Per Stirpes

• The Bottom Line: Per Stirpes is a legal instruction on your investment accounts that ensures a deceased beneficiary's inheritance is passed down to their children, safeguarding your wealth for the next generation.
• Key Takeaways:
• What it is: A Latin term meaning “by branch,” it distributes your assets along family lines, like branches on a tree.
• Why it matters: It is a vital risk_management tool for your legacy, preventing the unintentional disinheritance of your grandchildren and ensuring your long-term wealth-building efforts benefit your entire family as intended.
• How to use it: By adding the phrase “Per Stirpes” after each beneficiary's name on the designation forms for your IRA, 401(k), and brokerage accounts.

Imagine you've spent a lifetime carefully planting and tending to an orchard. Your plan is to leave one major section of the orchard to each of your three children. But what if, tragically, one of your children passes away before you do, leaving behind children of their own (your grandchildren)? Who gets that section of the orchard now? This is precisely the question that “Per Stirpes” answers for your financial assets. In the simplest terms, Per Stirpes is an instruction that says, “If one of my direct heirs is no longer living when I pass away, their intended share should go directly to their children.” The term is Latin for “by the roots” or “by the branch,” which is the perfect analogy. You are instructing your estate to be divided by the main branches of your family tree. Each child represents a primary branch, and their share will flow down that branch, even if they are no longer there to receive it themselves. The most common alternative is called “Per Capita,” which means “by the head.” In a Per Capita distribution, your assets are divided equally among only the surviving named beneficiaries. If one of your children has passed away, their share is simply re-absorbed and split among the surviving children. Their own kids—your grandchildren—would get nothing. Think of it this way:

• Per Stirpes: Distributes assets by family branch.
• Per Capita: Distributes assets by surviving individual.

For a value investor who thinks in terms of decades and generations, understanding this distinction isn't just a legal formality; it's the final and most critical step in stewarding the wealth you've so patiently built.

“Someone's sitting in the shade today because someone planted a tree a long time ago.” - Warren Buffett
A wise estate plan, using tools like Per Stirpes, ensures that the shade from the tree you planted will cover not just your children, but your grandchildren and beyond.

At first glance, a legal inheritance term might seem out of place in an investment dictionary. But for a true value investor, it's one of the most important concepts of all. Value investing isn't just about picking good stocks; it's a philosophy of building and preserving wealth over the very long term. Your estate plan is the mechanism that determines whether that wealth survives you. Here’s why Per Stirpes is a critical concept for a value investor:

• The Ultimate Long-Term Strategy: You analyze businesses based on their ability to generate cash flow for decades. You hold investments through market cycles, patiently waiting for their intrinsic_value to be realized. This long-term mindset must extend to your legacy. A Per Stirpes designation is the ultimate long-term play, ensuring the compounding machine you built continues to work for your family across multiple generations.
• A Margin of Safety for Your Legacy: Benjamin Graham's margin of safety is about protecting your portfolio from unforeseen negative events. A Per Stirpes designation does the same for your life's work. The tragic, early death of a child is a terrible but possible event. Without a Per Stirpes clause, this “black swan” event could lead to your grandchildren being unintentionally cut out of their inheritance. Per Stirpes is the “margin of safety” that ensures your plan holds up even under the worst-case scenario.
• Risk Management and Rational Planning: Value investors are master risk managers. They assess business risk, financial risk, and market risk. Yet, one of the biggest risks to family wealth is a poorly constructed or nonexistent estate plan. Family disputes and legal battles can destroy value faster than a bear market. By clearly defining your wishes with Per Stirpes, you are engaging in rational, forward-thinking risk management, minimizing ambiguity and the potential for conflict that can tear a family—and its assets—apart.
• Legacy as the Final Return: The final measure of your investment success isn't the peak value of your portfolio. It's how effectively that wealth is transferred to secure your family's future and fulfill your goals. A successful transfer, free of strife and confusion, is the highest form of “return on investment” a lifelong investor can achieve.

Choosing Per Stirpes is an act of foresight, discipline, and stewardship—the very same character traits that define a successful value investor.

This isn't a financial ratio to calculate, but a crucial method to apply across your financial life. Implementing it is surprisingly simple, but requires diligence.

1. Step 1: Audit Your Accounts. Make a list of every single account that has a beneficiary designation. This includes:
   • Retirement Accounts: Traditional & Roth IRAs, 401(k)s, 403(b)s.
   • Brokerage Accounts: Specifically those with a Transfer on Death (TOD) registration.
   • Life Insurance Policies.
   • Annuities.
   • Bank Accounts: With a Payable on Death (POD) designation.
2. Step 2: Locate the Beneficiary Form. For each account, you will need to review the current beneficiary designation form. You can usually find this online in your account portal or by calling the financial institution.
3. Step 3: Make the Designation. On the form, you don't just write your child's name. You add the key phrase. For example, if you have two children, Jane Doe and John Doe, you would write:
   • Primary Beneficiary 1: Jane Doe, Per Stirpes
   • Primary Beneficiary 2: John Doe, Per Stirpes
   • Many modern forms now have a simple checkbox for Per Stirpes or Per Capita next to each beneficiary's name, making it even easier.
4. Step 4: Acknowledge the “Superpower” of Beneficiary Forms. This is a critical point that many investors miss: Beneficiary designations on these accounts override your will. You could have a beautifully written will that details your wishes, but if your 20-year-old 401(k) form says something different, the 401(k) form wins. Ensure your will and your beneficiary designations are all telling the same story.

The best way to understand the impact of your choice is with a direct comparison.

This table clearly illustrates that failing to specify Per Stirpes can have dramatic and often undesirable consequences.

Let's consider Eleanor, a disciplined value investor who is now 80 years old. Over 50 years, by diligently investing in wonderful companies at fair prices and letting them compound, she has built a $2 million IRA. Eleanor has two children: Mark and Susan.

• Mark has one child: Peter.
• Susan has two children: Chloe and Zoe.

Years ago, Eleanor filled out her IRA beneficiary form, simply naming “Mark” and “Susan” as 50/50 beneficiaries. Scenario A: The “Per Capita” Default Last year, Mark sadly passed away from an illness. This year, Eleanor passes away. Because her beneficiary form did not specify “Per Stirpes,” the financial institution follows the default “Per Capita” rules.

• The IRA custodian looks at the named beneficiaries. Mark is deceased. Susan is living.
• The entire $2 million IRA goes to the sole surviving beneficiary: Susan.
• Mark's son, Peter (Eleanor's grandson), receives nothing from this account.

This was not Eleanor's wish. She loved Peter dearly and would have been horrified to know her life's savings bypassed him completely. Scenario B: The “Per Stirpes” Solution Now, let's imagine Eleanor, being the prudent planner she is, had read about Per Stirpes. Years ago, she updated her beneficiary form to read:

• Primary Beneficiary 1: Mark, Per Stirpes (50%)
• Primary Beneficiary 2: Susan, Per Stirpes (50%)

When Eleanor passes away, the distribution plays out very differently:

• The IRA is first divided into two 50% “branches” ($1 million each), one for Mark and one for Susan.
• Susan's branch is intact. She receives her $1 million.
• Mark's branch is passed down to his heir. His son, Peter, receives his father's intended $1 million share.

By adding two simple words, Eleanor ensured her intentions were honored, her legacy was protected, and all branches of her family were treated as she wished.

• Guards Against Unintentional Disinheritance: This is its single greatest benefit. It protects your grandchildren's inheritance if their parent (your child) predeceases you.
• Provides Clarity and Avoids Disputes: A clear Per Stirpes designation is a legally binding instruction. This drastically reduces ambiguity, which in turn minimizes the likelihood of costly family legal battles over your assets.
• Fairness Across Family Lines: For many, the idea that each branch of their family should receive an equal share of the estate is the definition of fairness. Per Stirpes codifies this principle.

• Potential Rigidity: It treats each branch identically. If you have a grandchild with special needs who requires more financial support, or if you are estranged from one child, Per Stirpes may not reflect your nuanced wishes. In such cases, a more complex legal structure like a trust may be necessary.
• The Beneficiary Form “Superpower”: The biggest pitfall is forgetting to update these forms. A designation from a job you left 15 years ago naming an ex-spouse could still be in effect and will override your current will. Regular reviews are essential.
• It is Not a Complete Estate Plan: Per Stirpes is a powerful tool, but it is not a substitute for a comprehensive estate plan. It doesn't help manage estate taxes, protect assets from creditors, or provide for minors. It should be used as one component of a broader strategy developed with legal and financial professionals.

• estate_planning
• beneficiary_designation
• transfer_on_death_tod
• wealth_management
• long_term_investing
• risk_management
• compounding