Per Stirpes vs. Per Capita Meaning
Two terms which are very commonly used in estate planning are per stirpes and per capita.
Both of which are Latin terms that describe how property associated with an estate should be distributed among the beneficiaries of the estate.
The difference between the two is quite significant, however, they are of equal importance. If you are planning for your family after you’re no longer around, you will need to be familiar with the nuances of the phrases per stirpes and per capita.
Per stirpes is a term which means taking by representation or by class.
In the context of estate planning, it means that beneficiaries who have the closest relationship to the person providing the distribution, will each receive equal shares of that person’s estate upon death. In situations where any member in the class of beneficiaries closest to the decedent happens to die first (but has surviving descendants), those descendants inherit the beneficiary’s share and acquire it through “representation.”
While the legal language might seem a little bit confusing, it’s probably easiest to illustrate what happens in a per stirpes situation with some examples.
For the first example, let’s assume that you have three children, Ken, Bob, and Tim.
An example of proper estate planning
Ken has two children, Taylor and Leanne. Bob, Tim, Taylor, and Leanne have no descendants, respectively. A will which states that your property should be distributed to your living descendants, per stirpes, would then have the following consequences:
- Ken, Bob, and Tim each receive 1/3 share of your will.
- Taylor and Leanne will receive nothing at all.
In a situation where Ken has pre-deceased you, will distribution is conducted as follows:
- Bob and Tim would each receive 1/3 share of your estate.
- Taylor and Leanne each receive 1/6 share of your estate through “representation.”
- Because they receive this inheritance by representing what Ken would have received, his surviving two children are now entitled to Ken’s share of the estate.
In a situation where Ken, Bob, Taylor, and Leanne have all survived you, but Tim has died off, the following occurs:
- Ken and Bob will each receive 1/2 of your estate, and there is no share for Tim. This is because he has no descendants and he predeceased you. Thus his share goes to waste, or is given away to non-beneficiaries.
- This is a very unlikely situation, and very unfortunate for the remaining heirs if it occurs accidentally.
- In this scenario, Taylor and Leanne would receive nothing.
Per stirpes is probably the more commonly used of the two estate planning strategies.
This is because it covers more of the typical family scenarios.
Further, it manages to stay faithful to the distributor’s wishes, even when direct descendants are no longer alive. The estate is still set up to benefit the interests of the next generation of direct descendants, rather than third parties.
The literal meaning of per capita means to take by total headcount or by the total number of people involved.
In the context of estate planning, it means that all of the living members in an inheritance group receive an equal share of your estate during its distribution.
If any member of that group should die prior to the distribution, the will be no share for that member. Consequently, the shares of the surviving family members increase.
To illustrate the differences between per stirpes vs. per capita, we can look at a few examples as before.
Using the same assumptions that we started out with before in the per stirpes illustrations, we’ll paint a clear picture if the difference between the two forms of estate distribution. In a situation where Ken, Bob, Tim, Leanne, and Taylor have all survived the distributor:
- Each receives 1/5 share of the estate, under per capita distribution.
- If Ken has died off prior to distribution, that means that Bob, Tim, Leanne, and Taylor would each then receive 1/4 share of the estate.
In a situation where Ken and Bob have predeceased you, but Tim, Leanne, and Taylor have all survived:
- Tim, Leanne, and Taylor each receive 1/3 share of the estate.
This type of distribution pays no attention to the level of relatedness of the beneficiary if they are your direct descendant.
Per Capita vs. Per Stirpes in Context
As stated previously, it is more common for estate planners to use the per stirpes designation.
This is simply because it aligns with the distributor’s wishes in most cases.
However, it’s certainly possible to adopt the per capita distribution strategy instead of the former.
Though in this case, you’ll have to be sure that your estate planning accounts for any generation-skipping shares. Watch out for these. They might accidentally create undesired transfers of your wealth and excessive taxes as a consequence of using this approach.
However, we all have family members who are savvier than others.
This approach is particularly beneficial when you trust the business savvy of specific grandchildren more than you trust your own children.
Let’s say that Joe and Sarah pass down 1,500 shares of business stock via a generation-skipping trust through per stirpes distribution.
In doing this, they pass down 500 shares to each of their children’s descendants. There are three children. The first two children yield four grandchildren in total, so each grandchild receives 250 shares.
The third child is an alcoholic that has five children by five different mothers. Each of the five grandchildren receives 100 shares.
This is due to the distribution by class.
Giving your estate to desired relatives
The children receive other assets through inheritance, but all 1500 shares go to the grandchildren through the generation-skipping trust. The children don’t receive anything regarding the business stocks. However, they may receive other forms of inheritance.
Note that in the above example, if Joe and Sarah distribute their estate on a per capita basis, the 1,500 shares are split differently.
In other words, the main difference between the distribution styles is the distribution by class (per stirpes) versus the distribution by the total number of heirs (per capita).
If Joe and Sarah distribute on a per capita basis, then the nine grandchildren receive approximately 167 shares each.
Unfortunately, when you do this through a per capita distribution or any other type of direct distribution – while your own children are still living – it will trigger a generation-skipping transfer tax onto the shares received by your grandchildren and great-grandchildren.
This can mean losing up to 40% of your wealth in the process of passing it down.
Avoid an extremely costly tax burden on beneficiaries by defining your intentions up front. Talk to your estate planning attorney about the possible taxes your estate will incur well in advance. Be sure to have a good understanding of per stirpes vs. per capita distribution, so that this kind of costly tax situation can be avoided.
Implications of Different Types of Estate Distribution
One of the practical implications of using per capita estate planning involves leaving direct shares to grandchildren and great-grandchildren.
This is crucial in maintaining the integrity of your wealth through diversification.
In other words, just like it’s advisable to diversify your assets while living – it’s advisable to diversify your assets when you die.
Here we’ll share two examples of failure to diversify assets and the consequences that followed.
Example 1 – A judge’s children lose everything.
About 4 years ago, one family lost their patriarch when he suddenly developed lung disease.
He was a retired judge, with four children and eight grandchildren.
Two of his children are single mothers with four boys each.
The other two children have no heirs, and they’re in their 50s.
The decedent was the patriarch of the family and cushioned the grandchildren through childhood. It’s as if they were his own sons.
Unfortunately, instead of planning for his grandchildren, his entire estate distributes evenly amongst his children – even if they don’t have descendants.
Over the course of two years, the children made frivolous purchases and bad investments.
They’ve never had so much money in the bank.
They even created a scholarship and charity in the patriarch’s name. While his grandchildren (and great-grandchildren) struggle to make ends meet, outsider’s are benefitting from his life’s work.
In two years time, the judge’s children have essentially squandered the estate of their late father. As a result, the family as a whole is back to square one.
Example 2 – Paid-for college & stock yields insurmountable debt 2 generations later.
One woman, from Mississippi, was able to pay for her 5 children to attend college, as well as one of her brothers. She took the entire family on trips around the world, and she seemed to be the perfect “matriarch.”
When she died, she left stocks, homes, and trusts to her entire estate.
The five children went on to have families of their own, but they could not afford to send their own children to college.
This is because they never reinvested the money passed down, and continued to pull out money without adding more.
They did not re-invest on behalf of their own children.
Instead, they continued taking trips and pulling from their inherited stock accounts until the accounts were empty.
By the time the grandchildren had their own children, the family was once again, destitute.