What is the Difference Between Per Capita and Per Stirpes?

OOne of the more confusing issues that arise in estate planning issue is the difference in how assets are distributed to a group of beneficiaries. It is a concern whether the asset is being distributed by intestacy, the language used in your estate planning documents, or your beneficiary designation accounts. Assets are distributed to a class, known as a group of beneficiaries, in two ways main ways: per capita or per stirpes. There are also some derivations of these two ways, which to further complicate the matter. Depending on the distribution method used, a member of a class may receive a different percentage of the estate from another member.

The most popular distribution method used is per stirpes. Per stirpes is Latin for "by roots." In other words it means by representation. A decedent's estate would be distributed per stirpes if each branch of the family is to receive an equal share of an estate. If one heir predeceases the decedent, the share that would have been given to the predeceased heir is distributed among the heir's issue in equal shares. If the predeceased heir is not survived by issue, then the surviving members of that class typically would receive equal shares of that predeceased heir's share of the estate. This method is the most common because it covers all of the bases in the typical family situation. This way you don't have to run to see your estate planning attorney each time a child or other beneficiary predeceases you.

Maybe a couple of examples will help.

Example 1. Xavier died with $100,000 estate. His wife predeceases him. He had four children - Ann, Bart, Cal and Dave. Bart, Cal, Dave are still living at the time of Xavier's death. Ann predeceased Xavier but had two children, Fiona and Gene, both are still living. Bart does not have any children. Cal has children Hector and Joyce. Dave has a child named Icarus. Under per stirpes, Bart, Cal and Dave will each receive one-fourth of the estate i.e. $25,000. Fiona and Gene, the two grandchildren will share equally in one-fourth of Xavier's estate, the share Ann would have taken if she was still alive. Each receives $12,500. Hector, Joyce and Icarus will receive nothing.

Example 2. Let's change the example. Same facts, except Ann and Dave predecease Xavier. Under per stirpes, Bart and Cal receive one-fourth of Xavier's estate, or $25,000. Fiona and Gene split Ann's share to each receive $12,500. Icarus steps up and receives Dave's one-fourth share of Xavier's estate, or $25,000. It is important to point out that Icarus's share is more that Fiona and Gene's though each are Xavier's grandchild.

The other main form of distribution method used is per capita. Per capita is a Latin term that translates into "by head," basically meaning "average per person." This means that if the beneficiaries are to share in a distribution "per capita," then all of the living members of the identified group will receive an equal share. Thus, in a strict per capita regime, if a member of the identified group is deceased, then a share won't be created for the deceased member and all of the shares of the other members will be increased accordingly. Again, it is easier to see with an example.

Example 3. Using the same basic facts as Example 1. Xavier's estate is $100,000 but he has a Will that says his assets will be distributed in a strict "per capita" manner. In a strict per capita regime, Bart, Cal and Dave each get one-third of the estate or $33,333.33 and fight over who get the penny. Ann's children are left out.

Most states don't like the outcome of issue not receiving an inheritance if the issue were stuck in the unlucky situation of having a parent (Ann in Example 3) predeceasing the grandparent/benefactor (Xavier). States using per capita have modified it to a "per capita with representation." Under this system, the estate is divided amongst the members of the 1st generation where there is at least 1 live taker.

Example 4. Using the same facts as Example 1 under per capital with representation leads to the following distribution. Xavier's children are the first generation with live takers. Xavier's estate is divided into quarters with Bart, Cal and Dave each getting a one-fourth share and Fiona and Gene splitting Ann's share to each receive one-eighth of Xavier's estate, or $12,500.

That is the same outcome under per stirpes. But, let's complication the situation a little with Example 5.

Example 5. In this example, all of Xavier's children have predeceased him. Fiona has also passed away survived by 4 children Tom, Dick, Harry and Sally. Hector has also passed away but he is survived by Paris and Ulysses. In this case, the first generation that has a live taker are Xavier's grandchildren - a predeceased Fiona and predeceased Hector and living Gene, Joyce and Icarus. This time the estate is divided into fifths. Gene, Joyce and Icarus each receive $20,000. Fiona's children each get one-quarter of one-fifth or $5,000. Hector's children, Paris and Ulysses each get $10,000 by splitting Hector's one-fifth share.

You will note in Example 5, Ann's branch of the family took two-fifths, or forty percent (40%) of Xavier's share while Cal and Dave's branch of the family each only took thirty percent (30%). Not quite equal. As with anything related to money, someone is going to complain. Thus, some states have come up with another form of per capita distribution called "per capita at each generation." Under this distribution method, each member of a generation who takes receives the same amount by pooling whatever drops to that generation, then dividing the pool among members of the same generation who are either alive or have surviving issue. The process is repeated if necessary until the entire estate is distributed.

Example 6. Same facts as Example 5. The estate is divided at the first generation with live takers. In this example, that is the grandchildren's generation. The estate is divided into fifths. Gene, Joyce and Icarus each take their one-fifth of the estate, or $20,000. The remaining two-fifths of the estate, $40,000, is pooled together and divided among Xavier's great-grandchildren - Tom, Dick, Harry, Sally, Paris and Ulysses. Xavier's great-grandchildren each receive $6,666.66 and can squabble over who gets the 1 penny.

As you can see, the distribution method utilized can greatly vary what ends up in someone's pockets. To further complicate the issue, these are the methods enacted by law. If you execute a Will, you can pick any of the above systems or even mix and match within your will, if you so choose. You would think passing out money would be easier?

Basics of Estate Planning: Estate Planning Tips When You Have Minor Children

In my July newsletter, I announced that my wife and I were blessed with our third child. During one of the late nights feeding our newborn, I realized that a good topic would be estate planning concerns that should be addressed when a new child comes into a family.

Many new parents become clients after the birth/adoption of their first child. Prior to being a parent, if one member of the couple passed away it would be tragic but in all likelihood the surviving member could move on after dealing with the grief. However, when a child is involved, the child relies completely on their parents for financial and emotional support. Sadly, 1 in 9 children lose a parent before that child turns 20ⁱ. See this Wall Street Journal article for more on this issue. That means there are steps, you should take when a child joins the family picture.

• Guardianship: Who will take care of your child? If you are married or in some form of permanent parental relationship and you pass away, the surviving parent generally becomes the legal guardian of the child. However, what happens if you and your spouse/partner both pass away? The first step is to ensure that you have completed some form of guardianship designation. You can designate a guardian in your Will or in some form of guardianship appointment document. Make sure the person that you appoint is comfortable with your decision and I'd suggest not using the Beastie Boy method of selecting a guardian. However, who you designate as guardian of your minor children, the Court will look at the "best interest" of the child before awarding guardianship. While your designation will warrant strong consideration, the Court may override your designation if the court feels it isn't in the child's best interest.



• Last Will and Testament/Trust. If you have a Will or Trust, it should be updated to reflect the new addition to your family.
  • First Child: If this is your first child, your previous Will likely had your spouse/partner as your primary beneficiary of your estate and a contingent beneficiary was some other loved one. You will need to update the contingent beneficiary to reflect that your child is the contingent beneficiary if your spouse/partner predeceased you. It is advisable to also insert some form of testamentary trust language into your Will. If you simply name your child as the heir and they are under 18, the child's inheritance will go into a custodial account until they are 18. Upon the child's 18th birthday, any remaining funds will be turned over to the child to do with as the child's wishes. Some will argue that is still a very young age for such financial responsibility. A testamentary trust will appoint someone to oversee the inheritance and turn it over to the child at a time that you see fit.
  • Additional Children: If this is an additional child, and you don't have a Will. What are you waiting for? If you have a Will, review your Will to make sure it as some form of pretermitted clause in the will. A pretermitted clause will ensures a child born after the signing of your Will is included as an heir to your estate. If it doesn't have that clause, you should update your Will with a codicil to include the new child and make sure a pretermitted clause is included to account for after born children.
  
  
• Beneficiary Designations. This is essentially the same issue as for your will. You need to make sure your beneficiary is correctly designated for your IRA, 401K, life insurance, Paid-on-Death ("POD") accounts, Transferred-on-Death ("TOD") accounts, etc. Typically, your primary beneficiary will be your spouse or partner. But, if this is your first child, you will likely have to alter your contingent beneficiaries to your child instead of from whomever you previously designated (I listed my sisters prior to the birth of my first child). Or, better yet, depending on the asset, you should designate some form of trust for your child. If this is not your first child, you need to make sure your designations incorporate all of your children. You can do this by listing some form of trust for the benefit of your children. Or, at a minimum, if you want to make sure all of your children are treated equally, you need to designate all of your children by name or state the contingent beneficiaries as "children, per stirpes."

Estate of the Month: Lauren Bacall v. Robin Williams - One Celebrity Gets it Right Another Likely Gets it Wrong.

Far and away my newsletter's most popular column is my take on the mistakes and error celebrities make in their estate plans. One of the reasons, I can provide insight into a celebrities estate issues is that the celebrity did not take one of the most basic steps with regard to their estate - creating a trust (see Elizabth Edwards, Walter Cronkite, Whitney Houston etc.) - thus, all the celebrities' information is publically available. In this, month's edition, I am will compare how two celebrities estate plan can demonstrate what the average person can learn from using a trust.

On August 11th and 12th, within the span of twenty-four hours, the cinematic world lost two of its greats. On August 11th, Robin Williams sadly succumbed to the severe depression he had been facing his entire life. Shortly, thereafter, on August 12th, esteemed actress Lauren Bacall died from a massive stroke at the age of 89.

Most people are intimately familiar with the work of Robin Williams. After rolling a one-off role as Mork from Ork on Happy Days into his own television series Mork & Mindy, the actor-comedian became a mainstay in cinema over the next 35 years. His film career included acclaimed work such as Good Morning, Vietnam (1987), Dead Poets Society (1989), Awakenings (1990), Aladdin(1992), Mrs. Doubtfire (1993), Jumanji (1995) and The Birdcage (1996). He earned won the Academy Award for Best Supporting Actor for his performance as therapist Dr. Sean Maguire in Good Will Hunting (1997). He was survived by a wife and three children from previous marriages.

Fewer people today are familiar with Bacall's classic work. She first appeared as a leading lady in the Humphrey Bogart film To Have and Have Not (1944). Her work with her husband Bogart is renowned in the film noir genre, with movies like The Big Sleep (1946), Dark Passage (1947), and Key Largo (1948). She had two children prior to Bogart's death in 1957 and had another child with second husband Jason Robards.

Williams had created several trusts including a real estate trust called "Domus Dulcis Domus Holding Trust." This is a latin phrase meaning "home sweet home." The Domus trust held his home residence in Tiburon, California and his Napa Valley mansion, named Villa Sorriso (translated to the Villa of Smiles), which rests on 653 acres. The total value of the properties gleamed from tax records approaches $35 million.

He also appears to have created a trust for his children. During divorce proceedings with Williams' second wife in 2009, Williams had a trust created for his three children as beneficiaries. This trust split their trust funds into three equal distributions for each of them, set to pay out when they reach ages 21, 25, and 30. Because this trust reportedly transfers the money to them whether Williams was alive or deceased, this was likely established as part of his divorce rather than purely for estate planning.

It is not known how much money was in this trust nor how much Williams' entire estate was worth and who else shared in it. The value of his assets, whether in trust or not, will only continue to grow because of income generated by ongoing royalties, earnings from new deals over his image and likeness, and future releases of his comedy material.

Compare that with Bacall. Her estate was listed at a very precise $26.6 million. Almost all of Bacall's estate will be split amongst her three children. But, there is more. She left $250,000 to two of her grandsons to be used for college expenses. She left $10,000 to be used to care for her dog, Sophia. (I guess she wasn't as generous as Leona Helmsley's dog getting $12 million). She left $15,000 to her maid and $20,000 to her household staffer. Bacall also requested that "my children respect my wish[es] to keep private certain personal letters, writings, diaries and other papers or memorabilia."

Notice all the information I can acquire with respect to Bacall's heirs compared to Williams' heirs simply by passing assets down through a will verses a trust. I didn't even have to work hard to get the information. I would have never known that she gave money to her assitant or housekeeper.

Now, how does that apply to the average person who doesn't have millions in their estate? Well, I deal with probate administration all the time, and you would be shocked at the calls I get from third parties seeking additional information on a decedent's asset, usually the real property. This arises because a will is public information and any related information is also public including addresses of real property owned, who is inheriting and how much an heir is receiving. That information needs to be provided to the probate court. Some trust information may leak out, especially for a celebrity. However, it makes much more sense, if you are worried about the privacy of your heirs, to use a trust. Bacall's estate provided vivid proof of how little privacy is afforded a will.

ⁱI will note there are some biological reasons for this statistic including the fact that men, can still procreate well into their senior years, see Tony Randall as a prime example driving up the age difference between a father and child. Likewise, when my newest child turns 19, I will 59. While 59 is approaching retirement age, medical issues start to arise around that age.