Per Stirpes or Pro Rata? You probably want Per Stirpes

Per Stirpes or Pro Rata? You probably want Per Stirpes

Periodically checking and updating beneficiary designations on retirement accounts and life insurance is prudent. The next time you navigate the online portal or the old school paper form to write in your updated beneficiary selection, look a little harder at some options you may have previously overlooked. Often, the beneficiary selection is paired with a radio button (online) or a checkbox (paper) that allows you to choose if the named beneficiary’s distribution is per stirpes or pro rata. Which should you choose?

First, what are the options? You will have the choice between per stirpes or pro rata.  Both phrases are Latin and used to reflect your wishes in the event that a named beneficiary is not then living (predeceased the asset owner). Per stirpes would direct that the deceased beneficiary’s designated share would pass equally to the decedent’s children (split equally). Pro rata directs that the deceased beneficiary’s share be cancelled and instead split among the remaining named beneficiaries.

Let’s use an example to highlight the different options available. Assume a married couple (Stan and Cheryl) with two kids (Jane and Phil) who both have three children (so six total grandchildren). Stan might then select beneficiaries on his $150k Individual Retirement Account (IRA) as follows: his wife (Cheryl) as the primary beneficiary and his two children (Jane and Phil) as the contingent beneficiaries, each receiving half of the total. Assume then that Stan, Cheryl and Jane are in a devastating car accident that kills all three of them. Here is where the selection made on the beneficiary designation paperwork becomes vital as it determines where the $150k asset is distributed. In the event Stan chose per stirpes, then 50% of the IRA (or $75k) would go to the surviving child, Phil. The remaining $75k would go to Jane’s children split three ways ($25k each). If instead, Stan selected pro rata, then the amount going to Jane would be forfeit and the entirety of the account ($150k) would be distributed to the only surviving child, Phil.

I have had the opportunity to work with many grandparents contemplating this option. The vast majority usually end up choosing the per stirpes option since choosing pro rata would have the effect of disinheriting the grandchildren left without a parent.

Our legal default options are often driven by cultural values and attitudes. Those same cultural values and attitudes can change from state to state, but more significantly from country to country. One can imagine the default inheritance rules being much different in the United States (for example) than countries like Saudi Arabia or Senegal. Here in Washington State, the default rule is generally per stirpes for distributions to family members for both testamentary gifts (via a will) as well as for those that pass without a will (intestacy). RCW 11.12.110 and RCW 11.04.015. However, be aware that default rules for the custodians of the asset (retirement plan or life insurance companies), with whom beneficiary designations are made, might have markedly different default rules.

Sometimes there’s good reason to choose pro rata over per stirpes. That is, sometimes the grandparent doesn’t want assets going to some or all grandchildren. And that’s okay. It’s the grandparent’s decision after all. Still, my anecdotal evidence suggests again that selecting per stirpes is much more popular for most grandparents.

As the grandparent ponders all the “what if” scenarios when deciding which option to make, sometimes they might wonder whether a child’s spouse should inherit the assets instead of the grandchildren in the event of the child’s death. That can certainly be the chosen option. But, as the grandparent usually has the overriding goal of providing for the beloved grandchildren, a gift instead to the surviving spouse can possibly present a challenge. If the asset is given to a surviving spouse, that same spouse might later remarry and gain additional children through marriage or by birth resulting in the potential for different priorities for the surviving spouse and the inherited assets than the grandparent intended.

Life changes happen and beneficiary designations should be reviewed regularly. Luckily, updating beneficiary designations is easy. As a cautionary note, one should never rely on default rules. Naming the exact beneficiary designations desired is always best as there can be specific tax benefits versus relying on default distribution rules.


The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual or entity. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Cornerstone Wealth Strategies, Inc., a registered investment advisor and separate entity from LPL Financial.

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