Settling a loved one’s estate and distributing their assets after death can be a time-consuming and stressful process. This process can be even more challenging when the terms of their will are unclear. To ensure you treat your beneficiaries fairly, it’s important to understand the difference between per stirpes vs per capita–and clearly document which one applies.
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What Is Per Stirpes?
Per stirpes, which in Latin means “by branch,” is a legal term in estate planning. In general, per stirpes stipulates how you distribute your estate if one of your original beneficiaries predeceases you. More specifically, if a beneficiary predeceases the testator, the beneficiary’s share of the inheritance goes to that beneficiary’s heirs.
Per stirpes often appears in wills and retirement accounts to define asset distribution. Legally, it ensures that the treatment of each branch of a family tree is consistent with the testator or account owner’s wishes. It’s important to note that per stirpes distribution does not consider spouses.
Per Stirpes vs Per Capita
Per capita–meaning “by the heads”–stipulates that assets pass through equally to the next generation’s surviving descendants. For example, if the estate holder has four children and is predeceased by one, their estate is then divided equally among the surviving three children.
If the deceased heir has children, those children aren’t accounted for when the estate holder’s assets are distributed. On the other hand, per stirpes would specify that the deceased’s portion of the estate goes to the deceased’s heirs.
It’s critical to distinguish between per stirpes vs per capita in your will, as clear documentation helps ensure your assets are distributed according to your wishes. It may also help preserve family dynamics if your beneficiaries don’t typically see eye to eye.
Per Stirpes in Financial & Estate Planning
Per stirpes can have a significant impact on your financial and estate plans. Understanding how it works can help you avoid unnecessary tax consequences and preserve more of your estate for your heirs.
For example, suppose you leave a share of your estate directly to your grandchildren. You leave the remainder of your estate to your surviving children. Transferring assets to your grandchildren will trigger the generation-skipping transfer (GST) tax–a flat 40% tax.
Alternatively, you can avoid this costly tax by specifying per stirpes distribution. In other words, understanding per stirpes vs per capita–and updating your will accordingly–can go a long way towards preserving generational wealth.
From a more practical standpoint, per stirpes helps you avoid updating your estate planning documents as family dynamics change. Lineal descendants per stirpes (LDPS) states that in the absence of a trust, an inheritance can automatically pass from a deceased beneficiary to that person’s heirs. Moreover, LDPS allows your heirs to bypass the time-consuming and costly probate process.
How to Use Per Stirpes
To use per stirpes correctly, you leave a portion of your estate to your descendants, per stirpes. This is typically specified in your will. Importantly, the word “descendants” must always appear. In other words, “to my descendants, per stirpes” is better than “to my children, per stirpes.”
You can also add the per stirpes or per capita designation to your retirement plan and brokerage account paperwork when naming beneficiaries. Specifying one or the other overrides the default beneficiary designation, which may not be aligned with your intentions.
Keep in mind that the definition and treatment of per stirpes may vary by jurisdiction. Be sure to work with your estate planning attorney or trusted financial advisor to ensure proper usage.
Per Stirpes vs Per Capita: Which Should You Use?
In general, there are two common cases where per stirpes may not be the right solution. First, you should not use per stirpes if you prefer to use per capita distribution. In other words, you would rather distribute your assets equally among your surviving children rather than pass them through to the next generation.
The other instance is if you wish to name a completely new beneficiary upon another beneficiary’s passing. For example, your only child predeceases you, you may want to leave your estate to a niece or nephew instead.
Per Stirpes vs Per Capita: The Bottom Line
Ultimately, the decision to use per stirpes vs per capita comes down to your unique family dynamics and personal circumstances. Indeed, there’s no one-size-fits-all solution. However, clearly specifying your intentions in your will and applicable financial accounts may help your family avoid unnecessary stress and financial consequences. Once you decide how to proceed, be sure to work with a legal professional to update your estate planning documents.
At Milestone Asset Management Group, our team of professionals can create and update your estate plan for you. Please schedule a call to begin your financial planning journey.