Imagine this scenario: You were diligent about getting all of your estate planning documents in order. You created a will and a trust to protect your assets. You established a Healthcare Power of Attorney (POA) to be sure the right person can make healthcare decisions on your behalf if needed, and a Durable POA so your funds can be accessed to pay for your care and keep your financial life in order. You’ve carefully selected beneficiaries for every one of your retirement and financial accounts. You’ve even made an effort to communicate your wishes clearly to your designees, beneficiaries, and loved ones.
But here’s the catch: that was years ago. And as we know, life happens!
We recently added a new and improved review process to our clients’ beneficiary designation information, looking at internal company data and investment custodian data. That process opened a can of worms! It was immediately clear that some of our clients urgently need to update their designated beneficiaries. I’m not too surprised. Even for me, estate planning tends to be a set-it-and-forget-it process. I made sure everything was covered in my own plan, checked the box as done, and moved on to other priorities. I see now why that’s a mistake that could not only be costly, but that could also cause family rifts and, ultimately, result in my wishes not being fulfilled.
As you may recall, your will and trust specify how individual and trust assets are distributed at death. The will and trust do NOT control the distribution of retirement accounts, life insurance, and annuities. These accounts are paid only to beneficiaries named on specific forms.
In my personal IRA beneficiary planning, the issue came down to a single but very important detail: choosing whether I want my retirement assets to be distributed to my heirs Per Capita or Per Stirpes.
In legalese, Per Capita (which can also be called “share and share alike”) means that I want no one but my named beneficiaries to receive the indicated share of my IRA. The account(s) will be divided equally among my named beneficiaries—in my case, my two children. That sounds reasonable, right? It seemed that way when I made the designation 15 years ago before I had any grandchildren! But things change over time. Today, Adam has four children and Jamie none. Under the definition of Per Capita, if Adam were to predecease me, the entire IRA would be distributed solely to Jamie—and my grandchildren would be excluded. That scenario is not my intention.
In my case, Per Stirpes (which is Latin for “by branch”) is the better choice. Why? Because it ensures that every person in my family tree will be considered if the heirs closest to me generationally—my children—are no longer living. That means that my grandchildren would receive equal shares of Adam’s portion of my IRA if he passes before me. (Note that spouses are not considered in Per Stirpes distribution because he or she is not considered part of the “branch.”)
But it gets even more complicated than that. Just naming beneficiaries is complicated! Natalie Choate wrote the book on the subject: Life and Death Planning for Retirement Benefits. In the 636-page authoritative volume, there’s a tiny statement that says that all the detailed rules assume you have properly named beneficiaries—and that “properly” is beyond the scope of her book. Yikes! To ensure that your intended heirs receive your retirement benefits, you must be exquisitely clear on your intentions. Every IRA, annuity, and life insurance application includes a beneficiary designation form. Upon death, the designations are followed verbatim, even when the recipient is clearly wrong—an ex-spouse or estranged relative are prime examples.
Our review process is designed to add tremendous value to clients by helping them get their named beneficiaries right, and then keep them right by reviewing them regularly. Our clients will be receiving a copy of their existing beneficiary designations in the coming weeks, and the statements will list their named beneficiaries, as well as whether they are Per Stirpes or Per Capita. Now that you know what that means, think carefully about what you intend. If you want to understand more fully, or make changes, we’re here to guide you and update your records.
Whether you are a client of ours or not, now that the can of worms is wide open, be sure to take the time to review your beneficiaries as soon as possible. It’s the best way (and perhaps the only way!) to ensure that your retirement assets and insurance benefits go to those you intend and those you love—even if life changes your intentions in the years ahead.