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What Happens With Split Beneficiaries

On Behalf of | Nov 8, 2019 | Estate Planning |

During the estate planning process, you will be asked to name one or more beneficiaries. Often, you’re asked for three tiers of beneficiaries: primary, secondary, and a final level in case of the worst case scenario. But what happens when a beneficiary is deceased or disclaims? Let’s look at this in further detail.

Split Beneficiaries

Beyond naming one beneficiary for each tier, it’s possible to name multiple beneficiaries and split the bequest per capita or per stirpes. We’ve discussed the difference between per capita and per stirpes before, but a quick recap is as follows:

  • Per Capita: Latin term meaning “by head”. In this case, the bequest is granted per person and if that individual is deceased at the time of the distribution or disclaims their share, the bequest does not pass on to that individual’s children or grandchildren.
  • Per Stirpes: Latin term meaning “by branch”. This means that the beneficiary’s successors will inherit an amount equal to what the beneficiary would have received had they not already passed by the time of the distribution.

Because estate planning is often done at specific life events, it’s not uncommon for a primary beneficiary to have passed before the decedent and the estate plans had not been updated to reflect a new beneficiary. Hence the need for multiple tiers.

You can, however, name multiple people or organizations in the same tier and the distribution will be either an even split between the named parties or will follow the distribution as described. For example, Sally and Bill may both be secondary beneficiaries, but Bill is to receive 30 percent and Sally is to receive the remainder.

Should one of the beneficiaries in the same tier pass on before distribution, their share would follow the rules as laid out by per capita or per stirpes. However, if a beneficiary were to disclaim their share, often the share would be granted to the other beneficiaries of the same tier. The disclaimed share would not be passed to the secondary or tertiary beneficiary. If all beneficiaries of the same tier were to disclaim the assets, then the distribution would move to the next tier.

There are no limits to the number of beneficiaries you can have in the same tier. You could name four primary beneficiaries and only one secondary; one primary and multiple secondaries; or one primary, one secondary, and multiple tertiary. It’s common for the tertiary level to be charities or organizations the decedent wanted to contribute to, and you can name more than one with specific splits of the estate as desired.

The Importance of Three Tiers

You may be thinking that you can’t think of enough people to whom you would want to leave your estate to fill three tiers. It’s a common concern. Many people choose children, parents, siblings, or extended family to fill the three tiers, followed by charities, friends, and other organizations or parties. Keep in mind that your beneficiaries do not have to be related to you; if you have a small family or no remaining family, you can choose close friends or charities instead.

It’s important to name at least two tiers, but at Simpson Law, we ask for three. This is because there is a possibility, however slim, that there could be a common family accident or catastrophe that results in both the primary and secondary tiers being passed on. Alternately, both your primary and secondary could disclaim their bequests due to a variety of reasons, and your estate would need to go to someone else in that case.

Percentages vs. Specific Amounts

You may have noticed that we use percentages in the examples above. Often the language used is something similar to “10% or $5,000, whichever is less”, with obvious variations in numbers and amounts as needed. We do this because naming a specific amount to bequeath someone may seem like a good idea, but it’s possible that by the time we arrive at a distribution, sometimes a decade or more after the estate plans were created, the estate may not have that much left to distribute. Using percentages instead of a specific number, or crafted using language such as what we described above, allows for this possibility and allows for a beneficiary to still receive something from the estate.

Questions? Be sure to talk to an estate planning professional about all of your options.