We began our discussion last week on the importance of proper designation of beneficiaries in estate planning documents, such as Wills and Living Trusts, and on beneficiary designation forms for life insurance, IRA’s, 401K’s and certain bank accounts.
The most common planning phrase used is per stirpes. Here, the issue (children or grandchildren) of a predeceased child will take their ancestor’s share. What happens if no designation is made? That is, what happens if the phrase per stirpes is not used?
Under wills executed before September 1, 1992, if per stirpes is not specified, the distribution will be per capita if all beneficiaries are equally related to the testator, and per stirpes if not equally related.
A per capita distribution means that each person who is entitled to inherit receives an equal share. Assume Mr. Client has four children – A has two children, B has 1 child, C has 1 child and D has three children. A and C die before Mr. Client. Mr. Client’s will does not specify per stirpes. All 5 beneficiaries – A’s two children, B, C’s child and D – will divide the estate equally.
Under wills executed after September 1, 1992, if a disposition of property is made to “issue” without the phrase per stirpes or per capita, then the issue take by representation. Again, assume Mr. Client has four children – A has two children, B has 1 child, C has 1 child and D has three children. A and C die before Mr. Client. Now, B and D will each receive their 25% share of Mr. Client’s estate; A’s two children and C’s one child (three in total) will share the balance of the estate (about 16.5% each).
In calculating a share by representation, the intital division of shares is made at the first generation level (here, the children of Mr. Client) in which a member is living. Members of the nearest generation to the testator will each receive one share and the remaining shares are combined and equally divided among the heirs in the next generation.