IRA Beneficiaries: Per Stirpes vs. Per Capita

Did you know that your IRA beneficiary supersedes your will? No matter how carefully you’ve crafted your last intentions in your will, an IRA beneficiary that was never updated after your divorce and remarriage can unwittingly bestow your former spouse with your IRA inheritance, while also disinheriting your new spouse and children. That’s why it’s important to update your beneficiaries after major life changes such as marriage, divorce, births, illness, domestic issues and deaths.

While you’re at it, make sure to check how the beneficiary form reads too. Most will default to either a “per stirpes” designation or a “per capita” designation. Knowing the difference in these two designations is important as is making sure you understand what the form you are signing defaults to so you can override it if necessary.

Both designations refer to what happens if one of your beneficiaries is no longer living. A per stirpes designation means that if one of your IRA beneficiaries is deceased, the deceased person’s children will receive his or her share. Imagine you have two children – a son and a daughter – to whom you’ve split your IRA beneficiaries 50/50. Your daughter has three daughters and your son has two sons. At your death, if your children do not survive you, your three granddaughters would receive your daughter’s 50% share of the IRA (16.67% each). Your two grandsons would receive your son’s 50% of the IRA (25% each). Keep in mind that if your son had no heirs, the entire balance would go to your daughter or her heirs.

A per capita designation does not look along the lineal lines. Rather, it attempts to treat remaining beneficiaries equally. In the scenario above, if you son and daughter predeceased you, under per capita your five grandchildren would receive an equal 20% of your IRA.

These are just two specific examples. There are many ways naming beneficiaries can play out and I recommend you discuss this with your estate attorney or financial planner to ensure you name beneficiaries in a way that accomplishes your intentions.

Why can’t you just avoid this whole beneficiary form and let the will name your beneficiaries? You can, but your estate is not considered a person under the law, and therefore beneficiaries will have limitations to how long they can stretch out distributions from the IRA. They will not be allowed to stretch the distributions out over ten years, which will result in losing valuable tax-deferred growth. Review your beneficiaries with your financial advisor to ensure they are aligned with your intentions.

Harli Palme, CFA, CFP®
Chief Operating Officer
Chief Compliance Officer

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