Per Stirpes: The Importance of Naming Grandchildren as Beneficiaries on Retirement Accounts

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Retirement accounts are part of your estate and must be included in your estate plan to ensure it goes to your chosen beneficiaries after you've passed on. Talk to your probate attorney in Orange County about how best to divide your retirement account among your descendants.

One way to keep it in the family is to use per stirpesPer stirpes ensures that your grandchildren inherit a fair portion of the estate if their mother, which is your daughter, dies before you. In other words, the children inherit their mother's share.

Without per stirpes, your daughter's share of the inheritance is divided among your surviving children which is her siblings, increasing the amount they stand to inherit. Your grandchildren don't see a cent of your retirement account.

The Basics of Naming Beneficiaries on Retirement Accounts

You need to be sure about who you want to inherit your retirement account. This is because the named beneficiary will benefit despite what you say in your will. For example, you weren't married when you opened your retirement account and named your cousin John the beneficiary.

However, in your will, you state that you want your daughter, Betty, to inherit the account. If you forgot to update the beneficiary, or you mistakenly thought that your will superseded the designated retirement account beneficiary, John will still get the money.

Think about contingency beneficiaries. They benefit when none of your primary beneficiaries is around to inherit undistributed estate assets. For example, you bequeath your car to your niece but she passes away before you. If you named your niece's daughter as a contingent beneficiary then she gets the car.

It may sound confusing, but an Orange County estate planning attorney will help you make sense of it all.

Your Spouse is Your Default Beneficiary

Most married couples name each other as beneficiaries, which makes sense. Your spouse has plenty of choices when deciding how best to use the account. For example, they can keep the account where it is and let it grow, they can liquidate a portion or all of it, or they can roll it into their retirement account.

Note that if you live in a community property state, your spouse is entitled to claim 50% of the account, regardless of who is the designated beneficiary.

Your Spouse is Not Your Default Beneficiary

If your beneficiary is your daughter and you die while she is still a minor, she has the option to take the required minimum distribution (RMD) based on her life expectancy as determined by the Single Life Table.

Your daughter's designated guardian can help her make the choice, but it's an even better idea to consult the attorney who helped you with your estate planning.

If the beneficiary isn't part of the family, they must withdraw all the assets from the account before December 31, on the 10th anniversary year of your death. Other beneficiaries must take annual life expectancy payments until December 31, on the 10th anniversary of your death.

Your Beneficiary is a Trust

There are many advantages to naming a trust as your beneficiary, including the increased control you have over distributing your assets.

When you create trust, you must name someone trustworthy as the administrator. They manage the trust on behalf of your beneficiaries. Trusts can be tricky to set up. This is why you should engage a specialist trust attorney in Orange County.

You Named a Charity as a Beneficiary

You can name your favorite charity/ies as a beneficiary, but it's recommended that you only do so once your closest descendants are taken care of.

Can Your Estate Be a Beneficiary?

Yes, it can, but it's not recommended. Retirement accounts don't go through probate. It's one of the things that makes them so attractive. When your account becomes part of your estate, it's subject to probate, just like everything else in your entire estate.

What Does Per Stirpes Mean?

Per stirpes is a way to include your grandchildren as beneficiaries on your retirement account. The legal term demonstrates a lineal distribution process should the primary beneficiary pass away before the testator.

Specifically, it follows a line of lineal descendants; from the testator to their child to grandchild and to great-grandchild.

Per stirpes doesn't apply to spouses, siblings, or parents, it's lineal children only. Clearly State It's Per Stirpes. You must say that the distribution is per stirpes, otherwise, your assets will be distributed per capita.

For example: "I leave my daughter, Berta King, half or 50% of my estate. If Berta King predeceases me, her inheritance must be distributed to Berta King's descendants, per stirpes."

The Problem with Not Including Per Stirpes on Beneficiary Forms

If you don't state that the distribution is per stirpes, your estate is likely to be distributed per capitaPer capita or by the heads distribution of property divides assets equally between all direct descendants, with no provision for grandchildren.

Example 1: James and Charlotte

Per capita

Mom and Dad have two children, James and Charlotte. James and Charlotte each have three children. James and Charlotte are the beneficiaries of Mom's retirement account. James dies before Mom. Charlotte gets 100% of the account. 

Or ...

Mom and Dad have three children, James, Charlotte, and Angela, and the siblings have three children each. The retirement account is divided equally between the three siblings: 33.33% each. James dies before Mom. His 33.33% is returned to the estate and divided among his sisters, who now get 50% each.

Per stirpes

Mom and Dad have two children, James and Charlotte. James and Charlotte have three children each. James and Charlotte are beneficiaries of Mom's retirement account. James dies before Mom. Charlotte still gets her 50%. James' 50% is divided among his three children. Each gets ⅓ of 50%.

Example 2: Why Per Stirpes Matters for Large Families

Per stirpes works better for small families than big ones. Per capita is better for big families. It's related to the perception of fairness.

Per stirpes

Mom and Dad have three children, James, Charlotte, and Angela. James and Charlotte have two children each. Angela has five children.

Mom and Dad have a horse riding business, which they want to keep in the family. Rather than dividing 1500 shares equally between the three children, they decide to skip a generation and leave the shares to the grandchildren.

James' children split 500 shares between them, 250 each. Charlotte's children also split 500 shares between them, 250 each. Angela's children have to split 500 shares five ways. They each get 100 shares. 

In a per capita arrangement, 1500 shares would have been split evenly between nine grandchildren who get the same amount.

Other Considerations When Naming Beneficiaries on Retirement Accounts

Think about your financial dependents and how they'll cope after your death. For example, you might have an irresponsible brother who has never been independent. You might also have a daughter who has special needs and won't ever be able to support herself independently.

You can choose to leave most of your assets in trust for your daughter so she always has the care she needs, and leave only a small portion to your brother, forcing him to make his own way.

When you die, your estate faces estate tax, gift tax, income tax, and property tax. Your estate planning and probate attorney will help you distribute your assets in a way that avoids as much tax as possible.

When to Update Beneficiary Forms and Why is this Important?

Life is fluid. Your circumstances this year will be different in two years' time. For example, you downscaled your house and your granddaughter was born. Your son got divorced and married a mother of two. 

In this example, you should update your beneficiary designation forms after each major change. Even if you don't have major life changes, it's still a good idea to take a look at your beneficiary forms every two years or so.

A beneficiary might have moved to a different state or gotten married and changed their name. The changes must be made in the beneficiary forms to ensure your retirement accounts go to the right person.

Your Orange County estate planning attorney will help you with the updates because any mistakes you make will stand if you die before you get around to updating the form again. Note, named beneficiaries to trump the wishes stated in your will. If you want to make a change, you must do it on the form.

Benefits of Hiring a Trust Attorney for Per Stirpes in Orange County

Estate planning is not as simple as one thinks. Especially as you mature and accumulate the trappings of a comfortable life. One of the things you should think about is whether you want to leave your family their inheritance directly, or in trusts.

Trusts aren't always the best choice. If this is the case in your situation, your trust attorney in Orange County will advise you on asset distribution, especially per stirpes and per capita methodsThis enables you you can make an informed decision to bequeath assets in a way that matters to you.

Professional Legal Advice and Guidance

Estate planning attorneys, including those who specialize in trusts or probate, are well-versed in the finer details of wills, trusts, and guardianship decisions. They'll show you how to structure your estate to avoid probate and pay the least amount of tax.

Experience with Estate Planning Laws

Estate planning and trust attorneys know how to use the law in a way that is most beneficial to you and your beneficiaries. 

Know the Best Options for Your Situation

If you start estate planning early, and you stick with the same firm, your attorney gets to know you and provides personalized advice. Your attorney also gets to know your family, which gives them further insights into which aspects of estate planning will suit you.

Avoid Common Mistakes When Naming Beneficiaries with the Help of an Orange County Estate Planning Attorney

We all make mistakes. Sometimes the consequences are negligible, but sometimes they're significant. With an expert estate planning lawyer by your side, you can avoid the most common mistakes, including the following:

Not Being Specific About Beneficiaries

Be specific if you name your favorite cousin in your will. Use her full name and be clear about what it is that you're leaving her. Don't leave it open to interpretation. 

This is especially important where stepchildren are concerned. Stepchildren aren't natural beneficiaries, like adopted and biological children. You may love them like your own, but unless you specifically enter their full names and designate their share in assets, they could be left out entirely.

Not Naming Contingent Beneficiaries

Contingent beneficiaries are the people or entities (like a charity) that will inherit an asset should your primary beneficiary have passed away. It's important to name as many contingent beneficiaries as necessary for your estate.

Not Naming All Your Children

Don't name one of your children as the beneficiary on all your retirement accounts and policies. You may think they'll share with their siblings, but don't take it for granted. There might be an unrelated spat between the two of them, which leads to decisions made in anger, or spite. They may be regretted and amended, but it's best to avoid the situation in the first place.

Moreover, a named beneficiary isn't obliged to share assets. If there are tenuous relationships between your children, this is where they'll suffer. In some cases, this could result in contestation and even more animosity.

Not Being Specific About the Manner of Distribution

You must very clearly state if you want assets distributed per stirpes. If you aren't clear then your estate will be distributed in the default manner, which is typically per capita.

Not Choosing Responsible Beneficiaries

Almost every family has one person who recklessly spends money. Name that person the beneficiary of your retirement account and all your hard-earned money will be frittered away.

It's better to put the money in a trust for that person and then appoint a responsible trustee who will administer money or assets in a judicious manner.

Choosing a Beneficiary Who is a Minor or Has Special Needs

Getting your estate planning attorney's input here is important because it's tricky ground. You can leave your retirement accounts to a minor, but not directly. A trust is suitable in this instance.

You might not be doing your nephew with special needs a favor by naming him on the beneficiary form. Many people with special needs get government benefits, but your gift could put them in a situation where they no longer qualify for benefits. Even a marginal change can worsen their circumstances. Your estate planning lawyer will set up a trust instead.

Choosing Your Pet

There are plenty of stories of millionaires who left their entire fortune to their cats. You might think that's a good idea because you're not fond of your family or you don't have any family left, but it's not.

Instead, make provision for them in your will or a living trust. Just appoint a fellow animal lover as your pet's trustee.

Not Talking to Your Family About Your Wishes

Your family may make certain assumptions about your will. If your son assumes he's going to inherit the family business, but you want to leave it to your daughter because she's more business savvy, you need to discuss it with both of them.

Special circumstances aside, talking to your family about your estate plan is generally a good idea. There's no need to go into detail but a frank discussion will go a long way to providing your family with peace of mind.

Protect Your Legacy for Future Generations with an Experienced Trust Attorney in Orange County

It's never too early to develop an estate plan. One of our estate planning attorneys in Orange County will help you keep your plan up to date over the years and ensure that it remains clear about your wishes, especially if you want to go with per stirpes distribution to ensure your grandchildren aren't left out of your will.

To book a consultation and get your estate planning going, fill out our online form or contact us at 949-867-4818 at Parker Law Offices today!

Maria Parker assists her clients plan for their end of life health care wishes and the ultimate distribution of their wealth after death. She personally experienced the importance of planning at the time her father passed away.

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