Per Stirpes vs. Per Capita Beneficiary Designations

  • Key Beneficiary Designations: Understanding the difference between terms like Per Stirpes and Per Capita is vital in managing assets such as 401(k)s, life insurance policies, and IRAs.
  • Distribution Methods for Beneficiaries: When you have multiple beneficiaries, choose between Per Stirpes, which passes inheritance to a deceased beneficiary’s descendants, and Per Capita, which divides assets equally among living beneficiaries.
  • “By Representation” Method: This distribution strategy, a middle ground between Per Stirpes and Per Capita, equally divides the inheritance of predeceased children among all grandchildren. However, it’s not available in every state.
  • Default Distribution Methods: By default, assets like ToD and PoD accounts typically use a Per Capita distribution if the designated beneficiary predeceases. This can lead to unintended inheritance outcomes if not aligned with one’s will or trust.
  • Coordinating Estate Plans: Aligning beneficiary designations with your will and trust is crucial to ensure your estate is distributed as intended, particularly in multi-generational scenarios.

Estate planning and retirement planning can be stressful undertakings, especially with the many legal and financial terms you are expected to know. It’s important to understand the details of beneficiary designation terms because even small differences can have a great effect on how money is managed and distributed. 

If you have assets that accept a beneficiary designation, such as a 401(k), annuities, life insurance policies, or IRAs, then you must denote how these assets will be distributed to beneficiaries. You can list multiple primary beneficiaries and also contingent beneficiaries. Primary beneficiaries are always first in line if they are living. Contingent beneficiaries are always second in line behind any and all primary beneficiaries.

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Let’s say you have multiple primary beneficiaries or multiple contingent beneficiaries. Did you know there is also a way to further specify how to split up assets within each of these major beneficiary tiers using the Latin terms Per Stirpes and Per Capita?

These designations determine how the asset will be distributed if you have multiple beneficiaries in the same beneficiary tier (primary or contingent) and one of your beneficiaries passes before you do.  In this article, we’ll focus on per stirpes vs per capita as it applies to life insurance.

Meaning of “Per Stirpes”

“Per stirpes” is a Latin term translating to “by branch” or “by root.” This concept is crucial in estate planning, referring to the distribution of an inheritance when a beneficiary passes away before the grantor. In such cases, per stirpes ensures that the inheritance intended for the deceased beneficiary is transferred to their direct descendants, such as children, grandchildren, and great-grandchildren.

Essentially, per stirpes distribution ensures that if a beneficiary dies before you, their portion of the inheritance is passed down to their offspring. If the deceased beneficiary has multiple children or heirs of the same generational level, they equally divide the inheritance intended for their parent. This arrangement does not affect the inheritance shares of other beneficiaries named in your will, trust, or other beneficiary designations.

What Does Per Stirpes Mean As A Beneficiary Designation?

With a per stirpes designation, the shares of any predeceased beneficiary will be passed down evenly to that beneficiary’s heirs. 

NOTE: People will often name a spouse as a primary beneficiary and children as equal contingent beneficiaries with a per stirpes designation.

Let’s use Dan, Susan, and Jeff for an example. Dan, Susan, and Jeff are named as equal beneficiaries on a life insurance policy. If the life insurance policy stipulates that the death benefit should be distributed evenly per stirpes, each beneficiary will receive a set share. Now, suppose once again Dan passes before the insured. Instead of reallocating his benefit portion to Susan and Jeff, Dan’s portion will be passed on to his heirs upon the death of the insured.

The main advantage of the per stirpes designation is that should a beneficiary pass before the insured (or the grantor in estate planning arrangements), the deceased beneficiary can still leave money to their heirs. In the case of life insurance, having a per stirpes arrangement could make all the difference in providing for those who rely on you financially. 

The asset distribution method of per stirpes covers as many generations as is necessary to get to the closest living lineal descendent. If you have two children listed on your policy, the money will go to both of them evenly. But, should one of them pass away before you, then their children (your grandchildren) would inherit their parent’s share of the insurance money. This way, those grandchildren are still financially protected.

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What Does Per Capita Mean As A Beneficiary Designation?

With a per capita, also referred to as pro rata, designation, each beneficiary will receive equal shares of the distribution. In Latin, per capita means “by the head.” Think of the beneficiaries as individuals.  If one beneficiary dies, the remaining beneficiary(s) will each receive a larger portion of the assets.  Beneficiaries are often your spouse, your children, all of your living descendants, or whoever is specified in the life insurance policy. With a per capita designation, the share of any predeceased beneficiary would be reallocated equally to the other remaining beneficiaries. 

Let’s return to Dan, Susan, and Jeff for another example. When the insured dies, the policy’s death benefit will be distributed among them. However, if Dan were to pass away before the insured, the death benefit would be distributed to Susan and Jeff only. Carrying this example one step further, let’s suppose two of the named beneficiaries pass before the insured. Under a per capita designation, the deceased beneficiaries, regardless of any heirs they may leave behind, are no longer legal beneficiaries so the benefit would be distributed to the one surviving beneficiary.

What Are The Differences Between Per Stirpes vs. Per Capita?

Ultimately, these designations determine whether the assets or death benefits are divided among listed beneficiaries (per capita), or passed down to heirs (per stirpes) should one of the listed beneficiaries pass away before the grantor.

If you want a set amount of shares to go to each beneficiary and their heirs, you will want a per stirpes designation. However, let’s say you don’t have any kids and simply want your assets to be divided among siblings or different organizations. In this case, the per capita designation would be suitable.

Understanding the “By Representation” Distribution Method

“By representation” is a distribution approach that serves as a middle ground between per stirpes and per capita methods. Similar to per stirpes, the by representation method comes into play when more than one of your children predeceases you. In such a scenario, all your grandchildren would inherit equally.

Under this method, the portions of the inheritance designated for the deceased children are pooled together and then divided equally among the grandchildren. It’s important to note, though, that this distribution strategy is not universally applicable, as it’s not available in every state.

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Default Distribution Methods: Per Stirpes vs. Per Capita

Typically, Transfer on Death (ToD) accounts, Payable on Death (PoD) accounts, and other assets with beneficiary designations default to a per capita distribution if the designated beneficiary has passed away. In the absence of any living named beneficiaries, these assets revert to the estate and are distributed through probate.

Financial institutions holding these assets, like banks, insurance companies, and brokerages, often use their own forms, which may or may not permit contingent or per stirpes distributions.

It’s important to note that ToD and PoD accounts, along with other similar assets, are not governed by your will or trust. While bypassing probate is seen as advantageous, it can be risky if beneficiary designations do not align with your overall estate plan. Since these designations override instructions in your will or trust, ensuring they name the correct beneficiaries is crucial.

Coordinating your PoD and ToD account distribution plans with your will, trust, and other estate planning documents is essential. Without coordination, these accounts can create unintended consequences.

For example, consider a situation where you have three adult children, each with three children. If one of your children dies before you and you don’t update your per capita designations on your PoD and ToD accounts or switch them to per stirpes (as specified in your will), the result is that three of your grandchildren, the offspring of your deceased child, would inadvertently be excluded from the inheritance.

The Bottom Line

The designation you select should be based on your preferences, the people in your life, and how you’d like your money to be distributed among family, friends, organizations, etc.  It’s important to properly designate your life insurance beneficiaries to ensure your legacy is passed on the way you wish.  Consider who you are financially responsible for, specific people, charities, organizations, and institutions, then select the designation that will best fulfill your responsibilities, needs, and wants.

If you need help making beneficiary adjustments or setting things up for the first time, schedule a strategy session with one of the McFie Insurance team. 

Gracine McFieby Gracine McFie

There are many ways to access information about finances, but it can be hard to determine which sources are trustworthy. I like to put information together in an accurate, straightforward, easy to understand manner so people can make good financial decisions based on the information provided without having to waste time wondering if the source is reliable.

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