Beneficiary Designation
Beneficiary designations determine who receives assets from accounts, insurance policies, and retirement plans when the owner dies. Understanding distribution methods, especially per stirpes, is critical for the exam.
Per Stirpes vs Per Capita
| Method | How it works | If a beneficiary predeceases |
|---|---|---|
| Per stirpes | By branch of family tree | Deceased beneficiary's share goes to their children |
| Per capita | By head count among living | Deceased beneficiary's share is redistributed equally among remaining living beneficiaries |
Per Stirpes Example
A widow has three children and designates them equally as beneficiaries per stirpes:
- Child A: alive
- Child B: alive
- Child C: predeceased, left 2 grandchildren
Distribution:
- Child A receives 1/3
- Child B receives 1/3
- Grandchild 1 receives 1/6 (half of Child C's 1/3)
- Grandchild 2 receives 1/6 (half of Child C's 1/3)
Think of it this way: Per stirpes means "by the branch." Each branch of the family tree gets its share, even if the original beneficiary has died. The deceased child's portion flows down to their own children.
Exam Tip: Gotchas
- Per stirpes is the most frequently tested distribution method. Know how to calculate distributions when a beneficiary predeceases.
- Per stirpes vs per capita is about the grandchildren. Under per stirpes, Child C's grandchildren each get 1/6. Under per capita, they get nothing.
Per Capita Example
Same scenario, but designated per capita:
Distribution:
- Child A receives 1/2
- Child B receives 1/2
- Grandchildren receive nothing (their parent's share is redistributed)
Beneficiary Designation Basics
- Named on retirement accounts (Individual Retirement Accounts (IRAs), 401(k)s), life insurance, annuities, transfer on death (TOD) / pay on death (POD) accounts
- Primary beneficiary - first in line to receive assets
- Contingent (secondary) beneficiary - receives assets only if the primary beneficiary predeceases the account owner
- Beneficiary designations override the terms of a will or trust
- An investment adviser representative (IAR) should review beneficiary designations regularly, especially after marriage, divorce, birth, or death
Exam Tip: Gotchas
- Beneficiary designations override wills. A beneficiary designation on a retirement account or insurance policy takes priority over a will. If a divorced person forgets to update their 401(k) beneficiary, the ex-spouse may still receive the assets.
Additional Per Stirpes / Per Capita Rules
- Per capita is generally the default if no election is made
- Some employer plans (e.g., 401(k)s) may not support per stirpes designations; confirm with the plan