When you’re developing your estate plan, it’s not only important to specify who your heirs or trust beneficiaries are (and what they will receive), but what happens to their share of your estate if one or more of them pass on before you do.
You can specify this by deciding whether your heirs will be “per stirpes” or “per capita.”
- Per capita (“by head”) means that if one of your heirs passes on before you do, your remaining assets will be split among your surviving heirs. The deceased heir’s children will receive nothing.
- Per stirpes (“by branch”) means that if one of your heirs passes on before you do, their share of your estate will be passed on to their children.
The main reason you would choose a per stirpes designation for an heir is if you wanted your grandchildren to inherit a portion of your estate should their parent (your child) pass on before you.
Different heirs can have different designations. For example, you might assign per stirpes status to your children who have children, and per capita status to your child who is unlikely to have children.
By default, most estate plans and trusts follow the per capita rule, so if you want to add per stirpes designations, make sure this language is codified in your will and trust document.
A hypothetical example
Wendy, a widow, has three children: Vera, Chuck and Dave. Vera and Chuck have children. Dave isn’t married and doesn’t want kids. In her estate plan, each child will receive one-third of her accumulated wealth.
Wendy wants her grandchildren to inherit some of her wealth if either Vera or Chuck dies before she does. So, she assigns per stirpes status to Vera and Chuck as beneficiaries of her estate.
Dave’s beneficiary status remains per capita, since he has no children to inherit his share of Wendy’s wealth. If he dies before Wendy, his share will be divided equally among Vera and Chuck.
You may need to update financial accounts as well
Per stirpes or per capita beneficiary designations you include in your will or trust generally don't apply to financial accounts held outside of trusts. These may include IRAs, 401(k) and 403(b) plan accounts, annuity and insurance policies and many taxable bank and brokerage accounts.
By default, most of these accounts assign per capita status to beneficiaries. If you want to change these designations you’ll have to update the beneficiary form for each account.
Many IRA beneficiary forms allow you to do so by checking off per stirpes next to the name of the beneficiary. But some account providers (such as many 401(k) plan recordkeepers) don’t offer such checkoff boxes on their beneficiary forms.
In these situations, you may need to contact the provider to ask them to manually add per stirpes status to the designated beneficiaries. Make sure you get documentation once this is done.
If you have further questions about these designations, speak to your estate planning attorney. Your financial advisor may also be able to offer assistance.
This article was authored by Chris Gullotti and Jeffrey Briskin. Chris is a financial advisor and Partner with Canby Financial Advisors, LLC, an Investment Adviser registered with the U.S. Securities & Exchange Commission. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or ability. Chris can be reached at 508.598.1082 or cgullotti@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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