I help a lot of clients with their retirement planning and anytime I come across a situation that I think we can all learn from I like to change the names to protect the innocent and then write about it here at Intentional Retirement.

Today’s installment is brought to you by the phrase “Per Stirpes.”  No, that’s not a nasty disease.  Per Stirpes is a Latin phrase that means “by branch” and, believe it or not, those two words are incredibly important when it comes to your beneficiary designations.

Here’s the scenario.  A widow (not a client of mine, but of a colleague) in her 80s had a sizeable IRA and she named her four adult children as beneficiaries.  Two of those children died unexpectedly last year and then the client also passed away at the end of the year without updating her beneficiary designations.

One of the surviving daughters was the executor of the will and she asked us to divide the IRA into four equal parts and pay each part out to the four beneficiaries or their surviving families.

Per Stirpes vs. Pro Rata

This is where our Latin lesson comes into play.  When you name multiple beneficiaries (or multiple contingent beneficiaries), as this client did, there’s always the chance that one or more of those beneficiaries will die before you do.

If that happens, the language in your IRA agreement will specify what happens next.  In some cases, that language will specify that the benefits should be paid Per Stirpes: To each named beneficiary OR their surviving family (i.e. their “branch” of the family).

In other cases, the IRA agreement may specify that the assets be divided on a Pro Rata basis among any surviving beneficiaries, effectively disinherited any of your beneficiaries (or their families) that predecease you.

Returning to our example, the family wanted us to divide the assets into four equal parts and distribute them to the four kids or, in the case of the two children who had died, their surviving family members.  Instead, we were obligated to divide the assets into two equal parts and distribute them to the two surviving children because the IRA agreement stipulated Pro Rata instead of Per Stirpes.

“Wait,” you might be saying.  “I don’t ever remember being given the choice between Per Stirpes or Pro Rata.”  That’s because many IRA custodians choose one of those options (or some other option) as a default and then leave the burden on you to tell them if you want something different.  To make matters worse, not all custodians choose the same default.

You can see where this could create problems and might cause you to accidentally disinherit certain branches of your family.  To avoid any problems, it’s a good idea to review your beneficiary designations periodically to make sure that they are designed to accurately carry out your wishes.

Some tips for updating your beneficiary designations

• Review your designations each time there is a major change in your family circumstances (e.g. birth, death, divorce, etc.).
• Specify whether the designation is Pro Rata or Per Stirpes
• On accounts that don’t allow beneficiaries, consider using a Payable On Death (POD) or a Transfer On Death (TOD) designation in order to avoid probate on those assets.
• Coordinate your designations with your will or trust, but keep in mind that your beneficiary designations will trump your will, even if your will is more up to date and accurately reflects your wishes.

Touch base if you have any questions.  Have a great weekend!

Carpe Diem,

Joe