Quick Answer
Beneficiary designations on retirement accounts, insurance, and TOD/POD accounts override a will or trust. Per stirpes sends a deceased beneficiary's share down to their own descendants; per capita redistributes it equally among the surviving beneficiaries instead, and per capita is the usual default when no election is made.
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 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.
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 if no election is made
- Some employer plans (e.g., 401(k)s) may not support per stirpes designations; confirm with the plan
What Should You Check on Exam Day?
- Remember beneficiary designations override a will or trust.
- 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 the default distribution method when no election is made, and some employer plans may not support per stirpes designations.