any QCDs relatively early in the year, so that there’s plenty of time for these things to resolve themselves, within the same tax year.

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.

As of today, my latest book is available: More Than Enough: A Brief Guide to the Questions That Arise After Realizing You Have More Than You Need.

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 significant part of the portfolio is eventually going to be left to loved ones and/or charity.

A similar thing can also happen for people simply as a result of the way that spending in retirement usually works. That is, early in retirement, you have to spend at a very low rate — because you don’t know what investment returns you’ll get, you don’t know how long you’ll live, and you don’t know whether you’ll have massive medical expenses later in life. Said differently, it often makes sense to plan for an outcome in which you get poor investment returns and live to age 105 in a nursing home. But most likely, that’s not what’s going to happen. As a result, Enough ultimately turns out to be More Than Enough, most of the time.

And that realization — that you have (or are at some point likely to have) more than enough — raises a whole list of new questions and concerns. Some of those are financial (e.g., how much can I afford to give away to charity during my lifetime?), and some are non-financial (e.g., how should I communicate my estate plan to my intended heirs?).

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

For reference, this book was written largely simultaneously with my previous book (After the Death of Your Spouse), and it actually shares some of the same material (specifically, some of the material about trusts, working with attorneys, and working with financial planners).

The book’s table of contents is as follows:

Part One: Non-Financial Considerations (What’s the goal? And why?)

1. Do You Have More Than Enough?
2. Who Gets the Money?
3. Talking with Your Kids or Other Heirs

Part Two: Financial Considerations

4. Giving and Spending During Your Lifetime
5. Learning to Spend and Give More
6. Impactful Charitable Giving
7. Impactful Investing
8. Reassess Your Asset Allocation
9. Trusts
10. Asset Protection

Part Three: Tax Strategies

11. Qualified Charitable Distributions
12. Donating Appreciated Taxable Assets
13. Deduction Bunching
14. Donor-Advised Funds
15. The Roth Question(s)
16. (State) Estate Taxes
17. Developing a Workable Plan

Part Four: Finding Professional Assistance

18. Working with an Attorney
19. Working with a Financial Planner

Conclusion: Mission Accomplished. Now What?

Afterword: Our Most Limited Resource

If you think the book would be helpful to you or to a loved one, I would encourage you to pick up a copy. (Print version here, Kindle version here.)

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.

The following is an excerpt from my book More than Enough: A Brief Guide to the Questions That Arise After Realizing You Have More Than You Need.

There are some cases in which assets should not be left directly to one or more of your intended heirs (e.g., because the heir is a minor, disabled, or simply has a history of making poor decisions).

Or consider this scenario: after your death, your surviving spouse remarries. And, when your surviving spouse later dies, all of the assets that you currently think of as your assets are ultimately left to the new spouse. And when that new spouse dies, all of the assets go to his or her kids rather than to your kids or other intended beneficiaries.

A trust is the solution to situations such as the above.

There are many different types of trusts, each of which serves a particular purpose. The basic idea though is that a trust is a legal entity which can own assets. Sometimes trusts are used for tax planning purposes. In many cases though, the purpose is to allow the person who created the trust to exert some control over how their assets will be managed after their death or incapacitation. That is, somebody can create a trust, fund it with assets, and write the terms of the trust in such a way as to stipulate certain requirements as to how the assets will be invested or spent—and then those rules will have to be followed even after the person who created the trust dies or becomes incapacitated.

With trusts, it’s important to get guidance from an attorney who specializes in estate planning. If the attorney is not a tax expert, it’s critical that the firm has somebody on their team who can provide expert tax guidance, as there are both income tax and estate/gift tax considerations involved with trusts.

In order to understand the various purposes for a trust, you first need to know a bit of terminology.

Parties to a Trust

A trust involves three parties: the grantor, the beneficiary, and the trustee.

• The grantor (sometimes called the donor or settlor) is the party who defines the terms (rules) of the trust, transfers property to the trust, and, usually, retains the right to change the trust until his or her death.
• The beneficiary (or beneficiaries) is the party for whose benefit the assets in the trust are held/managed.
• The trustee is the party in charge of managing the trust (e.g., making investment decisions, distributing assets to the beneficiary when applicable, and fulfilling any administrative requirements). The trustee owes a fiduciary duty to the beneficiary (i.e., a duty to put the beneficiary’s interests above the trustee’s own interests). And the trustee must manage the trust in such a way that is in keeping with the terms of the trust.

These parties may be actual human persons, or they may be legal entities. For instance, you could name a law firm or CPA firm as the trustee to a trust. And it’s common to name a non-profit organization as a beneficiary of a trust.

The trust may also designate somebody as a successor trustee, to take over when the initial trustee dies, becomes incapacitated, or relinquishes the role.

The trust may also designate one or more parties as secondary beneficiaries (also referred to as contingent beneficiaries), for whose benefit the assets would be managed if the primary beneficiary has died.

Another important point is that, while there are three parties to a trust, one person may actually be in multiple roles—or even all three roles.

EXAMPLE: Collin is the grantor of a trust (i.e., he funded it with his own assets). The trust is set up so that Collin is also the trustee and beneficiary while he is still alive, with his sister named as the successor trustee and his children named as the secondary beneficiaries.

One way to think about this is that before Collin created the trust, he had various rights in his assets. When he created and funded the trust, he transferred some of the rights in his assets to himself as the grantor, some to himself as trustee, and some to himself as beneficiary. Consequently, he retained all the rights in his assets that he held before the trust was created, but he now holds them in different capacities. In so doing, he creates a mechanism for others to act in the various capacities in the future.

As time passes, his sister may take over management of the trust as successor trustee when, for example, Collin becomes unable to manage his assets on his own. In addition, at Collin’s death, if his sister hadn’t already, she would become successor trustee and his children, the contingent beneficiaries, would become entitled to the benefits of the trust.

Note that there is no successor grantor because the main power given to the grantor is to change the trust. However, when the grantor dies, a trust becomes irrevocable, and cannot be changed.

More Trust Terminology

A trust can be an inter vivos trust or a testamentary trust. An inter vivos trust is created by the grantor during his or her lifetime, whereas a testamentary trust is created at the time of the grantor’s death. That is, with a testamentary trust, the grantor’s will provides for the trust to be created and funded upon his or her death.

A trust can be revocable or irrevocable. With a revocable trust, the grantor can change the terms of the trust (or even terminate it completely) as long as he/she is still alive and of sound mind. With an irrevocable trust, there are some exceptions, but changes generally cannot be made once the trust has been created. (The fact that you cannot make changes to an irrevocable trust is not, in itself, beneficial. But there are certain goals that can only be achieved with irrevocable trusts. For instance, if somebody sues you, they often will not be able to access assets in an irrevocable trust. Similarly, as mentioned later in this chapter, irrevocable trusts can be helpful for minimizing estate taxes.)

More Trust Usage Examples

With the above terminology discussion out of the way, we can go through a few examples of cases in which a trust would be useful.

EXAMPLE: Susie is a widow with three adult children (two daughters and a son). Her son has a long history of making poor financial decisions. In Susie’s will, rather than leaving 1/3 of her assets to each of her children outright, she leaves 1/3 to each of the daughters, and she leaves the remaining 1/3 to a trust. Susie names her son as the beneficiary of the trust, and she names her attorney as the trustee. This way her son still receives the benefits of the assets, but somebody else (the trustee) will be choosing how to invest and spend the assets.

EXAMPLE: Luther and Harriette are married, in their 60s. Harriette has two adult children from a prior marriage. Luther does not get along with Harriette’s children. Harriette is concerned that if she dies before Luther and her assets are simply left to Luther at her death, he will ultimately disinherit her children. As a result, Harriette provides in her will for a testamentary trust to be created upon her death and for her assets to be placed into that trust. The terms of the trust are that Luther will receive the income from the assets while he is alive, and then the assets will be left to her children upon Luther’s death.

EXAMPLE: Nigel and Veronica have an adult son who is disabled. The son is currently receiving Social Security disability benefits. And because of his low level of income and assets, he also qualifies for Supplemental Security Income (SSI) and Medicaid. If they simply leave their assets to him outright, he would lose eligibility for SSI and Medicaid. Instead, they create a special needs trust, which will receive their assets upon the death of the second spouse. Their son is named as beneficiary of the trust, and a trusted CPA is named as the trustee. Because the son has no control over the assets in the trust, it will not disqualify him from receiving SSI or Medicaid. The trustee will not be allowed to outright give the assets to the son, but the assets can be used for a variety of purposes for the benefit of the son.

Trusts are sometimes used to reduce potential estate tax costs. One of the ways to do this is to transfer assets to an irrevocable trust (thereby removing the assets from the grantor’s taxable estate), often while maintaining some current benefit (e.g., the right to take income from the assets for a period of years). By transferring assets now, the grantor will often have a taxable gift, but a significant advantage is that the gift is at today’s value, rather than at some more highly appreciated value at the date of the grantor’s death. There are many different variations on this concept though (e.g., intentionally defective grantor trusts, qualified personal residence trusts, charitable remainder trusts, etc.).

Another common use of trusts is simply to avoid probate. Assets that are placed in a trust do not have to go through probate upon the death of the grantor, because the terms of the trust (rather than state probate laws) govern how the assets are transferred. In some cases, avoiding probate can result in significant savings in terms of costs and time. (The cost of probate and administrative hassle involved vary considerably by state.)

In other cases, people may want to avoid having their assets go through probate for the sake of privacy. Probate records, including the will and estate inventory, are generally public information, whereas trusts are not.

Note though that if your goal for a trust is to have assets pass to beneficiaries without having to go through probate, it will be important that the trust is an inter vivos trust rather than a testamentary trust. Testamentary trusts do not avoid probate. (They come into being as a part of probate, via the will.)

Responsibilities as Trustee

The trustee of a trust has certain responsibilities and powers, which should be spelled out in the trust document.

One of those responsibilities is that the trustee has a fiduciary duty to the beneficiaries of the trust. That is, the trustee must manage the assets in a prudent way for the benefit of the beneficiaries, and the trustee must put the interests of the beneficiaries above the trustee’s own interests (other than to the extent that the trustee is a beneficiary).

The details vary by state law, but the trustee generally has a duty to keep the beneficiaries informed as to the administration of the trust. This often includes providing (at least) annual statements as to the trust’s assets, liabilities, income, expenses, and distributions. If/when the trust is closed, the trustee should send each beneficiary a record of all the major actions taken as trustee, including distributions made.

As with an estate, a trust is a taxable entity. If a trust has gross income of $600 or more for the year (or any taxable income more than zero), the trustee must file a Form 1041 reporting (and potentially paying tax on) that income. (Note: there are some exceptions while the grantor is still alive. That is, with some types of trusts, the trust’s income is simply treated as if it were the grantor’s income. However, once the grantor dies, the trust will be considered a separate taxpayer going forward.)

If you are trustee of a trust, it’s important to keep records of your actions in that role. Document any significant actions that you take (investment decisions, distributions from the trust, etc.) as well as your reason for those actions.

Professional Trustees

If you have (or plan to create) a trust, one important decision you’ll have to make is whether to name a family member or a professional entity as the trustee (or as the successor trustee, if you’re naming yourself as the original trustee).

The primary benefit of naming a family member as trustee (or multiple family members, as co-trustees) is that doing so will avoid some costs. Professional services are not free of course. An additional potential benefit is that a family member will have better knowledge of family dynamics, which can be helpful in some cases.

There are, however, significant points in favor of hiring a professional trustee.

Firstly, having a professional serve as trustee can prevent conflict in some cases, as the trustee will be an outsider, impartial among beneficiaries. And even if conflict isn’t avoided, it can be nice if the ill will is at least directed toward an outsider rather than toward a family member. (In some cases, the beneficiary of a trust comes to see the trustee as “the person who keeps me from getting to my money.” If the trustee and beneficiary are family, this can create permanent rifts.)

Second, naming a family member as trustee often imposes a significant burden on that person, in terms of time, stress, and potentially family conflict. And that burden may last for years.

Third, a professional trustee will have relevant skills and knowledge (e.g., investment experience), which a family member may not have.

And finally, hiring a professional trustee will generally provide some level of oversight. That is, the firm providing the service generally will have some level of internal controls to prevent theft, mismanagement, etc. In contrast, if you name, for example, your adult son as the trustee of a trust with your adult disabled daughter as the beneficiary, there may be no meaningful oversight—nobody checking to make sure that your son is performing his responsibilities appropriately.

Chapter Simple Summary

• A trust is a legal entity that can own property. There are many types of trusts, each with a different purpose, but the most common uses of trusts are to avoid probate, minimize estate taxes, or exert some control over a pool of assets after the grantor dies or becomes incapacitated.
• The grantor/donor is the party who creates the trust, defines its terms, and funds the trust with assets.
• The trustee is the party in charge of managing the trust.
• The beneficiary is the party for whom the trust’s assets are managed.
• The trustee of a trust has a fiduciary duty to the trust’s beneficiaries.
• Naming a professional as trustee of a trust does result in some additional costs, relative to naming a family member. But it also adds meaningful safeguards and may help to prevent family conflict.

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.