By Jack Owen, Jr. Esquire, CPA, Estate Planning Attorney and CPA, and Craig Kirsner, MBA, President of Stuart Estate Planning Wealth Advisors
This old Latin term means keeping your assets in your family bloodline … or does it?
Keeping wealth in the family is a priority for those who’ve worked hard to build it. But you can never be too careful when it comes to the distribution of your assets. The presumption that our direct heirs will outlive us isn’t always the case, nor are your assets automatically going to go to your grandchildren.
The Latin “per stirpes” (meaning ‘by roots’ or ‘by branch’) clause in estate planning provides that assets are distributed to a deceased beneficiary’s children or grandchildren.
What many people fail to understand is that per stirpes isn’t a failsafe for distributing assets only to your family tree.
There are situations where its effects may be negated entirely, so it’s crucial to understand how proper estate planning could avoid those risks.
What people don’t realize is that if you leave your assets directly to your children, then per stirpes is only used on the day that the person dies. It’s on that day that they check to see if your children are alive, and if so, your assets would go directly to them that day. The problem is if that child dies the next day, or 20 years later, then those assets they inherited will pass by way of your children’s will, usually to their spouse, not your grandchildren.
An example of per stirpes in action
Let’s consider an example where a parent has two children. Presuming each of those children are named as beneficiaries in a will or trust, the parent’s assets will be split between them when the parent dies. Should either or both beneficiaries then pass away, the wealth will be distributed as per the instructions of the beneficiary’s own estate plans. Whoever inherits is also subject to those arrangements.
This means that when a decedent’s children die, there’s no guarantee that the grandchildren will inherit anything or that any wealth will remain in the family.
If we also presume that each child inherits half their parent’s assets but one child dies, all of the grandchildren will have that half distributed equally among them. So, for example: if $1 million is passed to two children but one dies before inheritance, the grandchild or grandchildren will inherit $500,000. A single grandchild would get the full amount, two would receive $250,000 each, and so forth.
This seems nice and neat. However, there may still be problems, even if the money stays in your bloodline.
The dangers of divorce and outdated beneficiaries
A key in estate planning is understanding the risk which divorce represents for the future of your family wealth. Current divorce rates mean that there is a 40-50% chance that your assets will be at least heavily depleted by legal fees your beneficiaries may incur. A clearly defined estate plan that’s designed to protect assets and assigns them to grandchildren, for example, can mitigate this risk.
It’s also very important to understand how beneficiary designations overrule the wishes of any will or trust. For example, imagine you had taken out a life insurance policy in the past and named a beneficiary at that time (such as a spouse, friend, or charity). Things change over time and perhaps you’ve soured on those past relationships or an individual has passed away. Even if your will or trust has been updated to reflect your new wishes, your old policy might still have those now defunct names listed as beneficiaries.
This means those past beneficiary designation provisions will be honored because they weren’t updated – which could disenfranchise your currently-favored beneficiaries. Even with per stirpes language in your estate plan, those old beneficiary designations would take priority over your family tree. This is one of the reasons why a thorough estate plan makes sure all of your wishes remain updated to be as current as possible, across all of your documents.
Inheriting through per stirpes can be a risk by itself
Even a case of a grandchild successfully inheriting per stirpes could pose a risk if they are suddenly wealthy at 18 or 21 years old. It’s great to be young, but it’s not an age famous for financial responsibility. These young individuals may make poor decisions on how to maximize their inheritance. As mentioned above, should your direct heir like a son or daughter survive you and then pass on, the assets you left them will be distributed as per their wishes and not your own. If they haven’t made provisions for their children to inherit the money at a responsible age, the wealth could be squandered.
What to do when per stirpes can’t guarantee an airtight estate plan that ensures your assets are distributed properly? One answer is a multi-generational trust that’s designed to protect your children and grandchildren from the dangers of divorce, creditors, lawsuits, and even themselves.
How a dynasty trust protects your family’s future
A dynasty trust allows you to grant control to your children over the assets you leave them and the income from the trust (including your I.R.A), should you so elect. No courts need to be involved because a properly set up and funded dynasty trust allows you to avoid the long and expensive probate process. This potentially frees you of high legal fees which can drain up to 5% of the estate’s value. Your assets can go straight to your family with very little delay in distribution. A dynasty trust can also ensure assets don’t go to in-laws whom you don’t particularly like or trust, ensuring that they stay within your bloodline.
Dynasty trusts are revocable (meaning you can change them at any time while you are alive) and their provisions for distribution can be tailored to suit your situation. Concerned a grandchild may inherit at too young an age? Simply design your trust to allow distribution access for specific reasons or at pre-defined times such as starting a business, buying a car or a home, or going to college. This is just one example of the many, many ways that these estate plans give you control over your legacy.
In short, dynasty trusts give you the peace of mind that per stirpes can only provide some of the time.
To learn more about proper investment and estate planning, come to one of our upcoming dinner workshops at Ruth’s Chris or Abe & Louie’s steakhouse in Boca Raton or Fort Lauderdale. Call 1-800-807-5558 or email assist@stuartplanning.com for details or to RSVP.
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Stuart Estate Planning Wealth Advisors have not affiliated companies. Stuart Estate Planning Wealth Advisors is an independent financial services firm that creates retirement strategies using a variety of investment and insurance products. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Any references to safety and security generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Stuart Estate Planning Wealth Advisors does not offer legal advice. Jack Owen, Jr., Esq., CPA is not affiliated with Stuart Estate Planning Wealth Advisors. Jack Owen, Jr. Esq. office location: 4500 PGA Blvd., Suite 200, Palm Beach Gardens, Florida 33418. 690566