In the preparation of a will, you’ll be designating primary beneficiaries. We’ll look at what that means, and what happens when one dies before you do?

It is assumed when you plan your estate that the individuals you list as beneficiaries will outlive you. That isn’t always the case, unfortunately. So what happens to the inheritance that beneficiary is set to receive. Often it depends on how your will is structured. First let’s discuss beneficiaries.

What is a Beneficiary in a Will?

A beneficiary is anyone who the creator of an estate plan has named in their estate plan who will ultimately receive an inheritance from them upon their passing. Beneficiaries are a critical portion of every estate plan as they are an integral reason to creating the estate plan. The whole reason of taking the time to create an estate plan is so you can name beneficiaries to inherit from you.

In a comprehensive estate plan, there will be different types of beneficiaries – primary beneficiaries as well as contingent beneficiaries. Further, not all beneficiaries have to be individuals, or classes of individuals (i.e. grandchildren, etc.). They can also be organizations.

A primary beneficiary is the person or organization to inherit first from a trust or a will. Whereas a contingent beneficiary is the person or organization to inherit if the primary beneficiary is predeceased. Sometimes the contingent beneficiary is called a “second in line” beneficiary.

What Happens When a Beneficiary Dies?

If a beneficiary passes away, then the person who established the trust or had the will drafted should go back and have it amended. Sometimes as estate planners we get asked, “If a beneficiary dies, does our estate plan no longer have effect?”

Although a beneficiary passing away is never planned for, a thorough estate plan should take this possibility into consideration. Further, even if the estate plan does not take this into account the estate plan will still be in effect, it will just be modified.

When naming beneficiaries for an estate plan, there are two common paths for their inheritance to take. Both paths consider the possibility of the beneficiary predeceasing the person who is creating the estate plan.

The first way to name a beneficiary is to say their inheritance “lapses.” What this means is that if the beneficiary passes away prior to the creator of the estate plan, the inheritance that was set to go to them is no longer in effect.

For example, if the person creating an estate plan had four children and the terms of the estate plan stated their inheritance were to lapse should they die prior to the creator, and the estate plan stated the children were to take equal shares of the estate, what happens if one of the children predeceases the creator? In this case, we have three living children, and they would each take a 1/3 share of the estate as their inheritance instead of a 1/4 share if their sibling had still been living.

The second way to name beneficiaries for an estate plan is to say their inheritance passes “per stirpes.” This is a Latin term and means “by branch,” which will make more sense shortly. The easiest way to think of a per stirpes designation is this: if a beneficiary dies before you do, their share of your estate will automatically and evenly go to their descendants, their children or child. If your estate is set up to be distributed “per stirpes” and a beneficiary dies, each named, living beneficiary would receive their original portion of your estate. Any descendants of the deceased beneficiary would split that portion of the inheritance equally.

What happens though if the deceased beneficiary has no children in an estate plan that utilizes per stirpes language? In that case, the inheritance would go as if it has lapsed, as described in the paragraph above.

The best plan is to amend an estate plan when a beneficiary dies before the person who had created the estate plan. But by utilizing the lapse and per stirpes language, estate planners can create a plan that considers the possibility of a primary beneficiary predeceasing the creator.

Need your estate plan made, or looking for advice on what beneficiaries to name? Contact The Mitten Law Firm today.