If you’re reading this, it’s safe to say that you’re still kicking and breathing. But, that won’t last forever. To quote social media guru Gary Vaynerchuk:
You’re gonna die.
As financial planners, we think that you should plan for this occasion: dying. As heartless as that may sound, consider that it’s the opposite. Planning for your death is incredibly thoughtful; doing so will help to minimize stress for your family.
One important part of this planning is setting up your beneficiary designations. What are beneficiary designations? Beneficiary designations determine who gets your retirement account money when you pass away.
Your retirement accounts include your IRA accounts and your employer-sponsored retirement plans. This means traditional and Roth IRAs, SIMPLE IRAs, SEP IRAs, traditional and Roth 401(k)’s, traditional and Roth 403(b)’s, traditional and Roth 457’s, 401(a) accounts, and more.
Determining Beneficiaries for your IRA
Most married people opt for their spouse as their primary beneficiary. If you do that, it means your spouse gets the money in your retirement accounts when you die. This scenario is so commonplace that, if you are married and you don’t assign your spouse as the primary beneficiary for your retirement accounts, you’ll likely need some special paperwork to make that possible; your spouse may need to sign a notarized document that says he/she is okay with not being the primary beneficiary on your retirement accounts.
Also, you’ll likely need to set up contingent beneficiaries for your retirement accounts. If you’re married with kids, your contingent beneficiaries may be your children. If your primary beneficiary passes away before you do, your money will go to your contingent beneficiaries.
Per Stirpes Defined
A final consideration when setting up your beneficiary designations is whether to elect per stirpes. Although it sounds strange (it’s a Latin legal term), per stirpes is fairly easy to understand. Per stirpes means that if a beneficiary dies before you die, the deceased beneficiary’s children inherit your money.
Consider a grandmother, daughter and granddaughter. In most cases, when the grandmother dies, her money goes to her daughter. If the daughter dies before the grandmother, however, the money earmarked for the daughter would normally go elsewhere. But, if the grandmother elects per stirpes, (and her daughter dies before her), the money would go straight to the granddaughter. This is possible with a per stirpes election.
Should I Use Per Stirpes for My Beneficiary Designations?
If you’re setting up the beneficiary designations on your retirement accounts, you will be faced with this very question. Should you use per stirpes? The right answer for you depends on several factors.
For example, do you want your money to pass to your beneficiary’s heirs? It’s possible this was your plan all along. But, it’s also possible you don’t want your grandchildren to get access to your money.
One factor to consider is the age of the heirs who would receive the money via per stirpes. For example, if you’re looking at passing assets to your children (and your grandchildren via per stirpes), consider the grandchildren’s ages. Are the grandchildren minors? Would the grandchildren be able to manage your assets on their own? These are not easy questions to answer. This is why you may want to consult with a qualified estate attorney on choosing your beneficiary designations.
Consider Per Stirpes for Beneficiary Designations
You’ll likely be staring at the little per stirpes checkbox when you set up your next 401(k) or IRA account. Depending upon your particular circumstances, it may be an easy or difficult box to check.
If you’re assigning your children as your primary beneficiary and their children (your grandchildren) are well into their 30s (and capable of managing their own finances), then checking the per stirpes box may be an easy decision. If your grandchildren are minors, then working with an estate planning attorney to design a trust may be a better plan.