If you are interested in making sure that the right people inherit your retirement accounts, it is critical to understand the difference between per stirpes and per capita in beneficiary designations. It’s one of the most important decisions you will make, and once you understand, one of the simplest.
Assets outside of retirement accounts are passed by your will, a trust, or by transfer on death. Beneficiary designations are not used. Retirement accounts on the other hand pass by beneficiary designation. Usually if you are married you will name your spouse as primary beneficiary. If you have children, they will usually be named as contingent beneficiaries according to whatever percentage distribution you choose. Contingent beneficiaries are important in the event the primary beneficiary is deceased at the time of your death. We often see contingent beneficiary sections that are incomplete. Why? It seems they are just too complicated and people skip over it, say they will do it later, then forget and never come back to it.
When you name your contingent beneficiaries, the next step is to decide if they will be per stirpes or per capita. Per capita is usually the default so you will want to pay special attention here. Per Stirpes is a latin term that means “by branch”. Therefore, if you name your children as your beneficiary per stirpes and that child dies first, his/her share will go to his children equally. On the other hand, if a per capita designation is used, the account would instead go to any remaining primary beneficiaries, equally. NOT the grandchildren in this case. Instead the money would go to the surviving siblings of the deceased child. Per capita translates to “head count”.
We would encourage anyone who is reading this article to check your beneficiary designations immediately. First make sure your primary beneficiaries are correct. Then ensure you have named the proper contingent beneficiaries and ascertain whether they are per stirpes or per capita.
Also in closing, remember, all retirement accounts must be emptied now within ten years, with the exception of a spouse, following the account owners death. This adds another wrinkle to an already tricky process.