Much has been written on this blog and in other financial publications, about the importance of beneficiary designations in retirement accounts, and I believe that most clients understand why it’s so important to be sure they have thought this through before choosing their designations. But one aspect of the designation that many do not always have a handle on prior to making their choices is whether, in the case of multiple beneficiaries, they should select the Per Capita or Per Stirpes designations.
One of the reasons for this, I believe, is the fact that most beneficiary designations will have a default selection, meaning that it is not always required to actually choose one or the other. And because of this, most clients simply input the names and percentages, without much thought as to what will happen in the unfortunate event that one of their beneficiaries should pre-decease them. And that’s just what the Per Stirpes or Per Capita selection does – it determines what will happen to a beneficiary’s share of their inheritance should they pre-decease the grantor of that inheritance.
Per Stirpes is a legal term, derived from Latin, meaning “By Branch”, which stipulates that should a beneficiary predecease the testator—the person who has made the beneficiary designation—the beneficiary’s share of the inheritance goes to his or her heirs. Here’s an example of how Per Stirpes works. Mr. Smith has 2 children, John and Mary. Mary has no children, but John has two, Jason and Claire. Mr. Smith has named his two children as primary beneficiaries of his IRA account, and each is to get 50% at his death. Unfortunately, at the time of his death, his son John has already passed on. On a Per Stirpes basis, his IRA will be distributed as follows – 50% will go to his daughter Mary, and the other 50% will be split by his two grandchildren, Jason and Claire because they were John’s heirs and are next in-line on his “Branch” of the family.
Per Capita, also derived from Latin, meaning “By Heads”, on the other hand, stipulates that the inherited property is divided equally among surviving descendants in the same generation nearest the testator. Per Capita is also known as Pro Rata, from the Latin “In Proportion”, but they mean the same thing for purposes of dividing inheritance. So, if we take the same example as before, but instead apply the Per Capita (or Pro Rata) rules, instead of John’s children (Mr. Smith’s grandchildren) receiving John’s 50% share of the inheritance, Mary would receive 100% of the property.
As you can see, there is a big difference in the results of the disposition of property at death from a choice that many fail to ever think much about, which is why it is so important to consider the different options carefully and make sure your choice is consistent with your ultimate wishes. Beneficiary designations can almost always be changed if you realize you’d like to alter your current choices, but it’s a good idea to consult with your estate planning attorney as soon as possible if you’re not sure they are in-line with your overall estate plan, because once you’ve passed on, it’ll obviously be too late.
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