Keeping your beneficiary information up to date is a critical part of your financial well-being. Life gets busy. We get it! But this is something that needs to be maintained. We recommend reviewing your listed beneficiaries at least once a year. This includes combing through your will and trust, insurance policies, retirement accounts and investment accounts.
There are countless examples of why you may need to update your beneficiaries as a lot can happen over the course of a year! Loved ones may have passed away, a change in marital status could have occurred, a new grandchild might have been born, or perhaps you now want to include a new charity in the beneficiary equation.
What many people don’t realize is that the beneficiary designation supersedes any will or trust document. Updated estate planning documents alone may not carry out your most current wishes if the beneficiary designations on your account(s) are not updated. Every so often we run across horror stories in the media related to this. A few months ago, there was an article about how one man’s children missed out on a $400,000 IRA inheritance because his beneficiary designations were not up to date. As you can see, this is a very important aspect within the planning process.
Let’s discuss the beneficiary form. I hope we are all familiar with this piece of paper. It’s that page on an application where you list who will receive your assets when you pass away. On the form there is a space to list your primary beneficiaries and your contingent beneficiaries and allocate the percentage of the assets you want them to receive.
The primary beneficiary is first in line to inherit the assets upon the account owner’s passing. If no primary beneficiary survives the account owner, that’s when the balance of the account will be distributed to the contingent beneficiaries. It is always smart to have contingent beneficiaries listed in case the primary beneficiary is no longer around to receive the assets.
“Per Stirpes” Defined
What exactly is “per stirpes,” and why you should even care about it? Per stirpes is Latin for “by roots” and is also referred to in legal terms as “by right of representation.” A distribution is deemed to be per stirpes when each branch of a family receives an equal share of the estate or assets.
A per stirpes designation can make a big difference in certain situations, especially when dealing with multiple heirs representing different generations, as discussed below.
When Your Beneficiaries May be in the Danger Zone
If there is only one beneficiary on each tier (i.e. one primary and one contingent), then there isn’t much to be concerned about.
However, things can get more complicated if the account has multiple beneficiaries. Your beneficiaries may run into issues if they predecease the account holder. This would cause their portion of the assets to be equally redistributed to the remaining beneficiaries, which becomes a problem if the individual that died has survivors that were expecting to receive a portion of the inheritance. In other words, if you are expecting to get an inheritance but you die before receiving it, how much (if anything) of the inheritance will be passed down to your kids?
For example: John Smith is a widower and has three adult children, Kevin, Stuart, and Bob, who will each receive 1/3 of their father’s assets when he dies. Unfortunately, Bob predeceased his father. Under the default beneficiary settings, John’s assets will now be divided equally between Kevin and Stuart, which will effectively disinherit Bob’s children from the inheritance.
However, under a per stirpes distribution, Bob’s portion of the inheritance would still go to his children “by right of representation” (i.e. Bob’s 1/3 of the inheritance would pass down to his lineage) if Bob predeceased his father.
All legal and estate planning jargon aside, the bottom line is that if you have multiple beneficiaries you need to consider what would happen if one of them passed away before you. Do you have more than one child? Do your beneficiaries represent multiple generations (i.e. siblings, children, grandchildren)? In such an instance, implementing a per stirpes designation may save your loved ones from some considerable estate planning headaches down the road.