What happens if you leave your IRA to your children “per stirpes?”

When you name your children as the beneficiaries of your retirement account or life insurance policy, do you know what happens if one of them dies before you?  You very likely named your spouses as the beneficiary of your life insurance policies and retirement accounts, and named your children as contingent beneficiaries, with each child getting an equal share.

To select the per stirpes option, you may need to check a box on the form.

If one of the children dies before you, you might assume that the child’s share goes to his or her children (your grandchildren) rather than being divided among your other children (leaving those grandchildren get nothing), but how do you make sure that it works that way?

The critical thing to look for is the phrase “per stirpes.”  Per stirpes is a Latin term which translates as “by roots” that describe what happens if one of your beneficiaries dies before you.

As an example, let’s say that you have two children, Ann and Bob.  Ann has no children.  Bob has two children, Cathy and Carl, and Carl two daughters, Dawn and Denise.

If the beneficiary designation for you IRA names your children, per stirpes, and Bob dies before you do, Ann still gets her one-half share, but Bob’s one-half share is divided equally between his two children, Cathy and Carl.  If Carl had also died before you, his one-half of his father’s share is split between his two daughters.  Bob’s share goes down though his family like the roots of a tree, splitting at each generation.  As a result of all of this splitting, your IRA would pass one-half to Ann, one-quarter to Cathy, one-eighth to Dawn, and one-eighth to Denise.

To select the per stirpes option, you may need to check a box on the form.  Per stirpes may also be the company’s default option when there are multiple beneficiaries, so you don’t have to do anything to select it (look in the fine print on the form or in the agreement you signed with the company to see if it is the default).  If you don’t see per stirpes as an option and it’s not the default, what can you do?  You can simply write it in on the form.  Just add “or their issue, per stirpes” after the children’s names on the form, but be sure to double check that the company will accept the additional language.

While the example above is the generally accepted description of per stirpes, you should always check to be sure that the company hasn’t defined the term to result in a different distribution, such as Ann, Cathy, Dawn, and Denise each getting one-quarter of the distribution.  You may also see “by right of representation” instead of per stirpes on some forms.  While the two terms are generally used to mean the same thing, again, you should check the definitions.