Oftentimes, account owners wishing to provide a legacy for their heirs list them as beneficiaries on their retirement accounts as well as their Individual accounts (often called Individual TOD (Transfer on Death) or POD (Payable on Death)). What may not be top of mind is a little known tool called the Per Stirpes election.
Per Stirpes is Latin for “by branch” or “by roots” and it allows account owners to designate the heirs of their heirs in the event they predecease you. This is best illustrated by the example below:
Account Owner is married to Wife and has Child #1, Child #2 and Child #3. He is the proud grandfather of two grandchildren (both from Child #1). Account Owner would like to leave his IRA to his wife but if she were to pass away he would like the account to be divided evenly between his children. In this case, we would name Wife as Primary Beneficiary and the three children as contingent (or secondary) beneficiaries. In the unlikely event, however, Child #1 passes away tragically in an accident before Account Owner, what happens to his 1/3 share? Without the Per Stirpes designation, Child #1’s share would now go to Child #2 and Child #3. This would effectively disinherit Child #1’s children (your grandchildren). If however the Per Stirpes designation has been made on the contingent beneficiaries, Child #1’s heirs would then inherit his 1/3 share (and Grandchildren 1 and 2 would each inherit 1/6 of the account balance).
It is important to note that Son #1’s heirs include his children only. This does not include his spouse.
Adding the Per Stirpes designation to the Primary beneficiary may not be needed if that beneficiary is your spouse and you share heirs. By listing Contingent beneficiaries that are your children after your spouse (as primary) you no longer need the Primary beneficiary to be Per Stirpes because his/her children have already been named as secondary beneficiaries. If, however, you are part of a blended family, or your primary beneficiary is someone other than your spouse, it may be advantageous to add this provision to your primary beneficiary.
In any situation, it is important to think about what would happen should any of your primary or contingent beneficiaries pass away before you. If your intent is to leave behind a legacy for that particular beneficiary’s heirs, adding the Per Stirpes designation may be advantageous.