A Careful Look At Beneficiaries
For most people the choice of beneficiaries is simple: Spouse first, then adult children. For others it may not be that simple—or not stay that simple. Let’s see what we can learn.
The most common cases requiring beneficiary designation are on wills and trusts, and on financial accounts like qualified retirement plans (401(k)s, etc.), IRAs, annuities, etc. Some provide for “transfer on death, (TOD)” which accomplishes essentially the same thing.
Most people assume that if they die without designating a beneficiary, assets automatically go to their spouse, and then to their children. This may prove true, but the determination can require a costly, unnecessary probate process, tying up money in court for many months. It’s better to avoid that result.
Events like divorce and remarriage, and having children from two or more marriages can complicate beneficiary designations. If you remarry, do you want all your assets to go to the new spouse, and then to the spouse’s children—perhaps some of them biologically yours, others not—rather than or in addition to your children from the previous marriage? Do you want to include stepchildren? If you have not remarried, do you want to include your ex-spouse?
Moreover, two types of distributions to children exist: per capita and per stirpes.
Per capita—literally, “per head” in Latin—divides assets equally to each individual at the time of distribution. Unless otherwise specified, default distribution is almost always per capita.
Per stirpes—“per root”—divides equally by person at one generation and then maintains that division by branch in those person’s offspring. For instance, $100,000 divided per stirpes between a brother and sister would be $50,000 each if they are both alive at the time of distribution. But if they are both gone, and the brother had 10 children and the sister 2, his children would get $5,000 each and hers $25,000 each. If one of the 10 had died leaving 4 children, they would share $5,000, receiving $1,250 each.
A Careful Look At Beneficiaries
The difference becomes important if you want to include grandchildren and even great-grandchildren in an inheritance.
Each of us needs to make a concentrated effort to think through these options and what is best for our loved ones and estate plan.
If we haven’t reviewed your options, we should. Estates and family situations change. Don’t forget to keep up with your beneficiary designations!
If we can help you with updating or changing any of your financial arrangements or if you have questions, as always feel free to contact us.
