Who’s Your Beneficiary?

Thomas Moyer, CFP®
Grandparents holding grandchildren

When you leave this earth, many of your assets will pass on to your beneficiary designation – not necessarily according to your wishes or the conditions set forth in your will.

“But aren’t they usually one in the same?” you may ask.

The answer is no. Truth is, many people do not understand that not all beneficiary designations are created equally.

There are two forms of beneficiary designation: per stirpes and per capita.

  • Under per stirpes, your assets will be divided up equally among each of the designated branches in your family.
  • Under per capita, your assets will be divided up among the named beneficiaries who are still alive.

Though they may sound similar, there are considerable differences in how your estate is distributed and to whom. Under per capita, no provisions are made for the children of a beneficiary who pre-deceases you, while per stirpes extends the provisions to the deceased beneficiary’s heirs.

Let’s explore the differences.

Siblings Paul and Paula (the branches) each have two children (the sub-generation). One day Paul is driving his parents to the airport when a car accident horrifically takes all their lives. Under a per capita distribution, the parents’ assets go to Paula in their entirety. Paul’s children have essentially been dis-inherited, not because his parents intended it this way, but because that is the required method of disbursement under the per capita beneficiary designation. 

Consider the same example, only in this scenario Paul and Paula’s parents’ financial advisor counseled them on choosing the per stirpes stipulation for their estate plan. In the same catastrophic scenario, Paul’s share of his parents’ inheritance will pass to his children, not to Paula.

With per stirpes, you do not need to update your will to include your grandchildren when they become part of the happy family dynamic. (However, you will need to make updates for specific bequeaths beyond basic per stirpes and/or in cases of divorce or discord where you want to ensure someone does not benefit from your passing.)

Our collective experience has taught us that most people want their assets to pass to their heirs per stirpes, and, in fact, this is how most people’s wills are drawn up. But the will only directs assets that do not have a beneficiary designation.

Because per capita is the more common default beneficiary type for IRAs, 401(k)s, and life insurance policies in the companies we’ve dealt with over the years, many people may not be aware that per stirpes is an option for these assets and investments. In fact, it is extremely common for people to have one type of beneficiary in their wills and another in their investments and insurance policies.

If you cannot remember writing per stirpes on a beneficiary form for an IRA, 401(k), annuity, life insurance policy, or any other investment or estate-planning document, talk to your financial advisor. He or she can help you amend the necessary paperwork to ensure your beneficiaries are named per stirpes.

Don’t let your legacy of largesse and generosity be tarnished by a simple oversight, leaving loved ones high and dry and potentially leading to family disharmony. After all, such missteps cannot be corrected once you leave this earth.