“What in the world does that mean?” I can’t tell you how many times I’ve been asked that question during almost 30 years in the financial industry. Clients naming beneficiaries on IRAs, 401(k) accounts, annuities, or insurance policies stop dead-in-their-tracks when asked to decide whether they want beneficiaries to receive proceeds from their account Per Capita or Per Stirpes. After all, we don’t use Latin much anymore. But picking the wrong option has important implications that can create turmoil and hard feelings among family members after you’re gone.
Let’s say you’re married and have three adult children. Your spouse is probably your primary beneficiary and your kids (we’ll call them A, B & C) are contingent beneficiaries. If your spouse dies first, A, B & C split the proceeds equally. But what happens if one of your contingent beneficiaries dies before you as well?
Under Per Capita, if your primary and at least one contingent beneficiary die before you, then the proceeds will be distributed equally to the remaining contingent beneficiaries.
For example, if child A has three kids, child B has none and child C has two kids, you have five grandchildren. If you chose Per Capita and your spouse and child C predecease you, the proceeds of your account will be split equally between your children A & B. The heirs of deceased child C receive nothing.
Under Per Stirpes, if your primary and at least one contingent beneficiary die before you, the proceeds will be distributed equally among all the contingent beneficiary family lines. So, heirs to the deceased contingent beneficiary will receive a portion of the money.
Same example. Your spouse and child C predecease you. This time you’ve chosen Per Stirpes. The proceeds of your account are now split equally between all three family lines and the two kids of deceased child C (your grandkids) receive that portion.
The Will doesn’t determine the beneficiary
There is a mistaken idea floating around that the provisions you outline in your Will govern things like IRAs, 401(k) accounts, annuities, and insurance policies. Not true. No matter what your Will says, the beneficiary form you signed is the gospel truth, written-in-stone, irrefutable, go-to document that will be used by the court to distribute those assets. And if you forget to name a new beneficiary after a change in family status, somebody is just plain out of luck.
That issue has been argued all the way to the U.S. Supreme Court. DuPont Company paid a deceased employee’s $402,000 pension to his ex-wife, even though she waived her rights to it in the official divorce decree. The man’s daughter sued DuPont to recover the money. But Supreme Court Justices voted unanimously in favor of DuPont because the ex-wife’s name was the only name on the beneficiary form.
Regular beneficiary reviews
That’s why it’s important, not only to pick Per Capita or Per Stirpes-whichever is right for your situation but also to perform regular beneficiary audits. Forgetting to change beneficiaries is one of the most common estate planning mistakes. And it can be incredibly costly for the people you want to benefit from your estate.
Find orphaned accounts
Make sure you review all accounts with named beneficiaries. You may have some orphaned 401(k)s out there at previous employers. You forgot about them. You didn’t roll them over when you left that employer and they’re just lying there unattended, maybe with a beneficiary that’s no longer correct or an incorrect Per Capita or Per Stirpes designation.
This article is presented as information only and should not be considered financial, tax, or legal advice.