Wealth Planning Insights
A Look at Schwab's Advanced Beneficiary Designations
Keith Fenstad, CFP®, April 2022
When it comes to asset transfers at death, beneficiary designations are just as important as a will, particularly when the beneficiary account (such as an IRA) is the largest single asset in the estate.
Because of the new shortened 10 year distribution period for Inherited IRAs, more people are forgoing naming trusts as beneficiaries and listing children directly.
Many clients may be surprised to know that Schwab’s “default” beneficiary designation simply divides the assets among the surviving beneficiaries - with no consideration to their lineal descendants. For example, if there are three named beneficiaries and one dies, the account is divided among the two surviving beneficiaries. Under this standard “default” designation, nothing would pass to the children of a deceased beneficiary. See Illustration 1 below for two examples of the standard designation where 1 of 3 and 2 of 3 named beneficiaries are deceased.
An often overlooked and misunderstood beneficiary option is a “per stirpes” or “per capita” election. These elections include the lineal descendants of a named beneficiary in the event that beneficiary predeceases the account holder. It is like having a built in contingent beneficiary without specifically naming all the heirs.
With a per stirpes election, the lineal descendants of a deceased beneficiary split the portion that the deceased beneficiary stood to receive. See Illustration 2 below for two examples of per stirpes where 1 of 3 and 2 of 3 named beneficiaries are deceased.
Schwab's per capita election is the same as per stirpes if any named beneficiary survives. The difference is how descendants are treated if ALL the named beneficiaries pass away. With per capita, all the descendants are treated equally. See Illustration 3 for an indication of the difference between the standard, per stirpes and per capita elections in the event there are NO surviving beneficiaries.
The easiest and preferred way to view and update your beneficiaries is online via the Schwab website under Service/Beneficiary. They can also be changed using a Schwab beneficiary update form.
Keep in mind, this applies specifically to Schwab, other custodians can have a different approach for their beneficiary designations.
Please reach out to your Wealth Advisor to review and ensure these designations align with your ultimate wishes.