Per stirpes, per capita, and by representation: A Refresher (Sort of)

Take-Away: Individuals need to fully understand the consequences when they use the short-hand terms per stirpes, per capita, or by representation in their Wills, Trusts, and beneficiary designations.

Background: I was recently talking to a widower who told me that he named his three children as the designated  beneficiaries of his $3 million dollar IRA. The widower said that his beneficiary designation named “my children per capita.” I asked if he actually meant “my children per stirpes?” The widower said he was sure that his beneficiary designation read per capita. I then asked him (being something of a jerk, but also wanting to get his attention) ‘why he did not like his grandchildren?’ That question surprised him. I then pointed out that if one of his children did not survive him (and all three of his children had children of their own) that the death of one child would mean that his two surviving children would split his $3 million IRA, and his grandchildren from his predeceased child would not share in his IRA. He said that he thought his grandchildren from his predeceased child would share in his large IRA. I assured him that would not be the case when he used the term per capita in his IRA beneficiary designation. All of which underscores that individuals are often confused when it comes to the legal terms per capita, or per stirpes, or by representation.

Per Stirpes: The basic legal principle of per stripes in Michigan is covered under the Estates and Protected Individuals Code (EPIC).

MCL 700.2718 (2): If a governing instrument calls for property to be distributed ‘per stirpes’, the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants. Each surviving child, if any, is allocated one share.

Accordingly, if the named beneficiary dies prior to the testator or the settlor, the  per stirpital distribution remains in effect. The bequest to the deceased beneficiary passes automatically to the deceased beneficiary’s descendants.

Example: Steve dies with three sons, Mike, Robbie and Ernie. Mike has two children, Robbie has one child, and Ernie has five children. Steve’s Trust leaves the residue of his trust estate to ‘my then living descendants, per stirpes.’ If Mike, Robbie and Ernie all survive their father, each receives one-third of Steve’s estate. If Mike and Robbie survive Steve, but Ernie does not, Mike and Robbie each receive one-third (33.3%) of Steve’s trust estate, and each of Ernie’s 5 surviving children will share in the last one-third (33.3%) of Steve’s estate. In other words,  each of Ernie’s children will receive 6.66% of Steve’s estate. If neither Robbie nor Ernie survive their father, then Robbie’s sole child will receive his late father’s 33.3% of Steve’s trust estate, while each of Robbie’s 5 surviving children will receive 6.66% of Steve’s trust estate.

Per Capita/By Representation:  EPIC also defines the terms ‘by representation’ and ‘per capita at each generation’. [Don’t be surprised if you find yourself moving your lips as you read this definition.]

MCL 700.2718(1): If an applicable statute or governing instrument calls for property to be distributed ‘by representation’ or ‘per capita at each generation’, the property is divided into as many equal shares as there are surviving descendants in the generation nearest to the designated ancestor that contains 1 or more surviving descendants and deceased descendants in the same generation who left surviving descendants, if any. Each surviving descendant in the nearest generation is allocated 1 share. The remaining shares, if any, are combined and then divided in the same manner among the surviving descendants of the deceased descendants as if the surviving descendants who were allocated a share and their surviving descendants had predeceased the distribution date. This rule of construction applies to all documents originally created on and after April 1, 2000, and to all instruments amended on and after April 1, 2000, that use the phrase ‘by representation’ or ‘per capita at each generation.’ If an amendment uses either phrase, the rule of this section applies to the entire instrument.’

Needless to say, this statutory definition is neither a model of clarity nor susceptible to easy understanding by a layperson. Prior to April, 2000 in Michigan, by representation or by right of representation meant the same thing as per stirpes. Now it can have a much different meaning as a distribution per capita by generation.

Per Capita: Practically speaking, if the named beneficiary dies prior to the testator or settlor, the bequest to the deceased beneficiary becomes null and void. In effect, the bequest to the deceased beneficiary reverts back to the decedent’s estate to be shared equally by all surviving beneficiaries. In other words, a per capita distribution can only go to the named beneficiaries; the distribution does not pass on ‘downstream’ to the next generation. Thus, a bequest to a deceased beneficiary is distributed equally among the beneficiaries who are still living and who survive the testator or the settlor. It is sort of like, but not the same thing as, a class gift; the named beneficiary must survive the decedent to remain a ‘member’ of the ‘class’ to which the bequest is made and in order to receive a share of that distribution.

By Representation: The predeceased beneficiaries shares of the same generation are divided equally by all of their children. Under EPIC, the statutory definition of the term descendants is modified by the added stipulation that those who take have their shares determined according to a right of representation scheme of distribution. [MCL 700.1103(1).]

Example: Steve has three sons, Mike, Robbie and Ernie. Mike has two children, Robbie has one child, and Ernie has five children. Mike and Robbie predeceased their father, Steve. Steve’s Will directs that his assets pass equally to his children and to their descendants by representation. When Steve dies, his estate is divided between Mike, Robbie and Ernie’s families. Mike receives one third of Steve’s estate. Robbie and Ernie’s children (6 total) will all split the remaining two-third’s of Steve’s estate equally.

Conclusion: It is important to annually review Wills, Trusts, and other beneficiary designations to verify how assets will be distributed on the owner’s death. For example, a Will that was drafted before April of 2000 and which expressly provides that beneficiaries will receive the residue of the testator’s estate by right of representation may not result in the same distributions that it did when the Will was initially executed. Similarly, individuals may not fully understand the differences between per capita and per stirpes when it comes to distributions of their estate, or that these technical terms impact how a sizeable retirement account will be distributed if a named beneficiary does not survive the account owner. Maybe, rather than rely on these somewhat confusing short-hand descriptions of how assets will be distributed on death, it would be better to actually identify in the Will, Trust, or beneficiary designation who is to receive the asset/portion/share if the named beneficiary does not survive the asset owner.