by Brett Norris, CFP®
Vice President
Wealth Planning
In the realm of estate planning, the terms "per stirpes" and "per capita" play a pivotal role in how assets are distributed among beneficiaries. Understanding both terms is critical for anyone looking to ensure that their assets are transferred according to their wishes.
Understanding Per Stirpes
Per stirpes is a Latin term meaning "by the branch." In the context of estate planning, it refers to a method of distributing assets where descendants of a deceased beneficiary inherit the deceased’s share. This approach ensures that the inheritance is passed down through generations, maintaining the lineage of the original beneficiary.
For instance, imagine a person designating their two children as equal primary beneficiaries, where one child had two children of their own and the other had three. If per stirpes had been selected for both children, and they were to predecease the original account owner, two of the grandchildren would equally inherit their parent’s ½ share, and the other three would split their parents ½ share amongst themselves.
Understanding Per Capita
Per capita, another Latin term, translates to "by the head." In estate planning, this method of distribution divides an estate equally among living beneficiaries at a generational level. Unlike per stirpes, per capita does not allocate inheritance to a successive generation pro-rata based on the generation before them.
Imagine the same scenario as above, where two children are designated as equal primary beneficiaries; and one child had two children and the other had three. If per capita had been selected for both children and they were to predecease the original account owner, the five grandchildren would equally inherit 1/5 shares.
Comparing Per Stirpes and Per Capita
The choice between per stirpes and per capita distribution methods depends on the account-owner or testator’s intentions and the specific circumstances.
Per stirpes ensures that an inheritance is passed down through generations, preserving the lineage of the original beneficiary. This methodology may be most consistent with how assets would flow had the family died in the natural or expected order (i.e., parents first, then children, then grandchildren, etc.). In contrast, per capita focuses on equal distribution among living beneficiaries, but may result in future generations inheriting shares unequal to what they would have had their parents not predeceased them.
Common Pitfalls
It's worth noting that if a per stirpes or per capita election is made (for a primary beneficiary), contingent beneficiary appointments may be nullified. For example, if a person designates a single primary beneficiary for their IRA and elects per stirpes or per capita, and the named beneficiary predeceases the account owner and no beneficiary updates are made, their (the deceased named beneficiary) children will receive the entire account rather than the named contingent beneficiaries. This may be problematic if the named contingent beneficiaries are different than the primary beneficiary’s children.
Likewise, if there are multiple primary beneficiaries named and no per stirpes or per capita elections made, then one passes away, the entire account balance will be transferred to the remaining living primary beneficiaries upon the death of the account owner, potentially disinheriting the predeceased primary beneficiary’s lineage.
Be Aware of Custodian and Jurisdiction Rules
It is important to note that the default rules for distribution may vary depending on the jurisdiction or account custodian. For example, some custodians may default to per stirpes or per capita, while others may default to their own interpretation or distribution method (which may not correspond with either per stirpes or per capita). Consulting with a legal professional or advisor to understand the applicable rules for you is highly recommended. To avoid disputes and ensure that your estate is distributed appropriately, it is critical that you understand your applicable distribution method. Ambiguity can lead to conflicts among beneficiaries and may result in unintended outcomes.
Regular Updates
Estate planning and beneficiary designations are not one-time events. It is important to review and update your estate planning documents regularly, especially after significant life events such as births, deaths, marriages, or divorces. Regular updates ensure that your distribution method reflects your current wishes and family dynamics.
Conclusion
The importance of per stirpes and per capita elections for beneficiary designations cannot be overstated. These distribution methods have significant implications for how your accounts are divided among your beneficiaries. Understanding the differences between them and carefully considering your family dynamics and intentions will help you make informed decisions. Consult with your legal advisor to ensure that your estate planning documents and beneficiary designation agreements accurately reflect your wishes and comply with applicable laws. By doing so, you may achieve peace of mind knowing that your assets will be handled according to your desires and that your loved ones will be provided for in the manner you intended. To review your beneficiary designations and per stirpes or per capita elections for accounts managed by Ferguson Wellman and West Bearing Investments, please reach out to your portfolio manager and client relationship associate to discuss your current elections and help facilitate updates if needed.
Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.
We believe the information provided is from reliable sources but should not be assumed accurate or complete.