Asset Distribution

What Is Asset Distribution?

When creating an estate plan, the main decision is how your assets will be distributed after you pass away. Understanding “per stirpes” and “per capita” distribution is key to that decision.

The terms “per stirpes” and “per capita” become important when your descendants include children and grandchildren. In a will, these terms are often written as “I leave my [fill in the blank] to my descendants, per stirpes (or per capita).”

Per Stirpes

Distributing your assets per stirpes (sometimes called “by right of representation”) means that your assets will be divided evenly among your children, but if one of your children predeceases you, their children (your grandchildren) will inherit their parent’s share. For example, Connie has three children, Cara, Russ, and Susan. When Connie dies, Cara, Russ, and Susan each inherit a one-third share of Connie’s estate. However, if Susan dies before Connie, Susan’s two children, Gabby and Austin, will inherit Susan’s one-third share. The distribution would be: One-third to Cara, one-third to Russ, one-sixth to Gabby, and one-sixth to Austin.

Generally, the terms per stirpes and “by right of representation” are used interchangeably. However, there is a variation on “right of representation,” which is used in some states if two or more children predecease you. In that situation, suppose in addition to Susan, Cara also dies before you, leaving three children of her own, Madison, Darcy, and Anya. Under regular per stirpes distribution, Madison, Darcy, and Anya would split Cara’s one-third share while Gabby and Austin split Susan’s one-third share. Under the variation, all of the grandchildren would inherit an equal amount. In that situation, Russ would receive one-third while Gabby, Austin, Madison, Darcy, and Anya each equally divide the remaining two-thirds.

Per Capita

When you distribute your assets per capita and a child predeceases you, your living children and grandchildren will inherit equally. So, in the first scenario above where daughter Susan dies, leaving grandchildren Gabby and Austin, Gabby and Austin would inherit an equal share to children Cara and Russ. The distribution would be: one-fourth to Cara, one-fourth to Russ, one-fourth to Gabby, and one-fourth to Austin.

These terms can make a big difference in how an estate is distributed, and states have differences in how they interpret the terms. Make sure your property is being distributed the way that you want by consulting with your attorney.

Can I Use POD or TOD Accounts?

Probate is the process through which a court determines how to distribute property after an individual dies. Some assets are distributed to heirs by the court (probate assets) and some assets bypass the court process and go directly to beneficiaries (non-probate assets).  With POD and TOD accounts, the account owner names a beneficiary (or beneficiaries) to whom the account assets are to pass when the owner dies.  Generally all that is required to get the money or control of the account is for a beneficiary to show the bank manager or the brokerage firm an original death certificate.  The funds pass outside of probate, meaning that the beneficiaries can receive the money quickly without the involvement of the probate court.  The account assets also receive a “step-up” in basis when the original owner passes away, meaning that no capital gains tax should be due if investments are liquidated in order to be transferred.

Who Has Access?

Only the account owner has access to the assets while alive; the named beneficiaries have no control over the account, and the owner can change beneficiaries at any time, if competent to do so.  If the named beneficiary predeceases the account owner, then the assets are distributed to the remaining beneficiaries or to successor beneficiaries, depending on what the owner writes on the beneficiary designation form or online.  If there is only one beneficiary and he or she predeceases the owner, and the owner makes no subsequent changes to the beneficiary designation, the assets go into the account owner’s probate estate.

Limitations and Issues

Receiving assets could be a problem for certain beneficiaries, such as a child with special needs who depends on Medicaid and other public benefits.  If the account amount is large enough, it could be advisable to do special needs planning to avoid the assets interfering with the receipt of public benefits.

Also, some attorneys discourage passing assets through accounts like these for the simple reason that people sometimes forget about the accounts, and their existence can confuse an individual’s estate plan.  For example, the will may say that everything should be distributed equally to the account owner’s three children, but the POD or TOD account passes assets to only one child, creating unequal shares among the children.  If avoiding probate is the goal, it may be better to put all assets into one revocable trust that clearly states who should get what.  But these potential problems are much less of an issue if the estate is a simple one – for example, one surviving parent with only one child.