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Estate planning involves preparing for situations that aren’t fun to think about.  Combined with legalese that can make the process seem more confusing, no wonder people have a hard time completing the necessary steps to properly safeguard their wealth.

Say you open a new retirement account and are choosing beneficiaries.  This may seem straightforward.  If you are married, you can designate your spouse, include children, etc. You can even select contingent beneficiaries in case your primary beneficiary predeceases you.

But have you ever come across two unfamiliar Latin phrases when designating beneficiaries?  The terms “per stirpes” and “per capita” sound intimidating, but they play a crucial role in determining how assets are distributed among beneficiaries when you pass away.

In this post, we will unravel the differences between “per stirpes” and “per capita” to help you make informed decisions about your estate plan.

Understanding the need for proper beneficiary designations

Suppose you have three children—Alice, Bob, and Carol.  To make sure your estate plan is airtight, you must think about some “what if’s?”.  Namely, what if one of your beneficiaries passes away before you?  What would happen to his/her share?  Sure, you can always update your beneficiary designations or estate plan if that happens, but there’s an easier way.  You guessed it—per stirpes and per capita.

Per Stirpes: Dividing Along Family Branches

“Per stirpes” is a Latin phrase that means “by the roots” or “by the branches.” When an estate plan or will specifies a distribution of assets “per stirpes,” it means that the assets are divided based on family branches.

Here’s how it works:

Suppose you name Alice, Bob, and Carol as primary beneficiaries of your estate.  You want the assets to be distributed equally “per stirpes”.  If Alice has passed away by the time you also pass away, Alice’s share would go to her children (your grandchildren).  Bob and Carol would still receive their equal shares.

One-third would be split equally among Alice’s children, one-third to Bob, and one-third to Carol.

In essence, per stirpes preserves Alice’s share of the inheritance for her own heirs and ensures that if a beneficiary is no longer alive, their descendants are included in the inheritance.

Per Capita: Equal Distribution Among Survivors

Now, let’s consider “per capita.” This Latin term translates to “by the head” or “per person.” When an estate plan or will specifies a distribution of assets “per capita,” it means that the assets are divided equally among all living beneficiaries, regardless of their family branches.

Here’s how it works:

Again, let’s suppose that Alice, Bob, and Carol are equal beneficiaries, and that Alice has passed away.  If you selected these beneficiaries “per capita”, then Alice’s children (your grandchildren) would not be entitled to an inheritance.

Instead, the surviving beneficiaries (Bob and Carol) would each receive half of your assets.

Choosing between per stirpes and per capita

There is no right or wrong way to structure how you want your beneficiary designations.  It depends on your family situation and personal preferences.  But, as you can imagine, selecting per stirpes or per capita is important for the proper transfer of your wealth.

How can you make sure you’ve selected the proper distribution method?
First, check the beneficiary designations on your various accounts.  The custodians of these accounts will often have an option to select “per stirpes” when naming beneficiaries (not selecting per stirpes typically means you’ve selected per capita).  If per stirpes is your intention, simply update the beneficiaries on record.

Second, consider putting estate planning documents in place.  The benefit of going through the process of drafting an estate plan is you are forced to think about these situations and how you would like to distribute your inheritance.

If you need an estate plan, we make it easy for you.  Schedule an appointment to talk with one of our advisors today.