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Futureproof Your Estate: The Ultimate Guide to Per Stirpes vs. Per Capita

Futureproof Your Estate: The Ultimate Guide to Per Stirpes vs. Per Capita


Safeguarding Your Legacy:
The Importance of Beneficiary Designations

Did you know a simple oversight in your beneficiary designations (per stirpes vs. per capita) could unintentionally disinherit loved ones?

Many people assume their wills and trusts are the final word on who inherits their assets. However, when it comes to retirement accounts, beneficiary designations hold the key. Unlike other assets that are distributed through wills or trusts, retirement accounts bypass these documents entirely. They pass directly to the individuals named as beneficiaries.

Retirement Accounts and Beneficiary Designations

Retirement accounts, such as IRAs and 401(k)s, are governed by the beneficiary designations you set up with your account provider. This means that no matter what your will says, the beneficiaries named on your retirement accounts will inherit those funds.

The Power of Planning

Clear and precise beneficiary designations are crucial. They ensure your hard-earned savings reach the people you intend to benefit. Without careful planning, you could inadvertently leave your loved ones in a bind, facing legal disputes or financial hardship. Understanding your options and the implications of your choices is essential for safeguarding your legacy.

Navigating Contingent Beneficiaries
Beyond the Primary Beneficiary

The Spouse as Primary Beneficiary

It’s common practice to name a spouse as the primary beneficiary of your retirement accounts. This makes sense as a first step in ensuring your partner is provided for in the event of your death.

However, what happens if your spouse predeceases you? Or if you and your spouse pass away simultaneously? This is where contingent beneficiaries come into play.

Contingent Beneficiaries

Planning for the Unexpected: Contingent beneficiaries are the individuals who inherit your retirement accounts if the primary beneficiary is unable to. Naming contingent beneficiaries ensures your assets are distributed according to your wishes, even if the unexpected happens.

Incomplete Contingent Beneficiary Designations

A Missed Opportunity: Many people overlook the importance of contingent beneficiary designations. An incomplete contingent designation can lead to unintended consequences, such as your retirement funds being distributed to individuals you never intended or becoming subject to probate. This can result in legal disputes among family members and a significant delay in distributing your assets.

Per Stirpes vs. Per Capita
Demystifying Beneficiary Designation Options

The Choice Between Per Stirpes and Per Capita

You generally have two main options—per stirpes and per capita—when naming beneficiaries for your retirement accounts. Each option has a significant impact on how your assets are divided among your heirs.

Per Stirpes:
Preserving Family Branches (By Branch)

  1. Definition: Per stirpes means “by branch.” This option ensures that your assets are distributed in a way that preserves family branches.
  2. How It Works: Under per stirpes, if one of your designated beneficiaries predeceases you, their share of the inheritance will pass to their descendants. For example, if you name your three children as beneficiaries and one child dies before you, that child’s share will be equally divided among their children (your grandchildren). This ensures that your grandchildren receive what their parent would have inherited, maintaining the intended distribution within your family branches.

Per Capita:
Equal Distribution Among Remaining Beneficiaries (Head Count)

  1. Definition: Per capita means “by head.” This designation distributes your assets equally among the surviving beneficiaries.
  2. How It Works: Under per capita, if one of your designated beneficiaries predeceases you, their share is divided equally among the remaining surviving beneficiaries. For instance, if you have three children named as beneficiaries and one child dies before you, the remaining two children will split the deceased child’s share. This method does not pass assets to the deceased beneficiary’s descendants, which can significantly alter the distribution you intended.

Taking Action
Ensuring Your Beneficiary Designations Are Clear and Up-to-Date

Review your existing beneficiary designations for your retirement accounts. It’s crucial to ensure they reflect your current wishes and circumstances.

Verification and Updates

Verify the accuracy of both your primary and contingent beneficiaries. Make sure their designations (per stirpes or per capita) align with your intentions. Regularly updating these designations prevents future complications and ensures your legacy is preserved as you intended.

Considering Professional Guidance

Discuss your specific situation and beneficiary designation options with a financial advisor. An expert can help you navigate the complexities of estate planning, ensuring your retirement savings are distributed according to your wishes.

Complicating Factors
The SECURE Act and Required Minimum Distributions (RMDs)

Brief Introduction of SECURE Act:

The SECURE Act, enacted in 2019, has significant implications for inheriting retirement accounts. Understanding these changes is vital for effective estate planning.

  1. 10-Year Distribution Period: Under the SECURE Act, most non-spouse beneficiaries are now required to empty inherited retirement accounts within 10 years. This change eliminates the option for many beneficiaries to stretch distributions over their lifetimes, accelerating the timeline for taking distributions and potentially increasing their tax burden.
  2. Impact on Beneficiary Planning: The SECURE Act adds another layer of complexity to your beneficiary designation strategies. It’s important to consider how the 10-year distribution rule might affect your heirs and plan accordingly. This may involve re-evaluating your beneficiary designations and exploring options to mitigate tax implications for your beneficiaries.

In Conclusion
Safeguarding Your Legacy – A Proactive Approach

Beneficiary designations for retirement accounts are a critical aspect of estate planning. Understanding the differences between per stirpes and per capita options can help ensure your assets are distributed according to your wishes. Additionally, considering the impact of the SECURE Act is essential in developing a comprehensive estate plan.

The Power of Planning

Proactive planning and clear beneficiary designations are key to safeguarding your legacy. By taking the time to review and update your designations, you can ensure your retirement savings benefit your intended heirs.

Schedule a consultation with a financial advisor (we strongly recommend fee-only, fiduciary advisors) to discuss your beneficiary designations and develop an estate plan that aligns with your wishes.  You can ensure your legacy is preserved and provide peace of mind for future generations by taking this proactive step.

Estate planning can seem daunting, but it’s an essential part of ensuring your legacy. By understanding the nuances of beneficiary designations and the implications of the SECURE Act, you can make informed decisions that protect your loved ones and secure your legacy.

At this point you might be ready to act, but still feeling a little unsure about where to start or the technical aspects of inheritances or beneficiary designations. If that’s the case, please feel free to reach out, I and the Addis Hill team are happy to help.



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