Designating your beneficiaries is a retirement topic that often slides to the bottom of the pile — but when it comes to estate planning, it can often end up being one of the most important decisions you will ever make.
For most people the choice of beneficiaries is simple: Spouse first, then children. For others it may not be that simple—or not stay that simple. Let’s see what we can learn.
The most common cases requiring beneficiary designation are on wills and trusts and on financial accounts like qualified retirement plans, annuities, etc. Some provide for “transfer on death,” which accomplishes essentially the same thing.
Most people assume that if they die without designating a beneficiary, assets automatically go to their spouse, and then to their children. This may prove true, but the determination can require a costly, unnecessary probate process, tying up money in court for many months. It’s better to avoid that result.
Events like divorce and remarriage and having children from two or more marriages can complicate beneficiary designations. If you remarry, do you want all your assets to go to the new spouse, and then to the spouse’s children—perhaps some of them biologically yours, others not—rather than or in addition to your children from the previous marriage? Do you have any children with special needs? Do you want to include stepchildren? If you have not remarried, do you want to include your ex-spouse? Is there anyone else who is dependent on you financially or otherwise?
Moreover, two types of distributions to children exist: per capita and per stirpes.
Per capita — literally, “per head” in Latin — divides assets equally to each individual at the time of distribution. Unless otherwise specified, default distribution is almost always per capita.
Per stirpes — “per root” — divides equally by person at one generation and then maintains that division by branch in those person’s offspring. For instance, $10,000 divided per stirpes between a brother and sister would be $5,000 each if they are both alive at the time of distribution. But if they are both gone, and the brother had 10 children and the sister 2, his children would get $500 each and hers $2,500 each. If one of the 10 had died leaving 4 children, they would share $500, receiving $125 each.
The difference becomes important if you want to include grandchildren and even great-grand-children in an inheritance.
As you can see, there’s a lot to think about when it comes to designating your beneficiaries. While it may not be the most pressing retirement issue to consider, that does not diminish its importance — because your choices can have an impact that lasts literally for generations to come.
