When you make a Last Will and Testament or establish a Trust, you designate beneficiaries to receive property under the Will or through the Trust . You can provide that beneficiaries inherit through either a per capita or per stirpes distribution. The two types of beneficiary designations can have very different effects in terms of who inherits your estate.
Per capita is a Latin phrase that translates literally to “by head.” In a per capita distribution, each designated beneficiary receives an inheritance only if they are living when the inheritance vests. Usually, that means surviving the testator of the Will or grantor of the Trust. If a beneficiary dies before vesting, that beneficiary’s share is divided among the surviving named beneficiaries. Descendants of the deceased beneficiary receive nothing, unless they are specifically designated as beneficiaries.
As an example, consider a Will that provides for a per capita distribution equally among the testator’s three children on the testator’s death. If all three children survive the testator, they share the estate in equal shares of one-third each. However, if one child predeceases the testator, only the two surviving children share in the estate, each receiving half of the estate. Even if the deceased child has living children (who would be the testator’s grandchildren), those grandchildren do not inherit the deceased child’s share, unless they are specifically named as beneficiaries in the Will or Trust. That’s because the per capita distribution results in a beneficiary’s share belonging only to the specific individual who is a designated beneficiary, and not to their descendants.
Per stirpes is a Latin phrase that translates literally to “by roots” or “by branch.” In the estate context, a per stirpes distribution means that a beneficiary’s share passes to their lineal descendants if the beneficiary dies before the inheritance vests. Per stirpes effectively designates a class of beneficiaries to receive estate property, rather than designating only specific individuals to inherit property.
In the previous example, if the testator provides for an equal per stirpes distribution among all three of the children, and one child predeceases the testator, that child’s descendants inherit the one-third share that would have belonged to the deceased child. So, if the child had children of their own, the grandchildren receive the share of the estate, even if they are not named in the Will or Trust.
If the child who predeceases the testator has no children of their own, their share is divided between the children who survive the testator. Generally, the class that may inherit includes only lineal descendants of the designated beneficiary. Spouses of beneficiaries do not inherit in a per stirpes distribution, unless the Will or Trust specifically provides for the spouse.
The choice between per capita and per stirpes distribution is one of the most important decisions you make when you create your estate plan. It is one critical reason that guidance from an experienced estate planning attorney is absolutely essential. The right choice for you depends entirely on your wishes, your family circumstances, and your financial situation.
A per capita distribution ensures that shares of your estate end up in the hands of only those people you specifically designate as beneficiaries. That can be a drawback if you want to make certain that future grandchildren share in your estate, which a per stirpes designation can accomplish. For that reason, individuals with children often choose a per stirpes beneficiary designation, unless they wish to limit which family members can benefit from the estate.
Stated another way: If you use a per capita distribution, you may need to update your estate plan when a beneficiary passes away or a new family member is born. A per stirpes distribution avoids the necessity of revising your estate plan when family member beneficiaries change, since a deceased beneficiary’s descendants automatically inherit their share.
In addition, if you choose the per capita distribution and name children and grandchildren as your beneficiaries, the possibility exists for triggering a generation-skipping transfer tax if one of your children predeceases you. The GSTT rate currently is 40%. However, the transfer tax only applies if the transferred amount exceeds the current federal estate exemption amount, which for 2021 is $11.7 million for an individual and $23.4 million. So, while the tax may be a concern for high-net-worth individuals or couples, many estates will not be affected.
Determining the right type of beneficiary designations for your estate plan requires a detailed analysis of your circumstances, including your wishes for distribution of your estate after you pass away. You should rely on a knowledgeable estate planning attorney to help you make that evaluation and decide on the best way to accomplish your estate goals. Attempting to create an estate plan without assistance from a lawyer carries substantial risks.
At the law firm of Barron, Rosenberg, Mayoras & Mayoras, P.C., we provide a full range of services relating to estate planning, including assisting clients with deciding on the right type of beneficiary designation for their estate. We’ve been serving clients in Oakland County and beyond for more than 40 years. Our clients count on our commitment, experience, and credentials when they turn to us for their legal needs.
Call us today at (248) 494-4577 or use our online form to talk with our experienced estate and probate attorneys.