Insights & Thoughts

Spring Clean Your Estate Plan

by | Mar 21, 2021 | Financial Planning

Over the past couple of months, I’ve had a few clients reach out about updating their beneficiary information on their Schwab accounts after a routine will update. While all of our clients have beneficiaries listed on their IRAs, many people are not aware that you can also designate beneficiaries on your taxable accounts as well. If you’ve ever witnessed a probated estate, you’ll probably agree to avoid it if at all possible. There are steps you can take now to minimize the chance that your estate will go through probate. Estate planning terms can be a bit confusing, particularly when it comes to Latin derived words such as per stirpes and per capita. This memo will clarify these terms for you as well as provide you with the tools to perform a check up to be sure your estate plan is up to date and aligned with your wishes.

Let’s start by taking a closer look at probate. The English noun, “probate,” derives from the Latin verb “probare” which means “to test or to prove.” Probate in the context of someone’s estate is the legal process that takes place after someone dies to make sure property and possessions are given to the correct people, and taxes and debts owed are paid in full. By having a will in place, designating beneficiaries, and holding property jointly, you may be able to bypass the probate process. It would take several pages to go through all the nuances of probate, so I’m just hitting the highlights. For joint accounts, if the account is registered as Joint Tenants with Rights of Survivorship, upon the death of one account holder, the account transfers to the surviving spouse automatically, no probate needed. But for Joint Tenants in Common, that is not the case and an estate account must be opened for the decedent’s half to be transferred into. Individual brokerage accounts will go through probate unless you have designated beneficiaries. You can also set up Transfer on Death beneficiary designations for bank accounts and property such as motor vehicles and real estate.

Per stirpes and per capita are a couple more Latin-derived terms you have probably heard before. In Latin, per stirpes means “by branch”. In the context of estate planning, this means that if a beneficiary dies before the account holder, that beneficiary’s distribution is passed to his or her surviving dependents. Per capita in Latin means “by the heads”. If a beneficiary dies before the account holder, then any assets that would have gone to that beneficiary are simply distributed to the remaining beneficiaries. These seem pretty straightforward, but depending on how the remaining beneficiaries are defined, it can get a little muddy. Specifically, the verbiage children versus dependents can have very different outcomes.

The best way to explain the difference is with an example.

Example: Tom has 3 children; Mark, Jenny and John. John dies before Tom but leaves behind 2 children, Sally and Sam.

While this gives you the gist of these definitions, there are many different ways the example can play out when beneficiaries die before the owner or more descendants are born after the designation, particularly if per capita is chosen. Furthermore, there can be different definitions of these terms, one notable example being on the beneficiary paperwork for Charles Schwab. Schwab gives you the option to select per stirpes, per capita or neither. But in Schwab’s definitions, with both per stirpes and per capita, if your named beneficiary dies before you, Schwab will distribute that beneficiary’s portion to his or her living children in equal shares.

The only difference arises if all of your named beneficiaries die before you. If that unlikely scenario happens, under per stirpes, Schwab will distribute your named beneficiary’s(ies’) portion to his or her living children but if per capita is chosen, Schwab will distribute your assets equally among all of the living children of your named beneficiaries. If neither per stirpes nor per capita is chosen, Schwab will distribute assets per capita among the remaining primary beneficiaries. Clear as mud, right?

I’m guessing after reading this email, many of you will want to check the current beneficiary designations on your existing accounts and make updates as needed. As I mentioned earlier, in addition to IRA beneficiaries, you may also add beneficiaries to brokerage accounts essentially making them Transfer on Death accounts. For individual or Tenants in Common accounts, this can make the difference in needing to go through probate or not. Probate typically consumes a lot of time and money and should be avoided if unnecessary. If you have complex or specific gifting instructions in your will, you need to be careful when designating beneficiaries on brokerage accounts since this would supersede the will. As you spring clean your house, it’s a good time to spring clean your estate plan as well and make sure your assets are set up to pass along to your designated heirs as hassle-free as possible.



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