When it comes to distributing assets from an estate plan, there are generally two key methods of doing so: pro rata or per stirpes. Because these two terms are Latin, they are far from self-explanatory and thus easy to confuse.
Pro rata distributions are usually made directly amongst your beneficiaries. In contrast, per stirpes distributions are made to your beneficiaries and their own children. This difference often makes the most impact if one of your beneficiaries were to pass away before any distributions are made.
Keep reading to get the full explanation of the difference between pro rata vs. per stirpes so that you can better understand which option may work best for you and your estate plan.
What does pro rata mean?
Pro rata is a Latin term that means “proportionately.” You may have heard of the term “prorated” before, in which case can help explain its meaning.
A pro rata calculation can be used in a variety of occasions, such as in business, estate planning, and other general finances. The term indicates that the individual’s payout or benefit should be proportionate to their personal stake or investment in that asset. A common and helpful example is auto insurance. If you were to purchase an annual auto insurance policy part-way through the year, the company would prorate the premium such that you’d only pay the portion of the premium that you’re using. We explain how pro rata works, how it’s calculated, and how it applies to a variety of scenarios in our What is pro rata guide.
In the context of estate planning, pro rata means that the distribution made to beneficiaries is always equal, relative to the number of beneficiaries named. For example, let’s say that an individual has three children. When the individual passes away, their estate would be divided equally amongst his or her three children.
What does per stirpes mean?
Per stirpes is another Latin term that can be translated to “by branch.” It is an estate planning designation that describes how assets should be distributed in the case that a beneficiary passes away before you.
In the event that one of your beneficiaries predeceases you, or before distributions from the estate are made, then their portion of the inheritance is passed down to their descendents. (To their “branch” of the family tree.)
Read our per stirpes definition for more information.
What does per stirpes mean for beneficiaries?
From the perspective of your beneficiaries, per stirpes means that they will inherit a predetermined proportion of total distributable estate, no matter what. Even if one of their fellow beneficiaries were to pass away before distributions are made, it does not increase their personal share of the inheritance. This is because the deceased beneficiary’s inheritance is passed down to their descendants.
Note that per stirpes distributions only pass down to direct, lineal descendants. This could be the original beneficiary’s children, or their children’s children (grandchildren.) per stirpes does not apply to the beneficiary’s other relatives, such as siblings or parents. It’s easy to think of per stirpes as a distribution that flows down the beneficiary’s branch of the family, and not up or sideways.
Let’s use an example to illustrate. Say you have three children: Tom, Alice, and John. Tom predeceases you, leaving behind a child of his own. You pass away, and your estate plan includes a per stirpes clause. This means that Tom’s one-third of the estate will be inherited by his child. Alice and John still inherit one-third of the estate each. They can choose to pass down their estate to their own children however they’d like. However, their children will eventually inherit less than Tom’s child.
Should you use per stirpes?
There are several advantages and disadvantages associated with using per stirpes in your estate plan. At the end of the day, whether or not you should use per stirpes depends on your personal preferences and desired outcomes.
On one hand, using a per stirpes distribution can help simplify your estate plan, and thus help you save some time. Instead of having to name contingent (back-up) beneficiaries for any and every possible scenario, per stirpes ensures that there is a clear pathway to who should inherit property or assets in case one of your original beneficiaries predeceases you.
However, per stirpes may not be the best option if you prefer to distribute your estate evenly amongst your primary beneficiaries only. If you want to name a completely different beneficiary should one of them predecease you, then you’d want to specify a contingent beneficiary rather than relying on per stirpes rules.
Finally, per stirpes may not pan out in a way that aligns with your wishes if you are a part of a blended family. Only biological or adopted children or considered your children through the lens of estate planning laws. That means that per stirpes rules may unfairly benefit individuals who are of direct lineage and leave a stepchild or other unadopted child out of your inheritance.
Pro rata vs per stirpes - what’s the difference?
pro rata vs. per stirpes: these two methods of estate plan distribution may sound similar at first, but can potentially result in dramatically different outcomes. These outcomes are most prominent in the event that one of your primary beneficiaries passes away before a distribution is made.
In the case of pro rata, the inheritance is divided up equally amongst your primary beneficiaries. If one of them were to pass away, the deceased beneficiary's share of the inheritance is redistributed equally amongst the surviving beneficiaries. That means that their inheritance could potentially increase.
If one of your beneficiaries predeceases you with a per stirpes distribution clause, then their share of the inheritance would pass directly to their child or other direct descendent. Any other primary beneficiaries would only inherit their originally intended share of the property.
Let’s continue on with our example from earlier to help illustrate a real-life application of pro rata vs. per stirpes.
In this example, pretend that you have three children: Tom, Alice, and John. They are each set to inherit one-third each of the property from your estate.
Option 1: pro rata
Let’s say that you include a pro rata clause in your estate plan. Unfortunately, Tom passes away right before any distributions from your estate are made. Because Alice and John are your only surviving beneficiaries, they will now inherit half of your estate each. If Tom had any children, they would inherit from Tom’s personal estate but would not receive any inheritance from your estate. Your estate is absorbed by Alice and Tom to eventually pass on to their own children.
Option 2: per stirpes
Let’s say that you instead include a per stirpes clause in your estate plan. Your beneficiaries all have children and it’s your priority to make sure that your grandchildren are also cared for. Using the same example as above, Tom predeceases you in an unexpected accident. Because you included the per stirpes clause, you don’t necessarily have to update your estate plan. When you pass away, Tom’s third of the inheritance passes directly to his child. The other two-thirds are divided equally between Alice and John, who can do what they wish regarding passing down property to their own respective children.
Should I use pro rata or per stirpes in my estate plan?
pro rata vs. per stirpes: which is better, and which one should you include in your estate plan?
Each option has its advantages and disadvantages, and there is no clear winner. Both rules provide a clear, set pathway for what should happen to your property in case one of your beneficiaries should predecease you. They also help simplify your estate planning process by cutting out the need to name contingent beneficiaries for a variety of scenarios.
However, applying a blanket rule to your estate plan isn’t always the best option. If you have a blended family, as well as specific individuals you wish to care for, it’s always safest to name specific beneficiaries and contingent beneficiaries.
Regardless of what you decide, it should be with careful intention such that your estate plan will help you achieve your desired outcomes. This part is often the trickiest, so don’t hesitate to get some professional support at your side! 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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