Estate Planning: What You Need To Know About Beneficiary Designations

Ever heard of estate planning? If the answer is no, don’t worry. Most people haven’t. So what is an estate plan? And why should you care about one? Let’s dive into understanding this concept and its importance in our lives.

An estate plan can mean multiple things such as:

• Establishing an advance healthcare directive or power of attorney.
• Designating guardianship for a young child.
• Taking advantage of certain tax benefits.

These and many more examples come under estate planning. The bottom line is that an estate plan can have a tangible impact on your life. In the event someone dies without a will, or intestate, the court decides how your assets will be distributed. Different states have different rules regarding dividing your assets without a will or an estate plan. This comes into play even more so if you’re divorced, have stepchildren, or own a business or various properties. States may even pass on some of your debts on to your heirs.

When we deal with our clients, they often want to ensure that their assets are preserved, managed and distributed properly should they face the unexpected. Thus, an estate plan is vital, and I would recommend that everyone should consider planning for the unexpected in advance and not put off dealing with until later in life.

An estate plan can be as simple as drafting a will or as complex as creating various trusts. However, there is one estate planning tool that I believe has not been given enough importance.

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Per Stirpes Vs. Per Capita

This might sound like an alien concept but I’ll provide an example to simplify it. Per stirpes merely means “by branch” and per capita means “by head.”

Beneficiary designations play a vital role in an estate planning and transferring of assets according to one’s wishes. A beneficiary designation takes priority over an estate plan document. For example, if your individual retirement account listed your ex-spouse as primary beneficiary, they may end up receiving the proceeds irrespective of what is stated on your estate plan documents.

We recommend checking the beneficiary designations on all your accounts periodically. Now let’s look at difference between per Stirpes and per capita.

Per stirpes means “by branch” in Latin. In this chart, Leo and Ava are the primary beneficiaries of their mother Daisy’s IRA account. Leo has two children, Olivia and Mason. Ava has no children.

Leo predeceases his mother, Daisy. Daisy had selected per stirpes on her IRA. Leo’s share (50%) now will be divided equally between his two children – Daisy’s grandchildren. Now when Daisy dies, Ava will inherit 50% of Daisy’s IRA, Olivia will inherit 25% and Mason will inherit 25%.

In contrast, per capita, which is Latin for “by the heads,” divides the estate among the outliving beneficiaries in the same generation. Continuing with our example, if Leo (son) predeceases Daisy (mother), then any portion that would have gone to Leo will now be distributed to Ava. Ava will inherit 100% of Daisy’s IRA. This scenario could be suitable for grandparents who do not wish to distribute their assets to their grandchildren. A deceased beneficiary’s children do not receive their share unless they have been clearly stated as beneficiaries or contingent beneficiaries on the estate planning documents.

These explanations of per stirpes and per capita distribution rules can help you make a prudent decision regarding distributing your assets after your death.  However, we advise clients to discuss this further with their attorneys in order to fully understand all the nuances and make a prudent decision for themselves.

Estate planning seems like a daunting task and it can feel like something that you don’t need. But from my experience, I can advise you that it’s best to jump onto estate planning as soon as you can. That will give you a peace of mind and take you toward true financial freedom.

Komal Motwani, CFP,  is a senior investment analyst with Yanni & Associates Investment Advisors in Wexford, Pa. She has more than 10 years of experience in the field of investments and financial planning. She may be contacted at komal.motwani@innfeedback.com.

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