Recently, I went to go visit a client, and he basically wanted to change some of the beneficiaries on one of his retirement accounts.
He has one daughter, four grandchildren, and he actually even has a great-grandchild at this point. He’s a widower so he’s been single for about the past 10 years, and he’s been dating a girlfriend for most of that 10-year time period. Although he’s not going to get married, he wanted to add her on as a beneficiary for part of his retirement account. It sounded pretty simple right off the bat, but I wanted to share with you how this works, and how, sometimes, something that seems relatively easy can be a little bit complex.
So the way that he currently has this set up is he’s got his retirement account set up as 100% going to his daughter as the primary beneficiary, and he has his contingent beneficiary as his four grandchildren. So what he would like to do is change this, and give his daughter 75% of his retirement account and his girlfriend 25%.
So sounds relatively simple so far.
Well, what a lot of people may not necessarily realize is there’s actually two ways to set up a beneficiary designation. There’s pro rata, which is probably the default option and the way most people probably do it, and then there’s something called per stirpes.
So let’s take a look at pro rata first and use this as an example here. Under the pro rata designation, if something were to happen to his girlfriend and she predeceases his daughter as the primary beneficiary, then the daughter gets 100% of the retirement account, which is probably exactly what he wants.
However, the girlfriend, because she’s much older than the daughter, will predecease his daughter, but if the daughter, for some reason, were to pass away first, then her 75% would then go 100% to the girlfriend because she’s the only remaining, living, primary beneficiary. His grandchildren would actually get disinherited from that retirement account.
So now let’s take a look at the other way we could do it. If you did it the per stirpes way. Per stirpes is a Latin term and it means “from the branch.” So basically, everything would stay in the blood line of whichever beneficiary we have. So if his daughter were to pass away, for example, then her 75% would get distributed to the four grandchildren and stay in that blood line.
On the other hand, if the girlfriend passes away, then that 25% also passes along to her bloodline, to her children and to her grandchildren, which is not exactly what my client wanted. He wanted to basically give her some money if she’s alive, but if she’s not alive, he wants to give that money to his daughter and to his grandchildren.
So that’s something I’m not sure a lot of people really necessarily understand about how those beneficiary designations work, but I hope that makes sense, and in a case like this, one of the ways that you could possibly get around this, and to make some of those special exceptions, would be to see an estate attorney, have a trust, and then that trust can get a lot more specific as to who gets what asset, and at what point they get that.
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What I Do
I help individuals make the transition from working to retirement.
As you approach retirement you will be making some of the most important financial decisions of your life. Most of these decisions don’t get a do-over, once you’ve made them your stuck.
My goal is to help you get the most out of your retirement resources. I do this by coordinating and optimizing what I call the 7 Core Elements of Retirement Planning.
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We use advanced financial planning software to help you understand your retirement cash flow so you know where the gaps are.
Understanding your retirement gap is the foundation to getting the most out out of your retirement resources and avoiding costly mistakes.
