Make Sure Beneficiaries Benefit How You Want

BOSTON ( TheStreet) -- Reviewing legal terms can be as exciting as watching paint dry, but when it comes to your estate plan, thoroughness trumps entertainment value. Despite the tediousness of the task, making the extra effort is well worth it and will help ensure that your hard-earned savings end up where you want them. 

Take, for example, the way in which you list beneficiary designations on your IRAs and qualified retirements plans. The beneficiary designations of these accounts are generally not governed by provisions of your will, so it's important that you review them regularly. If you have multiple beneficiaries, it's also essential to be familiar with the terms "per capita" and "per stirpes."

Determine your beneficiaries wrong and your grandchildren may get no money at all when you die -- or perhaps so much that you're shortchanging your children.

Per capita generally means your account will be divided among your primary beneficiaries in the percentages you allocate; should one of your primary beneficiaries predecease you, his or her remaining share will be divided equally among the successor beneficiaries. 

To illustrate, let's say you have three living children, each with three children of their own. When you pass, each child would get a third of the account value. If one of your children dies before you and you fail to make a change to your designations, though, his or her share would be re-directed equally between the two living children. They would get more than the original third, with nothing passing to the three grandchildren from your deceased child. 

With per capita, another option exists. You could specify that your IRA be divided "in equal shares per capita to my surviving descendants." In this case, if one of your children dies before you, the account would be allocated among five people when you pass: your two living children and the three grandchildren from your deceased child. Arguably, the two surviving children get shortchanged, essentially only getting a fifth of the inherited account, rather than the original third.

Consider a third option: per stirpes. In this scenario, you could leave instructions that you would like your IRA to be allocated "in equal shares per stirpes to your surviving descendants." Like per capita, the account would be divided equally to each of your three living children when you pass; if one of your children predeceases you, though, his or her share (a third of the account) basically would remain in tact and stay within the same family tree line. ("Stirpes" in fact, is a Latin derivation of "roots" or "branch"). Each of the surviving two children would get his or her original third and the other third would pass to the children of your deceased child to be divided equally.   

Unfortunately, while per stirpes is often preferable, many custodian agreements for IRAs and retirement accounts default to "per capita to the surviving beneficiaries," leaving it up to you to make the change when the account is open. In some instances, custodians even require account holders to draft their own addendum that is witnessed and signed, specifying the distribution instructions for beneficiaries. 

Failing to review the beneficiary designations of your retirement accounts on a regular basis could result in significant unintended consequences. While you could probably identify a million other things you'd rather do in your free time, spend the few minutes to make sure it's done right. Your loved ones will thank you in the end.     

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Greg Plechner is a CFP and a principal at Modera Wealth Management LLC, based in Westwood, N.J., and Boston and a member of NAPFA, the National Association of Personal Financial Advisors.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management. Nothing contained in this blog should be construed as personalized investment, financial planning or other advice, and there is no guarantee the views and opinions expressed herein will come to pass. Investing in the stock and bond markets involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be construed as a solicitation to buy or sell any security or engage in any particular investment strategy. Modera is an SEC-registered investment adviser. For more information about Modera, including registration status, fees and services, refer to the SEC or call (201) 768-4600.