One of the necessary evils of financial intentionality is account application forms. If you are actively seeking financial wellness, you will end up filling out reams of paperwork for IRAs, 401(k)s, 529s, life insurance policies, and will and estate documents. On virtually all of these documents there is a little check box, or a little Latin phrase that most people will simply check “yes” or gloss right over: the phrase “per stirpes”. However, if you’re intentional about your finances, you want to know what that little phrase means for you and for your money.
The Latin phrase “Per Stirpes” translates to “by roots”. Imagine you’re walking through the woods and you look off the path to your right. Sometime there had been a strong enough wind to push a tree almost completely on its side. Now, about half of the roots are completely exposed. You can see, starting at the base of the tree, thick dark curly lines flowing out from the base of the tree.
Similarly, when your financial advisor, lawyer, or insurance agent wants to know if your assets should go to your beneficiaries “per stirpes”, they want to know if your assets should flow out to the descendants of your listed beneficiaries if a listed beneficiary happens to pass away before you do.
Per Stirpes in Action
For example Bill, who is listed as a primary beneficiary on his father Adam’s IRA, passes away before Adam does. Adam selected to have his IRA assets distributed per stirpes and doesn’t update the beneficiary list before he passes away a few years later. All of Bill’s children would receive an equal share of the assets Bill was supposed to receive when Adam passed away. In this example, $150,000 splits equally into three $50,000 distribution to the grandchildren:
You may be saying, “This is exactly what I want. I need to call my advisor right now and make sure my assets will be distributed per stirpes!” Unfortunately, it’s not that simple.
Imagine the same scenario, but Cody (the grandson) has also passed away before Adam’s assets were distributed. Then both of Bill’s daughter’s would receive an equal share of the $150,000:
This still seems reasonable, but Adam may not have wanted all of the assets to go to his granddaughters. One granddaughter is a physician’s assistant that does well for herself, and the other works at a library. Per stirpes may not be the preferred way to distribute the assets in this situation.
Let’s make this even more complicated. What would happen if Bill had passed away, Cody passed away, and Cody had a surviving a spouse? What happens to the $150,000 that Adam had indicated Bill should receive per stirpes upon Adam’s death?
Cody’s wife, Adam’s granddaughter-in-law, wouldn’t receive anything. Zelda isn’t Bill’s descendant and so Zelda isn’t eligible to receive Adam’s IRA funds per stirpes. Family dynamics are sometimes complicated, but typically a grandfather-in-law may want his deceased grandson’s spouse to receive a share of his assets if he happens to pass away. But in the above example if Bill is listed as a primary beneficiary and per stirpes is selected and left unchanged, all the assets would go to the two granddaughters, because they are the only “roots left flowing out of the tree”.
But what would happen if Cody and Zelda had two children?
The assets would follow descendant roots down to Cody’s children and be split evenly between those children. Zelda still does not receive a cent, though, because she is not a descendant.
Play It Out
Before you elect to have your assets distributed per stirpes, try the “play it out” test. Play out what would happen if you happen to pass away. You may need sit down with a piece of paper and make charts similar to the ones above. Talk with your advisor, attorney, or agent and make an informed decision about where your money is going to go when you pass away. Review your beneficiaries list and estate documents on regular intervals – every 2 years to 5 years to make sure that they still match your wishes. Review your documents if there are big changes like the death of a loved one, or an unfortunate falling out between family members. Life can get complicated and you want to make sure your assets flow to the right individuals. You can become financially confident and you can have a better investment experience.
- Tim Bacus, EA