Is your annuity beneficiary form set up the right way? Are you going to accidentally disinherit some of your family? The answer may surprise you.
It’s very easy for financial advisors to get caught up in all the complexities of exactly how something works to benefit our clients. I vividly remember enthusiastically explaining to my client our investing philosophy. I explained what prompted us to buy or sell a security in their portfolio. I explained what safety features we put into their portfolio to help protect the client from volatility in the stock market. I was really on a roll go over all these benefits!
Then, when I had to take a breath, the client jumped in and asked what was most important to him: “So I want to make sure my portfolio will go directly to my kids when I die. Can you make sure it does that?”
As a financial advisor beneficiary designations are something that is so basic that I know it’s going to be taken care of as the client and I go through the paperwork. So I know the client’s wishes on who inherits their money will be taken care of before they leave my office.
But as a client, (who doesn’t go through this process everyday) beneficiary designations on their portfolio and annuity are at the top of the list of important issues to get resolved. Nothing else matters until they know that will be taken care of according to their desires on who will inherit their annuity or investment portfolio.
And you know what? That makes perfect sense.
Annuity Beneficiary Mistakes
Unfortunately, people make mistakes on how they designate beneficiaries on their annuities. These mistakes can include:
- Forgetting to update their beneficiary forms after major life events (marriage, divorce, birth of child or grandchild)
- Assuming your will trumps your annuity beneficiary designation (it doesn’t matter who you designate in your will to inherit your annuity, it will be based on what your annuity beneficiary form says)
- Only having a primary beneficiary – You need a contingent beneficiary in case the primary dies before you
- Not understanding the Latin phrases “per stirpes” and “per capita”
Per Stirpes Vs Per Capita
Now, most people are going to designate their spouse as their primary beneficiary on their annuity. Not always, but most of the time this will be the case. But if your spouse is the primary beneficiary and dies before you do (or at the same time you do), that’s when you need to understand the “per stirpes” and “per capita” designations.
Per Stirpes is a Latin phrase that means “by branch.” And when they say “branch” they’re talking about your family tree. So if you put your son and daughter as 50% each beneficiaries with the “per stirpes” designation, if the son dies before you do, your annuity upon your death will go 50% to your daughter and 50% to the children of your son. In other words the money follows down the son’s “branch” so that your grandchildren from your son are not disinherited.
Per Capita is a Latin phrase that means “by head.” Typically, per capita divides your annuity among the surviving beneficiaries that you listed. Typically, if you just list your beneficiaries’ names only, you are by default doing a per capita designation. So in the first example, if your son and daughter are listed as beneficiaries (with no per stirpes designation) and the son dies before you do, then your daughter will receive 100% of the proceeds of your annuity upon your death. The children of your son would get nothing. Sorry, kids!
You may be surprised to hear this. You may have thought you had your annuity set up the right way. You may have had no idea that your current beneficiary designations could potentially disinherit some of your grandkids.
Let’s Look At Some Examples
A couple of examples will help illustrate this point.
So here’s the situation. A husband has an annuity. He has listed his wife as the primary beneficiary. He has their son and 2 daughters listed as contingent beneficiaries, each receiving 1/3. Their 3 children have kids of their own. How he wants his annuity distributed looks like this:
This means, if he dies his wife will get 100% of the annuity. If his wife dies before him then his 3 kids will each get 1/3 of the annuity’s value upon his death.
Assuming his wife dies before him (and he never updates his beneficiaries after her death), the way his annuity passes to his children could be drastically different depending on whether or not “per stirpes” was used. That’s why you need to know how this works even if you have designated your spouse as the primary beneficiary. If you both die at the same time you want to make sure you have it set up the right way to go to the contingent beneficiaries. In most cases these will be your kids.
Scenario #1 – Co-Beneficiaries
In this scenario the man’s wife pre-deceases him. The annuity will pass to the contingent beneficiaries (his 3 children). However, his 2 daughters have pre-deceased him also, leaving just the son. The beneficiary form had just listed the children’s names only. No “per stirpes” designations were made. This means the annuity is divided evenly amongst the surviving beneficiaries. In this case that means just the son. He gets 100% of the proceeds. The grandchildren from the daughters get nothing. Sorry, kids.
By default this is considered “per capita.” The annuity passes to the surviving “heads.” In this case there is just one “head.” It is the son.
Scenario #2 – Per Stirpes Designation
In this scenario the contingent beneficiaries were listed as per stirpes. It would look like this on the beneficiary form, “John Doe per stirpes.”
In this scenario each “branch” of the contingent beneficiaries receives 1/3 of the annuity’s value. So even though both the daughters have pre-deceased their father, the grandchildren will still get to split their mother’s 1/3 portion of the annuity’s value. In this case, the grandchildren have not been disinherited.
Under this scenario the 1/3 that was going to go to the daughters will pass to their children and be evenly divided.
As you can see, the first scenario disinherits some of the grandchildren. While the second scenario (using per stirpes designation) allows the grandchildren to receive a portion of the annuity’s value.
There is no right or wrong way to designate your beneficiaries. If Scenario #1 is your wish that is fine. But if Scenario #2 is your wish, make sure you understand the difference between “per stirpes” and “per capita.”
Incorrect beneficiary designations are just one of the annuity traps that people can fall in to. To see more annuity traps that people fall into, be sure to download my free e-book “How To Avoid Annuity Traps.” If you currently have an annuity (or are thinking about purchasing one) you need to read this e-book before you do anything else. Just CLICK HERE to instantly download it.
In your service,