Per Stirpes Designation on IRAs
My firm has been asked by clients to add a “per stirpes” selection on the IRA beneficiary designation form. We are a multi-state company and have been told this is controlled by each individual state. Is there language available that could be utilized that would make it applicable to all states, or would we have to create a form for each state according to that state’s law?
Permalink Submitted by Alan Spross on Tue, 2007-10-02 20:40
My impression is that if an IRA custodian will accept a “per stirpes” or “per capita” beneficiary designation in the first place, that this wording is simply added after the designated beneficiary’s name. Some large firms including Vanguard, will not accept such a beneficiary designation, because it may become very expensive and time consuming to distribute the interest, while you also have some critical RMD decision dates expiring in the mean time. And any distribution errors can be extremely costly. Perhaps other default wording in the IRA agreement should address conformity with state statutes to the extent required by law, and that would apply to a variety of potential issues. This same issue also affects whether you choose to accept customized beneficiary designations, which would seem to be less of a problem than “per stirpes”, but many custodians will not accept customized wording either.
No question that there is the potential for disputes to arise, especially if the account is large and/or the decedent had several marriages or kids out of wedlock. With a client profile of this type, minor differences in state definitions is not likely to be the problem, but conceivably could compound a problem. You could of course require that the client provide only specific names and keep the burden on the client to keep up with family changes.
It might be wise to check with other custodians to see what problems have surfaced or if there is the opportunity for trade group cooperation on issues like this in the industry.
Permalink Submitted by Al Fry on Tue, 2007-10-02 22:03
If IRA is very large, it could be divided up, one for each child. Then simply name their heirs as contingent benes. That way heirs could be defined by the IRA owner, rather than by some custodian’s death claim department. Only cost would be additional custodial fees. I think mine are about $35 per year.
Permalink Submitted by Bruce Steiner on Wed, 2007-10-03 22:22
“Per stirpes” is a short and precise way to say that if someone is not living, the deceased person’s share goes to his or her children, and if one of the deceased person’s children is also not living, his or her share in turn goes to his or her children, and so on. It lets you say in two words what would otherwise take at least a few sentences, and it lets you say it in a way that everyone (at least lawyers and judges) will understand. If you try to say it in a few sentences without the words “per stirpes,” there’s a good chance you’ll either get it wrong or create an ambiguity that can result in litigation.
If the financial institution insists on ambiguity instead of precision, you might want to move to a different financial institution, to reduce the chances of litigation.
Most people want to provide for the issue of a deceased child. But “per stirpes” is not the only method.
For example, suppose you have 3 children, A, B and C. Suppose A has 1 child, B has 2 children and C has 3 children. Under a “per stirpes” disposition, if A is deceased, A’s child takes A’s 1/3 share. If B is deceased, B’s children (collectively) take B’s 1/3 share (in other words, each of B’s children takes 1/6). If C is deceased, C’s children (collectively) take C’s 1/3 share (in other words, each of C’s children takes 1/9).
Another approach is “per capita.” For example, if A, B and C are all deceased, under a “per capita” approach, each grandchild takes equally, 1/6 each. Some people use “per capita” if all of the takers are in the same generation, as in the above example.
Yet a third approach is “by representation.” In the above example, suppose A is living, but B and C are deceased. In a “per stirpes” approach, A takes 1/3, B’s two children take 1/6 each, and C’s three children take 1/9 each. But in a “by representation” approach, A still takes 1/3, but B’s and C’s shares are combined, and their children take equally. In other words, the 5 children of B and C take 2/15 each.
You can select whatever method you want (including disinheriting the issue of a deceased beneficiary, which is common where the beneficiary is not a child, but unusual where the beneficiary is a child). But you should make sure that you say it precisely so that you don’t create an ambiguity. Words like “per stirpes” are useful for just that reason — they are succinct and precise.