March 17, 2014

Per stirpes vs. per capita: what is the difference, and choosing what works best for your family - part 1

by jdporter

"Per capita" and "per stirpes" aren't just Latin phrases estate planning attorneys use to try to look smart. They can produce very different results for the flow of family assets. Understanding the difference between the two approaches in an estate plan, and choosing the right one for your family's situation, can avoid unpleasant and expensive probate litigation.

Because Stites On Estates believes trusts and estates fact patterns are hiding everywhere, we like to draw examples from popular culture. Let's explore the difference between "per capita" and "per stirpes" using the spectacularly dysfunctional Draper family so famously featured in Mad Men. Season 6 has ended, and we're thinking about what's next for Don and more Sterling Cooper as they figure out the late '60s. Waiting for Season 7, let's consider the estate planning issues in Don and Betty's life – issues we expect they themselves haven't thought about very much quite yet….

By 1968, Don and Betty have three children: Sally, Bobby, and Eugene. Let's suppose that by the late 1990s, Sally has one child, Bobby has two children, and Eugene has three children. Don was born in 1925, and Betty was born in 1932. Let's assume that all the smoking and drinking and driving without seatbelts that is so much fun to watch in Mad Men hasn't caught up with them by 2014, so that they're now 89 and 82, respectively.

Don and Betty don't really love each other very much anymore, but they do love all their children equally, and all their grandchildren equally. Should their estate be distributed per capita, or per stirpes?

Let's consider the different results under the two approaches if Sally and Eugene predecease Don and Betty, but Bobby survives them.

Under a strict per capita division, Don and Betty have seven living descendants: Sally's child, Bobby and his two children, and Eugene's three children. If the survivor of Don and Betty leaves a $3.5 million estate, each descendant will receive $500,000.

Sounds fair, right? In one way, yes. Each person receives the same amount. Yet Sally's branch of the family receives $500,000, Bobby's branch receives $1.5 million, and Eugene's branch receives $1.5 million. What's fair about that? It's almost as if Sally were being punished for having fewer children.

Compare the result above to a per stirpes division. Each branch of the family will receive approximately $1.16 million. One could say that's fair. But consider how these assets will actually flow under a per stirpes approach: $1.16 million to Sally's child, $1.16 million to Bobby, and $388,000 to each of Eugene's children. Sally's child will receive $1.16 million, three times more than the $388,000 each child of Eugene receives.

What's fair about that? It's almost as if Eugene's children were being punished for their father's longevity and having a sibling.

Deciding what is fairer – per stirpes or per capita – is difficult. One hopes trust and estate lawyers explain the two options clearly, help clients understand the application of each option in their particular family context, and then accurately implement the client's wishes.

Image above © AMC TV. Fair use rationale: critical discussion of the Mad Men television series. For detailed rationale, see here.