Per Stirpes: How to Avoid Sending Millions of Retirement Dollars to the Wrong Beneficiary

Taylor Schulte: Hey everyone. Really quick before we start the show, the world of podcasting is still very much the wild, wild West, and it can be challenging for people to discover new, high-quality podcasts to listen to. I would personally love to help more people find this show this year.

So I'm going to make a deal with you. I have a big box of one of my favorite finance books written by New York Times columnist, Carl Richards called The Behavior Gap. If you leave an honest written review for this show in the Apple Podcast app, I'm going to send you a copy.

So here's all you have to do on an iPhone or iPad and borrow your coworkers. If you have to leave a written review in the Apple Podcast app, not just one of those quickstar ratings, but an honest written review, take a screenshot of it and email it to me at podcast@youstaywealthy.com along with a good mailing address and I'll get the book out to you asap.

Now, if Carl wasn't overseas right now, he actually said he would've signed all of these books for us, but I think I came up with a better idea. So here is Carl Richards, author of The Behavior Gap, with a special message for the Stay Wealthy Community.

Carl Richards: Greetings from London. I'm Carl Richards, author of the book The Behavior Gap, and I am honored and thrilled that Taylor is giving copies of that book away to you listeners of this podcast. And I thought I'd just give you a little sort of sneak peek of the book.

I noticed about 20 years ago when I first started giving financial advice for living that we are crazy when it comes to money. We humans, you, me, all of us, right? We're crazy. But here's the sort of tricky part about our crazy behavior when it comes to money is that it's always well-intentioned. We don't know that we're crazy or that we wouldn't do it.

So we have this whole set of well-intentioned behaviors that are actually hurting us, and we all do now. I mean, here's the thing. Based on what I know about you, and I'm going to whisper for a second, I don't want Taylor to hear this, but based on what I know about you, I know I'm preaching to the choir, right?

Simply to the fact that you listen to this podcast. I know I'm preaching to the choir, but it doesn't help to get, it doesn't hurt to get a reminder every once in a while about these crazy behaviors and these behaviors show up in all areas of money, how we spend, how we save, how we talk about money, all of those things.

But one area that it becomes really obvious and often is our investment lives. We think that our job as investors is to run around the world researching and reading everything we can in the newspaper, watching what I jokingly call the Financial Pornography Network, trying to find the best investments craft and build the best investment portfolio.

But here's the secret, and again, based on what I know about you, you probably already know this secret. Here's the secret. You can build the best investment portfolio ever known in the history of the world with the best investments perfectly built.

And if you make one behavioral mistake, in other words, you get scared out of it at the wrong time, you make one behavioral mistake a decade, you may as well just own bank CDs your whole life. And there's no reason we need to do that. There's no reason we need to do that.

And that's what I try to hammer home in the book is really simple ways that we can stop doing dumb things with our money, right? All of us, you, me, all of us, right? So I hope you enjoy it and look forward to hearing from Taylor what you think. Thanks.

Taylor Schulte: Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm going to explain what per stirpes is. You might be asking per what? Yes, it's a funny Latin legal term, but it recently saved one of our clients from making a giant estate planning mistake, and she didn't even need to hire an attorney to fix it.

So if you want to make sure your money is inherited by the right people when you're gone, you're going to enjoy today's episode. For all the links and resources mentioned in today's episode, visit youstaywealthy.com/61.

If you're listening to this right now, it's safe to say that you're still kicking and breathing, but as we all know, that will not last forever. And as a financial planner, I think you should plan ahead for that occasion. As heartless as that might sound, I would consider that it's actually the complete opposite.

That planning for your death is an incredibly thoughtful and intentional exercise that will really help to minimize stress on your family when you're not here. The first step in planning for this occasion before we get to per stirpes, is to set up your beneficiary designations on your retirement accounts.

Really quick beneficiary designations, determine who gets your retirement account money when you pass away your retirement accounts include IRAs and employer-sponsored plans. This means traditional and Roth IRAs, simple IRAs, SEP IRAs, 401Ks, 403Bs 457s, and there are a few more, but I think you get it.

Remember that investments held outside of retirement accounts will be distributed based on other estate planning tools, things like a living trust or a will or a transfer on death. If you don't do anything at all, your estate could actually go through probate, and we don't want that, and it's a much longer conversation and a conversation for another day.

So for now, let's just focus on retirement accounts. Most married people choose their spouse as their primary beneficiary, so if you do that, your retirement dollars will go to your spouse when you pass away. This is really common. It's so common that if you're married and you don't name your spouse as the primary beneficiary, you're probably going to need some special paperwork to make that possible.

In addition to choosing a primary beneficiary, you're also going to want to set up contingent beneficiaries on your retirement accounts. And before I go any further, I just want to note that this is commonly skipped by people when they establish their retirement accounts.

Either they don't know what contingent beneficiary means or they intend to add their contingents in the future, but then they don't get around back to it. So don't skip this step. Adding a contingent beneficiary is really important, so make sure you have one on your retirement accounts or more than one.

If you're married with kids, your contingent beneficiaries might be your children. So if your spouse, your primary beneficiary passes away before you do your retirement accounts will be distributed to your children. If you're not married or you don't have kids, your contingent beneficiary might be a niece or a nephew or even a close friend.

You can name a trust as a primary or contingent beneficiary as well, but it's not always advised, and I would say that it requires a longer conversation with your trusted advisors, your accountant, your financial planner, and an attorney.

But yes, you can name a trust as a primary or contingent as well. Once you have your beneficiary designations dialed in and that's completed, the next step and a step that most people skip is to elect per stirpes or per capita for your beneficiaries.

So let's start with per stirpes. What is per stirpes? It's a strange sounding Latin legal term I know, but it's actually fairly simple to understand. Per stirpes means that if a beneficiary of yours dies before you die, the deceased beneficiary's children will inherit your money. Let me make that just a little bit easier to understand with an example.

Let's consider a grandmother, her daughter and her granddaughter. So the daughter is the primary beneficiary and the granddaughter is the contingent beneficiary. Pretty simple. In most cases, when the grandmother dies, her retirement dollars will go to her daughter, and then when the daughter dies, her money will go to the granddaughter.

Makes sense, right? However, if the daughter dies before the grandmother and grandma forgot to update her beneficiary designations, the money earmarked for the daughter would never make it to the granddaughter. Okay, so let me say that again.

If the daughter dies before the grandmother, she predeceases the grandmother, her daughter dies before the grandmother and grandma never updates the beneficiaries. The money that was earmarked for the daughter would never make it to the granddaughter.

If instead the grandmother elects per stirpes and the daughter dies before her, the money would go straight to the granddaughter. When grandma passes away, if I say this another way, when you choose per stirpes, you ensure that your kids' kids receive their share of your inheritance. If you don't have kids, replace that with your heirs as heirs.

So whoever's next in line, if you don't manually choose per stirpes, when setting up your retirement account beneficiaries per capita is going to be the default option, and most people probably have per capita selected without even knowing it because it's the default option.

Let's go back to our other example. Let's say the grandmother still has the same daughter and granddaughter, but she also has a son. The son and the daughter are listed as 50 50 beneficiaries. On grandma's million-dollar retirement account, the granddaughter is still going to be the contingent beneficiary. So if grandma gets run over by a reindeer tomorrow, the son and the daughter, the two primary beneficiaries would each receive $500,000.

The million dollars is split evenly 50-50 between grandma's, two primary beneficiaries, the son and the daughter. However, if the daughter gets run over by a reindeer first and then grandma second, the entire $500,000 originally earmarked for the daughter is all going to go to the son.

So the son would have all of grandma's million dollars in his pocket and the granddaughter, that contingent beneficiary, she's going to be left with nothing. Now, that might be okay with you per capita might be what you want, figuring out if you should choose per stires or not.

It depends on a few factors. Now, the most important factor is what you and your spouse, if applicable, what you and your spouse or just you want to happen. So have this conversation together or have this conversation with yourself or a friend or if needed, talk to a financial planner or attorney to kind of talk through this with you once you know what you want to happen.

You can also consider the age of the errors. Who would receive the money via per stirpes. For example, if you're looking at passing assets to your children and your grandchildren via per stirpes, you might want to consider the grandchildren's ages.

Are they minors? Are they financially responsible? Do you think that they'd be able to manage the assets on their own if they were to inherit them? If they're minors, a custom estate plan might make the most sense.

Things can get tricky for obvious reasons when you have young people in line behind you and you just want to make sure everything's really taken into consideration. But if they're adults and they're capable of managing their own finances, choosing per stirpes might be a simple option for you.

The bottom line is that per stirpes really should not be ignored. It's a critical piece of the retirement planning process that I think deserves to be reviewed at least every year. Now, before I let you go, you might be asking, Taylor, this all makes a lot of sense. I really want to make sure that I have things set up correctly.

How do I know what I've currently chosen and how do I make the appropriate changes if they're needed? The good thing is that it's a pretty simple two-step process. Step one is to contact the bank or custodian where your retirement accounts are held.

So a banker custodian could be Fidelity, Vanguard, Schwab, Morgan Stanley, Merrill Lynch, Wells Fargo, any of those. So wherever your retirement accounts are held and you're going to want to request a copy of your current beneficiary designations.

I'll also note too, that if you have online access, which I think most of us have these days, you should be able to log in online and view the beneficiaries that you've selected. But if not, again, contact that bank custodian and request a copy of your current beneficiary designations, and you're going to really want to do two things.

Once you have this in your hand, first, confirm that what you currently have on file is correct and it's aligned with your intentions. Second, you want to check to see if per stirpes has been selected. Remember, per capita is typically chosen by default. So if you didn't do anything, you probably have per capita.

If everything looks good, your job is done. You don't have to do anything else. But if you see something that needs to be updated or you have per capita by default and you want to select per stirpes, then you'll move on to step two, which is every bank or custodian.

Again, fidelity, Schwab, Vanguard, Merrill Lynch, Morgan Stanley, you name it. Every one of these places has what's called a beneficiary designation form, and it can always be updated. So if you need to make a change to your beneficiaries, including per stirpes or per capita, you need to contact your bank or custodian and request this form.

If you work with a financial planner, they can do the heavy lifting for you. Just contact them for this and they'll help you get this done. Similarly, you might also be able to do this directly online. Every company's a little bit different, so get that beneficiary designation form. Once you have that in hand, you can make the appropriate changes to your beneficiary designations.

So thank you guys as always for listening. I hope that was helpful. I hope you learned something new.

And remember, leave a written review, the Apple Podcast app. Take a screenshot of it, shoot me an email at podcast@youstaywealthy.com, and I'm going to send you a free copy of Carl's book, the Behavior Gap.

Thanks so much and I'll see you back here in two weeks.

Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.