Per stirpes vs. per capita: Factors to consider when choosing a beneficiary distribution method

Per stirpes distribution is a method of distributing assets to beneficiaries based on their blood relationship to the deceased. In this method, if a beneficiary predeceases the person making the last will and testament (the testator), their share of the estate passes to their descendants. This means that if a child of the testator dies before the testator, that child's share of the estate would pass to their own children (the testator's grandchildren) in equal shares.

For example, let's say John has three children: Alice, Bob and Charlie. If John dies and his will specifies a per stirpes distribution, his estate will be divided equally among his three children. However, if Alice predeceases John, her one-third share of the estate would pass to her own children (John's grandchildren) in equal shares.

Per stirpes distribution provides three key advantages because it:

• Keeps assets within the family. Per stirpes distribution helps ensure that assets remain within the family bloodline, even if a beneficiary predeceases the testator.
• Provides for descendants of deceased beneficiaries. If a beneficiary dies before the testator, their descendants will still receive a portion of the estate, ensuring that they are not left out of the inheritance.
• Simplifies the estate planning process. By using a per stirpes distribution, the testator doesn't need to update their will every time a beneficiary's family structure changes (e.g., through the birth of a new child or grandchild).

There are two major disadvantages to per stirpes distribution. They are:

• Unequal distribution among beneficiaries. If one beneficiary has more children than another, the grandchildren of the testator may receive unequal shares of the estate.
• Potential for assets to pass to unintended beneficiaries. If a beneficiary dies without descendants, their share of the estate may pass to other beneficiaries or their descendants, which may not align with the testator's original intentions.

Per capita distribution is a method of distributing assets to beneficiaries based on their individual status as heirs. In this method, the estate is divided equally among the surviving beneficiaries, regardless of their relationship to the deceased. If a beneficiary predeceases the testator, their share of the estate is redistributed among the remaining beneficiaries.

For example, let's say John has three children: Alice, Bob and Charlie. If John dies and his will specifies a per capita distribution, his estate will be divided equally among his living children. If Alice predeceases John, her share of the estate would be redistributed equally between Bob and Charlie.

Per capita distribution provides three key advantages because it:

• Equalizes distribution among beneficiaries. Per capita distribution ensures that all surviving beneficiaries receive an equal share of the estate, regardless of their relationship to the deceased.
• Simplifies the distribution process. By dividing the estate equally among the surviving beneficiaries, the distribution process becomes more straightforward and less complex.
• Reduces the likelihood of disputes. Since all surviving beneficiaries receive an equal share, there is less potential for disputes or disagreements over the distribution of assets.

There are two major disadvantages to per capita distribution. They are:

• The potential for assets to pass outside the family. If a beneficiary predeceases the testator and has no descendants, their share of the estate will be redistributed among the remaining beneficiaries, which may include individuals outside of the family lineage.
• No provision for descendants of deceased beneficiaries. If a beneficiary dies before the testator, their descendants will not receive a share of the estate, which may not align with the testator's intentions.

When deciding between per stirpes and per capita distributions, there are several factors to consider. They include:

• Family structure and dynamics. Consider the current and potential future structure of your family, including the number of children and grandchildren you have or may have in the future.
• Beneficiaries' individual circumstances. Take into account the unique circumstances of each beneficiary, such as their age, financial stability and personal relationships.
• Desired level of control. Determine how much control you want to have over the distribution of your assets and whether you want to ensure that certain beneficiaries or their descendants receive a specific portion of your estate.
• Complexity of the estate. Consider the complexity of your estate, including the types of assets you own and any potential tax implications.

To help ensure that your beneficiary distribution wishes are carried out, it's essential to work with an experienced estate planning attorney. They can help you draft a clear and legally binding will that specifies your chosen distribution method and any other specific instructions you may have.

It's also crucial to review and update your estate planning documents regularly, especially after significant life events such as births, deaths, marriages or divorces. This will ensure that your documents reflect your current wishes and consider any changes in your family structure or personal circumstances.

The tax implications of per stirpes and per capita distributions can vary depending on the specific circumstances of your estate and the laws of your state. In general, however, the following considerations apply:

• Estate taxes. The value of your estate, regardless of the distribution method chosen, may be subject to federal and/or state estate taxes. As of 2024, the federal estate tax exemption is $13.61 million per individual, while state estate tax exemptions vary.
• Inheritance taxes. Some states impose inheritance taxes on the beneficiaries who receive assets from an estate. The tax rates and exemptions vary by state and may be affected by the relationship between the beneficiary and the deceased.
• Income taxes. Beneficiaries may be subject to income taxes on certain types of inherited assets, such as retirement accounts or annuities. The specific tax implications will depend on the type of asset and the beneficiary's personal tax situation.

It's essential to consult with a qualified tax professional or estate planning attorney to understand the potential tax implications of your chosen distribution method and to develop strategies for minimizing the tax burden on your estate and your beneficiaries.

Choosing between per stirpes and per capita distributions is a significant estate planning decision that can have lasting consequences for your beneficiaries. By understanding the differences between these two distribution methods and considering factors such as your family structure, beneficiaries' circumstances, desired level of control and the complexity of your estate, you can make an informed choice that aligns with your goals and values.

Working with an experienced estate planning attorney can help ensure that your wishes are clearly documented and legally enforceable. Regular reviews and updates to your estate planning documents can help you maintain control over the distribution of your assets and adapt to changes in your family or personal circumstances.

Ultimately, the choice between per stirpes and per capita distributions is a personal one that depends on your unique situation and objectives. By carefully weighing the advantages, disadvantages and other factors involved, you can make a decision that provides for your loved ones and ensures that your legacy is distributed according to your wishes.