Per stirpes vs. per capita: It's too easy to accidentally disinherit your grandchildren

Choosing who you are going to leave your property to is one of the biggest decisions you make in estate planning. These individuals who will inherit your assets are called your beneficiaries. But what happens if one of your beneficiaries dies before you? When this occurs, the terms “per capita” and “per stirpes” come into play.

Per stirpes and per capita are two different ways of distributing assets if one of your beneficiaries predeceases you. It is easy to skip over legal jargon, but these designations can have serious ramifications on how your property is distributed at your death.

In Latin, per stirpes means “by branch” or “by root.” In estate planning, per stirpes distribution means that if a beneficiary predeceases you, their share of the inheritance goes to their lineal descendants. Lineal descendants are the direct decedents of the person - the children, grandchildren, great-grandchildren, etc.

In simple terms, if a beneficiary dies before you, their share of the inheritance goes to their child or children. If there are multiple children or heirs of the same degree, they split the deceased beneficiary's share equally. The shares of the other beneficiaries named in your will, trust or other beneficiary accounts remain the same.

How many generations does per stirpes cover?

Per stirpes distribution covers as many generations as is necessary to distribute the assets. To understand this fully, consider the following example:

When Laura updated her estate plan after her husband's death, she left her estate to her two children, per stirpes. Two years later, Laura, her daughter Carla, and Carla's child, Rose, died in a car accident. Rose was an only child and had one child herself. Her son Steven, Laura's great-grandchild.

Rose's only living child received his one-half share of the estate. Carla's one-half share of the estate was distributed to her grandchild Steven, Carla's closest living lineal descendent.

Per capita means that all living members of the beneficiary group receive an equal share. If a beneficiary dies before you, the deceased beneficiary's share is returned to the estate and distributed evenly among the surviving beneficiaries. The deceased beneficiary's share is absorbed proportionately by the others.

There is no right or wrong choice between per stirpes versus per capita. However, per stirpes is the more common option. One key benefit of per stirpes distribution is that your grandchildren will be protected, even if you fail to update your estate planning documents after a beneficiary dies.

Let's be honest - not many people update their estate plans religiously, so per stirpes distribution is a safeguard to ensure that your grandkids will not be disinherited and left with nothing. Sometimes it is impossible to update your estate plan with new beneficiaries because you die at the same time.

There are cases where per stirpes distribution does not make sense. For example, if you would rather reallocate a deceased beneficiary's shares among the remaining living beneficiaries or you want to include an entirely new beneficiary upon a beneficiary's passing.

If you decide on per capita distribution and name children and grandchildren as your beneficiaries, you may trigger the generation-skipping transfer tax (GSTT) if one of your children predeceases you. The GSTT is currently 40% but only applies to high-net-worth individuals.

The GSTT exemption matches the federal estate tax exemption. For 2022, the federal estate tax exemption is $12.06 million; it's $12.92 million for 2023.

The right choice for you depends on your unique goals, family circumstances and financial situation. An experienced estate planning attorney can analyze your situation and help you decide the best way to accomplish your estate planning goals.

You can include per stirpes and per capita designations in a will or trust. If you do not include a per stirpes and per capita designation, state law will govern what happens if a beneficiary predeceases you.

Per stirpes and per capita designations can sometimes be used with payable-on-death (PoD) and transfer-on-death (ToD) accounts, as well as other assets with beneficiary designations. Beneficiary designations are used for all types of assets, such as IRA, 401(k), 403(b), 457(b), profit sharing, defined benefit, annuities and life insurance plans.

There is a third distribution option that lies between per stirpes and per capita called “by representation.” This distribution option is very similar to per stirpes but in the event that more than one child predeceases you, all of your grandchildren would receive an equal inheritance.

The shares of the predeceased children are combined and distributed equally among the next generation (your grandchildren). This method of distribution, however, is not available in every state.

Now that you understand how important the difference between per stirpes and per capita distribution is, let's discuss the dangers of relying on a transfer-on-death (ToD) accounts, pay-on-death (PoD) accounts and beneficiary designations. With these assets, it is frighteningly easy to disinherit your grandchildren or cause another unintended outcome.

Is per stirpes or per capita default?

By default, ToD accounts, PoD accounts and other assets with beneficiary designations distribute assets on a per capita basis if the designated beneficiary is not alive. If there are no living named beneficiaries, the property is returned to the estate and distributed through probate.

The financial institutions holding these assets (bank, insurance company, brokerage, etc.) typically have proprietary forms that may or may not allow contingent or per stirpes distributions. Many institutions do not want the responsibility of determining the children of a deceased beneficiary and the liability if there is an error in distribution.

The institutions that allow per stirpes sometimes have a box to check but other times do not. They rarely require account holders to make a designation, so even when there is a check box present, it is very often overlooked. In these cases, the beneficiaries are subject to the default option, which is per capita. Often, this does not reflect the account holder's wishes.

ToD accounts, PoD accounts, and other assets with beneficiary designations are not governed by your will or trust. Most individuals see this characteristic as a benefit because the property bypasses probate, but it comes with dangers. Because your beneficiary designations supersede the instructions in your will or trust, it is critical that the right beneficiaries are named.

The distribution plan of your PoD, ToD and beneficiary designations must be coordinated with your will, trust and other estate planning documents. If your PoD accounts, ToD accounts or other assets with beneficiary designations are not coordinated with your will or trust, it can lead to unintended outcomes.

Imagine that you have three adult children, each with three children of their own. One of your adult children predeceases you. Life goes on, and you never get around to updating your per capita designations on your PoD accounts, ToD accounts and beneficiary designations. You also never change them to per stirpes, even though that is what you specified in your will.

When you pass away, three of your grandchildren will be passed over and not receive the inheritance intended for your deceased parent.

Conclusion

Per stirpes and per capita refer to two different ways of distributing assets when a beneficiary predeceases you. With per stirpes, the assets of the deceased beneficiary pass to their heirs. With per capita, the property of the deceased beneficiary return to the estate and are distributed between the remaining living beneficiaries.

If you are unaware of the differences between these two distribution methods, it is very easy for unintended outcomes to occur. Grandchildren can easily be unintentionally disinherited.