Generally speaking, there are two different ways that assets can pass down to your kids and grandkids. It depends on the distribution formula selected—whether the assets are going to pass Per Stirpes or Per Capita. These are very old-fashioned terms, but we still use these concepts, even today.
Per Stirpes Distribution
Per Stirpes is a way of transferring assets that really just follows the children and grandchildren down. For example, you have a decedent who has passed away and he or she has two grown children and one child has two grandkids and the other child only has one. When the decedent passes away, if the inheritance is passed Per Stirpes, then 50% would pass to one child and 50% would pass to the other child. Now, if the children have predeceased the decedent, then the 50%, under Per Stirpes, is going to simply go to their children.
In this scenario, one grandchild will end up with 50% of the estate, while the two grandchildren of the other child are going to have to split 50%. They’ll get 25% each, rather than the 50% that the other grandchild is receiving. That’s the Per Stirpes distribution formula– also known as right of representation.
In your trust, if you see language that says, “This gift shall pass to my issue by right of representation,” that is what it means. Everybody is going to get a share, based on the number of children and grandchildren that each of these separate people have.
Per Capita Distribution
Now, let’s look at what happens when assets pass under a Per Capita distribution system, rather than Per Stirpes.
Under Per Capita, things are going to pass a little differently. With Per Capita, we’re actually looking at each generation and we’re going to split it equally. Under this scenario, if the decedent, you’re going to end up with 50% going to one child and 50% going to the other child, if they survive the decedent.
If, however, both of these children have predeceased the decedent, then the assets are going to pass down to the grandkids. With the Per Capita distribution system, we’re actually going to give each grandchild an equal share. That means each grandchild is going to get 33% of the estate. Rather than one grandchild getting 50% and the other two grandchildren splitting 50%, which would make them unequal, the Per Capita distribution formula provides that you go to the first generation where there is somebody alive and split it equally at that generation. Now each grandchild is going to get an equal share.
That’s the difference between a Per Capita distribution and a Per Stirpes distribution.
How to Choose an Asset Distribution Formula
Why do people choose a Per Stirpes distribution, which is also known as right of representation versus a Per Capita distribution? The answer is easy. They usually don’t. Most people who do a trust or will have no clue about the difference between Per Stirpes and Per Capita. What ends up happening is you’ll have a lawyer who drafts the trust. Some lawyers like to use one distribution system and some lawyers like to use the other formula. The lawyer’s preference of a distribution formula is the way that it will probably be set up in your trust or will, unless you state a preference.
It pays to ask the question: If my children predecease me, how will the assets pass down to my grandchildren? Will it be equal? Will it be unequal? Those are very good questions to ask your estate planning lawyer.
Typically, most people aren’t thinking that they want one distribution formula or the other, because they have no clue that there are two ways to do it. Now you know. There are two ways to do it and you should have that discussion with your estate planning attorney.