Quick Answer
Beneficiary designations on retirement, insurance, and TOD/POD accounts generally override a will or trust, though a qualified plan's current spouse can have priority absent written consent. Per stirpes sends a deceased beneficiary's share to their own descendants; per capita redistributes it among the survivors, and per capita is generally the default unless per stirpes is affirmatively elected.
Beneficiary designations determine who receives assets from accounts, insurance policies, and retirement plans when the owner dies. Understanding the basics and the per stirpes vs. per capita distinction is critical for the exam.
What Are the Basics of a Beneficiary Designation?
- 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 generally 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, with a spousal exception on qualified plans. A beneficiary designation on a retirement account or insurance policy generally takes priority over a will. If a divorced person forgets to update their 401(k) beneficiary, the ex-spouse may still receive the assets, unless the plan is a qualified plan subject to the ERISA/Internal Revenue Code (IRC) joint-and-survivor annuity rules. For those plans, a current spouse has priority over the name on file unless that spouse has consented in writing to another beneficiary, so a remarried client's stale form naming an ex-spouse does not automatically control.
How Do Per Stirpes and Per Capita Differ?
| Method | How it works | If a beneficiary predeceases |
|---|---|---|
| Per stirpes | By branch of family tree | Deceased beneficiary's share goes down to their descendants |
| Per capita | By head count among living | Deceased beneficiary's share is redistributed equally among remaining living beneficiaries |
How Does a Per Stirpes Distribution Work?
A widow has three children and designates them equally as beneficiaries per stirpes:
- Alice: alive
- Bob: alive
- Charlie: predeceased, left 2 grandchildren
Distribution:
- Alice receives 1/3
- Bob receives 1/3
- Grandchild 1 receives 1/6 (half of Charlie's 1/3)
- Grandchild 2 receives 1/6 (half of Charlie'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
- Know how to calculate distributions when a beneficiary predeceases.
- Per stirpes vs per capita is about the grandchildren. Under per stirpes, the client's grandchildren (Charlie's children) each get 1/6. Under per capita, they get nothing.
How Does a Per Capita Distribution Work?
Same scenario, but designated per capita:
Distribution:
- Alice receives 1/2
- Bob receives 1/2
- Grandchildren receive nothing (their parent's share is redistributed)
What Other Per Stirpes / Per Capita Rules Should You Know?
- Per capita is generally the default when no election is made. Per stirpes has to be affirmatively elected. This is the answer the exam is looking for, and the two bullets below explain where that default actually comes from.
- For TOD/POD securities registrations, the Uniform TOD Security Registration Act itself does not set a per capita or per stirpes default; it authorizes the registering entity (the brokerage or transfer agent) to set terms and conditions for how a predeceased beneficiary's share is handled. In practice, registering entities typically divide the share equally among the surviving named beneficiaries (a per capita-like outcome) unless the registration adds a per stirpes substitution, shown as "LDPS" (lineal descendants per stirpes)
- For retirement accounts (IRAs, 401(k)s), life insurance, and annuities, the default method and whether per stirpes is even offered are set by the plan document or insurance contract, not by the TOD Act; confirm the specific plan or contract rather than assuming it matches the TOD registering entity's default
What Should You Check on Exam Day?
- Remember beneficiary designations generally override a will or trust, except that a qualified retirement plan's current spouse can have priority absent written consent.
- Distinguish primary from contingent (secondary) beneficiaries.
- Apply per stirpes correctly: a deceased beneficiary's share flows down to their own descendants, not to the other named beneficiaries.
- Apply per capita correctly: a deceased beneficiary's share is redistributed among the surviving named beneficiaries. The deceased beneficiary's descendants receive none of that redistributed share (though a descendant separately named as a beneficiary in their own right still takes their own share).
- Remember per capita is generally the default when no election is made, and per stirpes must be affirmatively elected. In practice that default comes from the registering entity's or the plan's own terms, since the Uniform TOD Security Registration Act authorizes those terms rather than setting a default itself.