“Per Stirpes” is a very important term to you if you own retirement accounts. So what is “Per Stirpes”? IRA custodians never explain it but the term “Per Stirpes” come from Latin and it means “per branch”. These two words can mean success or failure when it comes to your retirement account beneficiary designations and estate plan.
When you name a beneficiary for your retirement account you typically name someone who you believe will survive you. If they do, no problem. If they don’t, you’ve got a problem.
Where does the money go if your IRA beneficiaries are not living once you pass away?
Well, if you only have one beneficiary and they don’t survive you, the money goes to your estate. That is terrible because it often means your money will end up in probate. What is probate? It’s a costly and time-consuming process. Of course the lawyers love probate because it racks up huge fees for them but probate is something you should do everything you can do to avoid.
If you have more than one beneficiary and one of them fails to survive you, that person’s share gets split between the other living beneficiaries. Let’s look at an example. You name your three nephews Larry, Moe and Curly equal beneficiaries for your retirement account. Larry drops an anvil on Curly’s head and he goes to meet his maker.
You are so grieved by Curly’s untimely passing that you fail to update your beneficiary forms. As a result, Larry, Curly and Moe are still listed as beneficiaries even though Curly is no longer with us.
When you pass away, Larry and Moe will split Curly’s share. If that’s what you wanted, that’s no problem. But what if Curly has children of his own and you want those kids to get Curly’s share? Well…….under the current situation, they’ll be left out in the cold.
That’s where the term “per stirpes” comes in. You see, had you named each beneficiary (or at least Curly) “per stirpes” that person’s share would pass to their own children if they fail to survive you. Let’s go back to our example.
Let’s say you named your three nephews beneficiaries but added the “per stirpes” designation. In that case, when you die, Curly’s one-third portion of your assets go to his children.
In my experience, most people with retirement accounts are interested in this if their beneficiaries have children of their own. But banks, insurance companies and brokerage firms won’t tell you about this because they don’t want the headache I suppose.
There are other ramifications of the “per stirpes” designation which is why I strongly recommend you speak to your legal advisor before making this election. But unless you bring it up, it’s not going to be addressed. I’d prefer you consider it and then decide against it rather than not bring it up at all. The consequences of not using the “per stirpes” terminology when you should are just too great to ignore.
Have you heard this term before? Has your banker or broker brought it up? Did you decide to use this stipulation? Why or why not?