Choosing Your Legacy: Deciphering Per Stirpes Vs. Per Capita in Estate Planning
By Miriam Santiago, CFP®
September 25, 2024
Estate planning is a critical aspect of financial management that ensures your assets are distributed according to your wishes after you pass away. Among the many decisions you’ll make during this process is who to name as beneficiary of your retirement plan accounts. Before completing or updating any existing beneficiary designations, it is crucial to understand the differences between the terms ‘per stirpes’ and ‘per capita’ as they are commonly found on the paperwork. These legal provisions may dictate how your estate will be distributed among your heirs and can significantly impact how your legacy is preserved.
‘Per stirpes’ is a Latin term meaning ‘by roots’ or ‘by branch’. When you choose this method of distribution in estate planning, your assets are divided equally among your named heirs based on the branches of their family tree. If one of your direct heirs—or the named primary beneficiary—predeceases you, their share will be passed directly to their descendants, maintaining the intended division among family lines. As a simple example, let’s say you have two children: Adam and Betty. Adam has two children, Sam and Susan, and Betty has two children, Brian and Jane. If Adam and Betty are named as your primary beneficiaries, 50% to each of them, with per stirpes selected and Adam passes away before you, the allocation of your assets will be as follows: 50% to Betty, 25% to Sam, and 25% to Susan. Essentially, the share that would have gone to Adam is transferred equally to his children (your grandchildren), ensuring each branch of your family receives an equitable portion.
On the other hand, ‘per capita’ means ‘by head’ or ‘by person’. Under this distribution method, your estate is passed to your living beneficiaries in the same generation closest to you at the time of your death. Using the above example of your two children and four grandchildren, if your son Adam predeceases you, 100% would go to Betty. If Adam had living children, they would not benefit from any inheritance based on the per capita designation. It is important to note that Betty’s children wouldn’t benefit either unless she named them as beneficiaries in her own estate plan. Adam’s children wouldn’t receive any of your assets in this scenario. As you can see, care must be taken to ensure assets are left to the intended recipients, regardless of how life transpires after your estate plan is executed.
The choice between the per stirpes and per capita distribution methods depends largely on your family dynamics and goals for your estate. If you have multiple generations or wish to preserve your assets within specific branches of your family, which would benefit your grandchildren, per stirpes may be more appropriate. If your primary concern is ensuring each generation of your beneficiaries receives the maximum distribution from your estate, per capita might be the better choice. Per capita distribution is often simpler to administer, especially if your family structure is fairly straightforward. Per stirpes, while potentially more complex, allows for more precise control over how assets are distributed across generations. Additional attention should be given anytime you complete a beneficiary form (such as for an IRA or Roth IRA) as the option to designate per stirpes versus per capita is often overlooked.
Whatever your estate planning wishes are, it is important to make them thoughtfully, considering your family structure, goals for asset distribution, and legal implications. By seeking professional guidance from both your estate planning professional and your Wealth Manager, you can ensure that your beneficiary designations accurately reflect your wishes, thereby securing your legacy for future generations.
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