Thoughts On Beneficiaries

For our Spring Client meeting, we would like to take an opportunity to discuss your current beneficiaries’ selections and if we need to make any changes.  Please read the information below to help guide your decision especially if have grandchildren.

 The naming of beneficiary can be a very straightforward process.  However, as your beneficiaries get older it can be a little more complicated.  Let’s review the simple part first.

Typically, we see a couple name the other spouse as Primary beneficiary and the children as Contingent beneficiary.  So, if the primary beneficiary passes away then the children would inherit the account.  Simple and easy.

Now what if the children get married (or divorced), have children, have step-children, passes away,etc… basically just how life goes.  What happens in terms of beneficiaries?  Let’s go through some examples.

Our example family has one person as account owner (you) with a value of $1,000,000.  Our family has two kids, Donnie and Marie and five grandchildren. Donnie has 3 boys: Huey, Dewey, and Louie (Your grandchildren).  Marie has two daughters: Venus and Serena (Your grandchildren).

If you pass away and it is a 50/50 split, then Donnie and Marie will each get $500,000 of the account.  Simple and easy.

What if Marie passes away before you do.  What will that effect be?

If Marie passes away and then you die, 100% of the account or $1,000,000 will go the Donnie’s family.  Marie’s family will get $0.  If that isn’t what you envision then we need to add an additional feature to our beneficiary designation.

 Per Stirpes vs. Per Capita – Understanding the Differences

I’m going to define per stirpes and per capita first and then follow up with an example to make it more clear. 

Per Stirpes Meaning

Per stirpes is a latin term meaning “by branch.” 

You can think of per stirpes as following your family’s line, or lineal descendants, if a beneficiary dies before the original owner. 

Per Capita Meaning

Per capita is a latin term meaning “by head.” 

You can think of per capita as the inheritance being split among the remaining beneficiaries if a beneficiary dies before the original owner. 

How Per Stirpes and Per Capita Beneficiary Designations Work in Practice

I know per stirpes and per capita are difficult to understand without an example. Let’s look at an example to make sense of them. 

Per Stirpes

Let’s look at a per stirpes example with percentages and dollar figures to make it easier to track.  

Same example as before: Donnie and Marie are each named 50% primary beneficiaries of your $1,000,000 account. 

Now, let’s say Marie passes away before you. After you pass away, and assuming everyone else is still living, Donnie gets his half, or $500,000. Venus and Serena split what would have been Marie’s half. Venus and Serena each get one fourth, or $250,000. 

Remember, per stirpes follows the family line, which is why Venus and Serena split Marie’s portion. 

If Donnie and Marie had both passed away before you, Venus and Serena would have received the same amount ($250,000) because they still share in Marie’s 50% share; however, Huey, Dewey and Louie would have each received approximately 16.67%, or approximately $166,666.

Per Capita

Continuing with the same people, let’s look at how per capita would change the distributions. 

In this scenario, Donnie and Marie both pass away before you, leaving the five grandkids to receive distributions.

Instead of Venus and Serena getting 25% each and Huey, Dewey and Louie each receiving approximately 16.67%, each grandkid would receive 20%, or $200,000. 

Since you selected per capita, the kid’s shares don’t follow down the lineal line, but instead, are split by the heads remaining. In this case, five grandkids remain, which means they split the 100%, which is why they each receive 20% of the $1,000,000. 

If you are interested in changing your beneficiaries to a per stirpes or per capita basis, you will need to designate an Authorized Party to identity and locate your beneficiaries.

Choosing a per stirpes or per capita beneficiary designation is a complicated process. The order in which people die and what you select presents many different scenarios in how much someone could receive. It’s really important to consult with an estate planning attorney to make sure that if you select per stirpes or per capita, the distributions will happen as you intend.