IRA Beneficiaries: Per Stirpes Vs. Per Capita

By Harli Palme, CFA, CFP®

Chief Operating Officer, Principal

April 25, 2023

A beneficiary designation states to whom your assets will pass after your death. These types of designations are assigned to specific assets. For example, your employer’s 401k plan will have a beneficiary designation, which is separate from your personal IRA.

Generally, you only have a beneficiary designation for tax-deferred assets such as your IRA and your 401k. Your home and general brokerage account most often do not have these designations. When tax-deferred assets are inherited, there is typically a tax-beneficial payout schedule that applies to the beneficiaries. In order for the beneficiaries to receive this favorable payout schedule, they need to be specifically named as the beneficiary. An IRA that is just left to the account holder’s estate or will may be deemed to not be inherited by a person, and therefore a less tax-advantageous payout schedule is employed. This translates to less tax-savings.

Update Your IRA Beneficiaries

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.

You can have a beneficiary designation with your brokerage account if you like. This is often called a “Transfer on Death” assignment. Account holders like to do this because the account transfers quickly at their death and avoids the probate process. However, this type of designation on a non-tax-deferred account doesn’t garner any special tax considerations. Because there is no tax benefit to naming beneficiaries on these types of accounts you may want your non-tax-deferred assets to flow to the estate so that your will states clearly who is to receive the assets.

If you have any major life changes, you should consider updating your beneficiary designations. This should include a review of your life insurance policies and beneficiaries. A marriage, the birth of a child, or loss of a loved one is a reason to ensure that your assets as assigned to be inherited by the correct parties. Even without a major life change, a review of beneficiaries is practical every 3 to 5 years.

Per Stirpes vs. Per Capita

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 between 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.

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