When it comes to estate planning, there are several legal terms that dictate how property should be distributed amongst beneficiaries. Per Capita, Pro Rata, and Per Stirpes are a few common examples. These are terms derived from Latin. Although they may sound similar, they can create very different outcomes for your Estate Plan depending on which one you use. Today we will examine the difference between Pro Rata vs. Per Capita and explore which option may be a better choice for you and your Estate Plan. (Looking for an explanation of how Per Stirpes works? You can find our guide for that here!)
What Does Per Capita Mean?
Per Capita is a Latin phrase that means “by head” when translated, but in practice actually means “per person.” It is most often used when reporting statistics, and indicates that the reported number is a per person average.
Per Capita calculations are helpful because they provide context to data. When comparing data between two groups or countries for instance, you’re not necessarily comparing apples to apples. Per Capita breaks things down to a per person basis to allow for accurate comparisons to be made.
When is Per Capita Used?
Per Capita is primarily used when reporting economic or social statistics. It helps provide a reference for how a metric is applied to a specific population. Common examples of Per Capita calculations include income per capita, gross domestic product (GDP), and gross national product (GNP).
Let’s take gross domestic product (GDP), which is a measure of a country’s economy, to help illustrate why a Per Capita calculation can be helpful.
According to the World Population Review, Italy and Brazil rank eighth and ninth (respectively) in the world for gross domestic product (GDP). In 2022, Italy’s GDP was 2.07 trillion, and Brazil’s was 1.87 trillion. This metric reported on its own is certainly interesting, but it doesn’t provide a lot of context. The two numbers are astronomically large, but quite similar, so what are we really looking at here?
Taking the Per Capita calculation of each country’s GDP provides much better context. Italy’s GDP Per Capita is $34,260.34, while Brazil’s GDP Per Capita is $8,967. While both countries are relatively similar in economic size, the “per person” market value is tremendously better for Italians. Brazil is the most populous nation in Latin America, so any wealth produced must be divided amongst a much larger number of people. The Per Capita analysis allows someone to draw a better apples-to-apples comparison across countries that are very different from one another.
Alternatively, Per Capita can also be used to determine how financial allocations should be made.
For instance, an individual’s Estate Plan could designate a Per Capita distribution of property amongst their beneficiaries. This essentially means that your assets should be divided evenly amongst your living beneficiaries. If any of your beneficiaries were to predecease you, then the inheritance would be divided amongst the surviving beneficiaries.
Another example of Per Capita being applied in finance is the allocation of 401(k) fees. The Department of Labor gives employers the discretion to determine how administrative fees should be allocated amongst participating plan members. If an employer applies a Per Capita allocation of administrative fees, it means that each participating plan member pays the same amount regardless of their account balance. (The total administrative fees are divided evenly amongst participants.)
Pro Rata vs Per Capita Distribution - What’s the Difference?
Earlier, we touched on how Per Capita can help describe how a distribution from an Estate Plan should be made. Similar to Per Capita, there are other Latin terms that also describe how a distribution is made, including Pro Rata and Per Stirpes.
What are the differences between Pro Rata vs. Per Capita?
This is a trick question.
When it comes to estate planning specifically, Pro Rata and Per Capita are essentially interchangeable. Pro Rata means that distributions are made proportionately amongst beneficiaries, while Per Capita means that distributions are divided evenly amongst beneficiaries. As long as no special stipulations are defined, you’ll quickly realize that the distributions are made in equal shares regardless of which term you use.
With that being said, the devil is in the details.
Pro Rata could potentially take on a different meaning if you were to assign different weights (proportions) amongst your beneficiaries.
For instance, let’s say you have two children, Tom and Sally. You had a falling out with Tom many years ago and are no longer close. You would like to leave him with a modest sum, but not nearly as much as you would have had you been in a good relationship standing. Instead of distributing your estate evenly between Tom and Sally, you decide to pass on 40% to Tom and 60% to Sally. This means that all of your property and assets are divided such that Tom inherits a prorated share of 40% and Sally inherits 60%.
Further, you could even stipulate that the distribution is specifically Pro Rata (Per Capita) and not Per Stirpes. If Tom were to predecease you, 100 percent of your estate would pass to Sally. Tom’s allocated portion of the estate would not be passed down to his own children. Learn more about the interesting distinction between Pro Rata vs. Per Stirpes and how they can significantly impact estate planning outcomes here.
Should I Use Pro Rata or Per Capita in My Estate Plan?
Using blanket rules such as Pro Rata or Per Capita in your Estate Plan has its benefits. First, there is a universal legal application of these terms. Using this designation can be time-saving, as you don’t necessarily need to specify which assets or property should be bequeathed to whom. Further, you don’t need to identify a contingent (backup) for each beneficiary named in your Will, due to the predefined Pro Rata rules.
However, using such a blanket rule may not always align with your estate planning vision. For instance, you may want to be very intentional about which beneficiaries should inherit what assets or property. Perhaps a generic framework does not neatly fit in with your desired outcomes. In this case, you may be better off naming beneficiaries and contingent beneficiaries for each property in your estate.
Making these types of estate planning decisions can be difficult, especially when you have complicated legal terms and concepts to navigate. Why not cut down on the confusion and co-create your Estate Plan with an experienced partner? At Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning and settlement options today!
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