- Posted June 17, 2021
Per Capita vs. Per Stirpes: Beneficiary Designations Defined
So, you decided to purchase some life insurance, open an IRA, or take some action that requires designating a single beneficiary or multiple beneficiaries. You may have an idea of who you want your beneficiaries to be, your spouse, your children, or even your favorite charity. But the real question you may have is: what do per capita and per stirpes mean?
It is important to understand this difference in designation because while it can be changed at any time while the account owner is alive, once they have passed, it is irrevocable. In regards to special needs planning, naming beneficiaries is an incredibly important step. Beyond understanding the difference in designation, you should know why you are doing what you are doing when naming your child with a disability as a beneficiary versus naming a spouse or a special needs trust (SNT). And, since designations are irrevocable at the time of death, it is a good idea to regularly review your plans and make sure they are up to date.
If this sounds confusing, you might want to consider seeking assistance from financial planners, such as ourselves at Planning Across the Spectrum. As specialists in special needs planning, we are confident in our ability to guide new and prospective clients through this challenging process to ensure that you are making the right decisions for your circumstances. As part of a larger financial/estate planning team, we can collaborate and connect you with additional supports and key resources, including qualified attorneys with extensive experience in the creation and maintenance of SNTs.
So, what is the difference between per capita and per stirpes?
Per capita (also known as pro rata) is usually the term that people are familiar with because it also applies to worker’s pay and benefits, refunds such as a withdrawal from college, partnership liability, and so forth. It means “by head” so whether one is calculating their share of a company or in this case, the proceeds of their account to their beneficiaries, it means that the dollar amount will be proportionately divided among named beneficiaries. If a beneficiary were to pass away, the shares allocated to the other beneficiaries would be adjusted to account for the percentage originally intended for the deceased beneficiary.
For example, Mr. Smith has 4 children, Finley, Molly, Bentley, and Mickey. He named all of them as his primary beneficiaries for his life insurance. This means that when he dies, 25 percent of his life insurance proceeds will go to each child.
Unfortunately, Molly and Mickey both die before Mr. Smith does. On a per capita basis, the life insurance will be redistributed evenly to the remaining beneficiaries, Finley and Bentley. They each will receive 50 percent of Mr. Smith’s life insurance proceeds when he dies.
If all of Mr. Smith’s children predecease him, then the life insurance proceeds will be divided proportionally amongst the legal heirs of his children. In this case, both of Finley’s children, Mary and Joe, would receive 12.5 percent, and Molly’s daughter, Lily, Bentley’s son, Steven, and Mickey’s son, James, would each receive 25 percent.
Per stirpes typically involves more people and can be confusing to some; however, it is commonly recommended by financial planners. The Latin form of the term means “by branch.” This means that the dollar amount is divided through the different branches of a family and surviving descendants. In other words, if the original named beneficiary passes, per stirpes creates a trickle-down effect through which future generations have access to assets regardless of the loss of a beneficiary.
For example, Mr. Johnson has 2 children, Phoebe and Carter. He named them as primary beneficiaries for his life insurance. When Mr. Johnson dies, they each will receive 50 percent of his life insurance proceeds.
Sadly, Carter dies before Mr. Johnson. On a per stirpes basis, Mr. Johnson’s life insurance proceeds will be distributed to Carter’s 2 legal heirs, his sons Jackson and Jameson. Therefore, when Mr. Johnson dies, 50 percent of proceeds will go to Phoebe, 25 percent to Jackson, and 25 percent to Jameson.
If Phoebe and Carter predecease Mr. Johnson, then Jameson and Jackson would receive 25 percent each and Phoebe’s 3 children, Lori, Joanne, and Alexander would each receive 16.67 percent.
In making such financial decisions as purchasing life insurance or opening an IRA account, you may want to explore the option of establishing a supplemental needs trust (SNT). Naming a SNT as a beneficiary on your life insurance policy and/or retirement accounts when working through your estate plan can be more beneficial for a family member with a disability than inheriting assets through a per stirpes distribution. Our advisors at Planning Across the Spectrum can help you not only in reviewing your beneficiary designations, but in establishing a SNT and ensuring that the trust is properly funded. In doing so, we can help to coordinate an ABLE account with the trust and invest your money in a tax efficient way that also benefits the trustee.
Naming the individual’s SNT rather than the individual themselves can help to preserve government benefits, such as SSI and SSDI. We know parents and grandparents of an individual with special needs are well-intentioned when naming their children or grandchildren as a beneficiary to a life insurance policy, opened savings bonds, or other assets. It would be in everyone’s best interest if they reviewed all available assets to determine which distribution method in which a SNT is named as a beneficiary is more beneficial.
For example, if Gertrude names her two children, Mark and Kimberly, as beneficiaries to her life insurance policy on a per stirpes basis, they both receive 50 percent.
Mark and Kimberly both have two children of their own. Kimberly has a daughter, Allison, and a son, Robert. Mark has two sons, Kevin and Jacob. Jacob has a disability that qualifies him for government benefits. If Mark predeceases Gertrude, his children both inherit 25 percent of the life insurance policy. In this event, Jacob receives a large amount of money accidentally. This can place Jacob’s benefits at risk of reduction/loss or at least would require a costly correction of the mistake to continue qualifying for benefits.
Alternatively, if Gertrude named her children on a per capita basis and Mark predeceased her, Kimberly would receive 100 percent of the policy and Kevin and Jacob would not receive anything.
To a certain degree, this decision can also vary depending on the circumstances of the individual case, so it is best to seek additional services and support if you are considering naming an individual with a disability as a beneficiary to your personal assets. Each asset that you leave behind needs to be carefully reviewed while considering whether it is more appropriate to be left in a specific designation or a more tax advantaged way. That is where our advisors at Planning Across the Spectrum can help you review the best strategy for you.
At Planning Across the Spectrum, we are dedicated to providing sound financial planning and uphold a fiduciary duty to each of our clients in which we make decisions only on their best interests. If you are thinking of starting or revising your financial plans for the future, and you are looking for guidance and support from trusted and experienced financial planners who specialize in planning for individuals with disabilities and their families, consider scheduling a free consultation today.