When I go through clients' estate documents, especially a will, I always check the Contingent Beneficiary Clause. This clause is crucial because it specifies what happens to your property if the original beneficiary can’t or won’t inherit. This might happen if the beneficiary dies before you or if they refuse the inheritance.
Many wills don’t include this clause, which is understandable - no one likes to think about their loved ones passing away before them. But it’s important to consider this when planning your estate to ensure your property is distributed according to your wishes, even if circumstances change. The specific method of distributing your property can significantly impact your heirs and lead to different outcomes, especially when it comes to ensuring fairness and adhering to your wishes.
In this post, we’ll explore the main methods of property distribution: per stirpes, per capita, and per capita at each generation. We’ll also discuss equal versus unequal distribution, why these methods matter, and how to choose the right one for your situation.
To illustrate, let's create a hypothetical client, Julia. She’s a widow with three children and four grandchildren, and her estate is worth $1.2 million.
Julia’s will also state that each child gets 33.33% of her estate:
If Julia’s children outlive her, each one will inherit $400,000 (not accounting for probate fees) without issues. But what if one of her children dies before she does? Let’s say Catherine passes away first. Julia then has two options for Catherine’s share: distribute it equally among her surviving children or do so unequally.
Equal Distribution of Your Estate
Under the equal distribution, Catherine’s share is divided equally between Arthur and Ben, giving them each an additional $200,000 or ½ of Catherine’s share.
This method seems fair if Julia’s intention was to equally distribute her estate in equal shares. But what if Julia wanted to leave her estate in unequal shares?
Unequal Distribution of Your Estate
Sometimes parents don’t divide their estate equally due to specific needs or circumstances. For instance, a child with a disability might need more support, another might struggle with gambling or substance abuse, or there could be family tensions. Whatever the case, parents don’t always divide their estate equally.
Let’s assume that it was Julia’s desire to divide her estate disproportionally among her children in the following proportions:
25% to Arthur,
30% to Ben, and
45% to Catherine.
In this scenario, the equal distribution formula would split Catherine’s share equally among the surviving children, giving each 22.5% of Catherine’s share. The issue with this method is that it treats all children the same, regardless of their original shares. This might not align with Julia’s intentions and could be unfair to those she wanted to receive more.
Instead, Julia could use an unequal distribution method which accounts for family dynamics.
Under this method, we need to subtract Catherine’s 45% share from 100%, leaving 55%. Then, divide Arthur’s and Ben’s original shares by this 55% to find their new percentages.
This unequal distribution ensures that Julia’s surviving children inherit in proportion to their original shares, aligning better with her intentions.
Contingent Beneficiary Clause
When your will lacks a contingent beneficiary clause and you have multiple generations of surviving descendants, state law will determine how the deceased beneficiary’s share is distributed. That’s why it’s essential to include a contingent beneficiary clause in your will. This allows you to designate an alternative beneficiary and specify how your property should be distributed if the original beneficiary dies before you or refuses the inheritance.
Methods to Pass Your Estate to Heirs
There are three main methods to leave your property should a beneficiary predeceases you or refuses to accept the inheritance:
Per Stirpes
Per stirpes means "by the roots" or "through the bloodline." This method ensures each branch of the family gets an equal share of the inheritance, meaning descendants of a deceased heir receive that heir’s share. In other words, the per stirpes method ensures that a deceased child's share of the inheritance goes to their own children, so they aren’t left out.
Here's how it works:
Julia’s children - Arthur, Ben, and Catherine – each are entitled to an equal share of 1/3 of her estate. If Arthur and Ben die before Julia, Arthur’s son David would get Arthur’s third, and Ben’s children, Elly, Frank, and George, would split Ben’s third equally.
Per stirpes method is a very common approach and is used by approximately 1/3 of states.
Per Capita
Per Capita means “by the head” in Latin. This method divides the estate equally among all living descendants, treating each heir as an individual. For example, if Julia leaves her estate to her children, per capita, the estate will be divided equally among the surviving heirs, regardless of which branch of the family they come from.
Using the same example, if Arthur and Ben die before Julia, the five living heirs each get 1/5 of her estate.
Per Capita at Each Generation
Per capita at each generation is a hybrid approach that balances fairness among heirs and ensures each generation is treated equitably. This method involves two steps:
Divide the estate at the first generation level where there are surviving heirs.
Redistribute the shares of any deceased heirs equally among their descendants.
In Julia’s case, if Arthur and Ben die before her, Catherine gets 1/3, and the remaining 2/3 is split evenly among the four grandchildren, because they are in the same generation.
Per capita at each generation is a popular method of property distribution because it provides equal shares to heirs of the same generation.
Distribution of Trust Assets to Beneficiaries
These distribution methods can also apply to trusts. Trusts are a flexible estate planning tool that offer greater control over the timing and manner of asset distribution. By detailing the distribution method in the trust document, the grantor can ensure the assets are allocated according to their specific estate planning goals.
How to Choose the Right Property Distribution Method
Selecting the right distribution method depends on your circumstances and wishes. Consulting with an estate planning attorney is highly recommended to navigate the legal implications and choose the method that best aligns with your goals. One incorrect decision can significantly impact how your estate is distributed if a beneficiary predeceases you.
Here are some considerations when choosing a distribution method:
Family Dynamics: Understanding family dynamics can help prevent conflicts. Per stirpes respects family branches, while per capita ensures equal treatment of all descendants.
Heir Needs: Consider the financial needs of your heirs. Unequal distribution can provide more support to those who need it.
Estate Size and Complexity: Larger or more complex estates might benefit from the precision of per capita at each generation to ensure equitable distribution across generations.
Conclusion
Understanding the different methods of property distribution upon death is crucial for effective estate planning. Per stirpes, per capita, and per capita at each generation each offer unique benefits, depending on your estate’s circumstances and goals. Additionally, deciding between equal and unequal distribution can further ensure that the estate is divided in a way that respects your wishes and meets your heirs' needs. By carefully considering these methods and working with professionals, you can create an estate plan that provides clarity and fairness for your loved ones.
If you’re looking for tax-efficient strategies to transfer your wealth to heirs and charities, feel free to book an estate clarity meeting with us.
Comments