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 No matter how carefully you’ve crafted your last intentions in your will, an outdated IRA beneficiary that was never updated after your divorce can unwittingly bestow your former spouse with all of your IRA inheritance, while also disinheriting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’re signing defaults to, so you can override it if necessary.

Both of these 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 two daughters and your son has two sons.  At your death, if your son has not survived you, your two grandsons would receive his share of the IRA.  Your daughter would receive 50% of the IRA and your grandsons would each receive 25%. Keep in mind that if your son had no heirs, the entire balance would go to your daughter.

A per capita designation does not look along the lineal lines. Instead, if one of your beneficiaries is deceased, the proceeds are distributed to the other beneficiaries as if the deceased beneficiary was not to inherit any, regardless of whether or not he/she had children. Imagine you have three children, and each is to receive a third of your IRA.  If one child predeceases you, the IRA would go equally to the living two children.

What if none of your primary beneficiaries survive you (and either you selected per stirpes but your beneficiaries have no children, or you selected per capita)?  That’s when the contingent beneficiaries become important.  Your IRA money will go to your contingent beneficiaries only if no primary beneficiaries survive you. If you want to ensure that one of your heirs receives a portion of the IRA, you must name him/her as a primary beneficiary.

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 their lifetimes, which will result in losing valuable tax-deferred growth. Review your beneficiaries with your financial advisor to ensure the are aligned with your intentions.

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

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Giving Away Your Cake (and eating it too), AKA Charitable Remainder Trusts

ImageOne of the first recorded instances of the age old phrase “a man can not have his cake and eat it too” was written from Thomas, Duke of Norfolk to Thomas Cromwell, speaking about how the construction of Kenninghall had cut deeply into his finances. Today, we use this phrase when considering saving something of value, or giving it up for consumption. When thinking about our own personal assets, we have many choices. We have the opportunity to hold on to them (having our cake), swap them out (trading for a different cake), or selling them and buying a consumable asset (eating the cake).

With responsible planning for the future, the size of your portfolio should grow through the years. At the point of retirement for someone, a combination of pension, social security, and portfolio income may be able to provide for all of their expenses. This is a fantastic place to be in as a retiree. A dependable cash flow can empower gifting to the extent that the cash flow remains intact.

A few months ago, I wrote about Charitable Remainder Trusts here. For a retiree that has an excess income stream from investments, a Charitable Remainder Trust (CRT) can provide a certain and continued stream of income from donated property.  As the name suggests, a charity will inherit the property held in the trust when the beneficiaries pass away, just as it would if you left the property to a charity in your will. However, the additional benefit of a CRT is the income tax deduction received for giving the property occurs immediately. As a beneficiary you retain an income interest.

Give thought to the idea of giving some of your cake away now. There are many great non-profits and charities that will thank you. Now, I know all this talk of cake has really gotten that sweet tooth going, so feel free to eat some cake now too!

Trouble on My Mind

In 2007, Leona Helmsley passed away.  She famously left $12 million for the care of her beloved Maltese named Trouble.  The courts eventually decided that $2 million was a more appropriate sum.  The story created a lot of buzz.  Some people were appalled that she would leave such a huge amount to an animal.  Others understood why she did it and found nothing wrong.

Whether or not you agree with what she did, the story highlights a topic that may not be discussed during estate planning.  What happens to your pets when you pass away or are unable to care for them due to serious illness or disability?  You may think your children or a friend would step in and care for your pet.  Unless you have made advance plans, there are no guarantees that will happen.

When I began writing this post, I already knew that pets are regarded as property, not a furry child.  I have referenced my pets in my will.  As I researched this blog, I realized that was not enough.  Wills are not processed right away, so your wishes for your pet could be unknown for some time.  Also, wills do not apply unless you are dead.  A serious illness or disability would not require the reading of a will.

Pet protection agreements and trusts are other vehicles that can be used to outline care for your pet.  The documents can include instructions for feeding, exercise, toys, anything you want.  They can specify funds for care and outline a disbursement plan. 

Pet trusts are recognized in 46 states.  Since it is a trust document, it is more complicated and would require the assistance of an attorney.  For that reason, a pet trust could be more expensive than a pet protection agreement.

If you live in the Asheville area, Brother Wolf Animal Rescue offers classes about estate planning for your pet.  Visit their website at www.bwar.org and click the Events page for dates and times of upcoming classes. 

I dearly love my pets.  When I adopted them, I became responsible for their care for their entire life.  If they outlive me, I want to know their lives will be just as happy as when I was with them.  You feel the same way, or you would not have read this post all the way to the end. 

When you are thinking about who should get Grandma’s pearls, please take a moment and consider what should happen to your furry friends.  You should mention it to your estate planning attorney, if you have one.  Just like Grandma’s pearls, you want to know your friends will be treasured when you are gone. 

Cristy Freeman, AAMS
Senior Operations Associate