Using Complex Beneficiary Designations to Give Your Heirs Flexibility

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Per stirpes and per capita are amazing estate planning tools. In estate documents, they allow you to cleanly designate as your beneficiary not just one individual but also contingently his or her children, grandchildren, great-grandchildren, etc. as many levels down as are required to find a living heir or as are specified in the relevant document.

For a complete description with infographics of how these designations work, see “Beneficiary Designations: Per Capita or Per Stirpes?”

Unfortunately, Schwab’s beneficiary form says, “Per stirpes and per capita distributions are limited to your named beneficiary’s children and no further descendants.”

This means that your per stirpes or per capita designations at Schwab only go one generation deep by default.

For example, a per stirpes designation on your brother will reach your nieces and nephews through him but not your grandnieces and grandnephews.

What is the likelihood that your beneficiary designations will need to go deeper than one generation? If you have selected someone younger and/or healthier than you as your primary beneficiary designation, then the need may be unlikely.

However, estate planning is already a worst-case-scenario plan. I, for one, would prefer a plan that implements my wishes regardless of what happens.

Furthermore, many times the cookie-cutter estate planning that beneficiary designation forms and estate attorneys have to offer do not meet the complex types of wishes that real people have. When I write about estate planning or work with clients on their own plans, it is my mission to encourage clients and readers to dream bigger until they have a plan they are truly satisfied with.

We have one client who is the happy ninety-something-year-old father of three children, grandfather of ten grandchildren, and great-grandfather of thirteen (and growing!) great-grandchildren. Anyone who looks at his joy can tell that his is a wealthy man in the most important way.

It’s his specific wishes to leave assets to each of his children’s families per stirpes. However, if his child does not need or want the assets, he would like his grandchildren to inherit. And if they don’t need or want the assets, he loves the idea of his great-grandchildren inheriting instead. He also likes the idea of leaving some portion to charity.

Savvy investors with charitable estate intentions can decide to leave their traditional IRAs to charity, because the charity’s tax-privileged status means that they can ignore the tax owed distributing those assets, while leaving other assets, such as Roth IRAs which are post-tax or taxable accounts which receive a step-up in cost basis, to family.

In this way, we advised this client to designate his Roth IRA with the family shares only, while including the charity shares on his traditional IRA only.

These complex estate wishes do not fit on the cookie-cutter Schwab’s beneficiary form. However, if your estate wishes do not fit in the format of this form, you are permitted to write “See attached” in Section 4 and then attach a signed letter describing your beneficiary designations.

To implement this client’s wishes, the following language was recommended:

To whom it may concern,
Please use the following as my beneficiary designations for the attached Beneficiary Update forms.
I would like my IRA split into [number] shares according to the following allocations.

Family Shares:

1. [Fraction or Percentage] to The [Name of Child] Family Share

#. [Fraction or Percentage] to The [Name of Child] Family Share

[ONE LINE FOR EACH CHILD]

Charity Shares:
#. [Fraction or Percentage] to [Charity Name or Donor Advised Fund] Share

[ONE LINE FOR EACH CHARITY]

For each of the beneficiaries in the Family Shares, I would like to give my beneficiaries the right to refuse their share and have the share continue on to the next beneficiary as though they predeceased me.

 

The [Name of Child] Family Share

PRIMARY LEVEL: For My Child

This share shall be left 100% to [Name of Child] Full Name: _______
Current Address: _______
Birthday: _______
Relationship to Me: child
If my child [Name of Child] has predeceased me, I want to leave [his/her] share to [his/her] spouse [Name of Spouse] Full Name: _______
Current Address: _______
Birthday: _______
Relationship to Me: child-in-law, spouse of [Name of Child]

If my child [Name of Child] refuses but has not predeceased me or my child-in-law [Name of Spouse] refuses or has predeceased me, I want to leave this share to the below Secondary Level For My Grandchildren.

SECONDARY LEVEL: For My Grandchildren

If my child [Name of Child] (or [his/her] spouse [Name of Spouse]) refuses or has predeceased me, I want to divide [his/her] share into equal parts, one for each of [his/her] children’s families, my grandchildren through [him/her].

I want to leave one share to each of [Name of Child]’s children and, if any of [his/her] children refuse or have predeceased me, I want to leave that grandchild’s share to that grandchildren’s children, my great-grandchildren through that grandchild.
If no surviving children of that grandchild can be found, I want to leave that grandchild’s share to their below named spouse provided that they were married at the time of the grandchild’s death.
Currently, [Name of Child]’s children, my grandchildren through [him/her], are:

Full Name: _______
Current Address: _______
Birthday: _______
Relationship to Me: grandchild, child of [Name of Child]

[REPEAT FOR EACH GRANDCHILD]

 

[Name of Grandchild] Family
If [Name of Grandchild] refuses or predeceases me, [his/her] share should go to [his/her] children. Currently, [his/her] children, my great-grandchildren through [him/her], are:

Full Name: _______
Current Address: _______
Birthday: _______
Relationship to Me: great-grandchild, child of [Name of Grandchild]

If no surviving children of [Name of Grandchild] can be found, I want to leave [his/her] share to [his/her] spouse, [Name of Spouse].

Full Name: _______
Current Address: _______
Birthday: _______
Relationship to Me: grandchild-in-law, spouse of [Name of Grandchild] [REPEAT FOR EACH GRANDCHILD WITH CHILDREN]

[Name of Grandchild] Family

If [Name of Grandchild] refuses or predeceases me, [his/her] share should go to [his/her] children.
Currently, [Name of Grandchild] is not married and has no children.

TAKERS IN DEFAULT

If all the beneficiaries refuse or have predeceased me, I want The [Name of Child] Family Share to be divided across the remaining other Family Shares.

[REPEAT ENTIRE SECTION FOR EACH CHILD’S FAMILY SHARE]

[Charity Name or Donor Advised Fund] Share

This share I would like to leave 100% to [Charity Name or Donor Advised Fund], a charity.
Full Name: _______
Current Address: _______
Custodian: _______
Account Number: _______
Depository Trust Company (DTC) Number: _______

If this entity is no longer a charity, then I want this share [divided across the remaining other Charity Shares | divided across the Family Shares | divided evenly across all the remaining Charity and Family Shares].
–END–
These instructions apply to account number [Account Number].
Thank you,

[SIGNATURE AND DATE]

You can likely follow along how this lengthy text appears to faithfully implement his wishes. At each level, the heir is permitted to pass along their share of the assets to their own children. For the IRA, he can include the charity share language. For the Roth IRA, he can leave it out.

When submitting complicated designations like this to Schwab, Schwab assigns someone in their legal team and Estates team to review the designations for whether they feel they are able to accept them. After this review process, Schwab will come back with their determination.

In this client’s case, Schwab decided that they felt comfortable accepting these designations as his beneficiary designations. Writing complicated beneficiary attachments like this is a way you can conform your estate plan to your wishes rather than trying to fit your wishes in the forms you are given. Not every custodian is willing to accept the complexity, but I am grateful that Schwab is.

Photo by Neven Krcmarek on Unsplash

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Chief Operating Officer, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine