Understanding Per Stirpes Beneficiary Designations

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

When you fill out a beneficiary form for a retirement account, life insurance policy, or investment account, you may come across the term “per stirpes.” It’s a Latin phrase, but don’t let that intimidate you. Choosing per stirpes for your beneficiaries simply determines what happens if one of your named beneficiaries passes away before you do.

In this article, we’ll cover:

• What per stirpes means and how it works

• A simple comparison of per stirpes vs. non–per stirpes designations

• Why keeping beneficiaries up to date is so important

• Special considerations when children or minors are involved

What Does Per Stirpes Mean?

Per stirpes means “by branch” or “by the bloodline.” With this designation, if one of your named beneficiaries passes away before you, their share of the inheritance automatically passes down to their descendants.

If you don’t select per stirpes, your beneficiary designation is considered non–per stirpes, which means that if a beneficiary predeceases you, their share is generally redistributed among the remaining named beneficiaries.

Example: 50/50 Beneficiaries

Let’s walk through a clear example.

Case 1: Non–Per Stirpes (default in many plans)

• You name your two children, Anna and Ben, as 50/50 beneficiaries.

• Anna passes away before you.

• Result: Ben inherits 100% of the account. Anna’s children (your grandchildren) do not receive anything unless you’ve updated the beneficiary form to include them.

Case 2: Per Stirpes

• You name your two children, Anna and Ben, as 50/50 beneficiaries per stirpes.

• Anna passes away before you, leaving two children of her own.

• Result: Ben still receives his 50% share. Anna’s 50% share is split evenly between her two children (25% each).

This is why per stirpes is often called a “fail-safe” designation—it ensures the inheritance follows the family line if a beneficiary dies before you.

Why Keeping Beneficiaries Updated Matters

While per stirpes can act as a backup plan, the best approach is to keep your beneficiary designations current.

• If a beneficiary passes away, you can always file a new form naming updated beneficiaries.

• If you update promptly, the per stirpes designation never even comes into play.

• Regular reviews—especially after major life events like births, deaths, or divorces—can help ensure your assets go exactly where you intend.

Special Considerations for Minors

Per stirpes can create complications if the next in line are minor children. For example, if Anna’s 50% share passes to her 10-year-old child, that minor generally cannot inherit assets outright. Instead, the guardian of the child may have to serve as a custodian to the account until the child reaches the age of majority. However, when the child reaches the age of majority, they gain full control over their inheritance, which may or may not be beneficial.

This raises an important planning question:

• Do you want minor children to inherit directly?

• Or would it make more sense to create a trust and name the trust as the beneficiary?

Working with an estate planning attorney can help clarify the best approach for your family.

Key Takeaways

• Per stirpes means a beneficiary’s share passes down to their descendants if they predecease the account owner.

• Non–per stirpes means a predeceased beneficiary’s share is typically divided among the remaining beneficiaries.

• Keeping beneficiary forms up to date reduces the need to rely on per stirpes.

• If potential per stirpes beneficiaries are minors, additional planning (like a trust) may be necessary.

Beneficiary designations are powerful estate planning tools. A quick review of your forms can make all the difference in ensuring your assets are passed down according to your wishes—without leaving things to chance.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs)

What does “per stirpes” mean on a beneficiary form?
“Per stirpes” is a Latin term meaning “by branch” or “by bloodline.” It ensures that if a named beneficiary passes away before you, their share automatically goes to their descendants, such as their children or grandchildren.

How does per stirpes differ from non–per stirpes?
With a per stirpes designation, a deceased beneficiary’s share passes down to their heirs. In contrast, a non–per stirpes designation redistributes that share among the remaining living beneficiaries, bypassing the deceased beneficiary’s family line.

Why should I keep my beneficiary designations up to date?
Life events such as marriages, births, deaths, or divorces can change your intentions for who should inherit your assets. Regularly updating your forms ensures your accounts are distributed according to your current wishes rather than relying on default rules or outdated designations.

What happens if a per stirpes beneficiary is a minor?
Minors typically cannot inherit assets outright, so a custodian or guardian may need to manage the funds until the child reaches adulthood. Some families use trusts to control when and how minors receive their inheritance.

When should I consider naming a trust instead of individuals as beneficiaries?
If you want more control over how and when heirs—especially minors—receive their inheritance, naming a trust as the beneficiary can help. A trust allows you to set specific rules for distributions and avoid complications with guardianship or early access to funds.

Is per stirpes the best option for everyone?
Not necessarily. While per stirpes ensures assets follow the family line, some people prefer equal redistribution among surviving beneficiaries. The best choice depends on your family structure, estate goals, and how you want your assets to be passed down.

Gifting Your House with a Life Estate vs. Medicaid Trust

I recently published an article titled “Don’t Gift Your House To Your Children” which highlighted the pitfalls of gifting your house to your kids versus setting up a Medicaid Trust to own your house, as an asset protection strategy to manage the risk of a long-care care event taking place in the future.  That article prompted a few estate attorneys to reach out to me to present a third option which involves gifting your house to your children with a life estate.   While the life estate does solve some of the tax issues of gifting the house to your kids with no life estate, there are still issues that persist even with a life estate that can be solved by setting up a Medicaid trust to own your house.

In this article, I will cover the following topics:

• What is a life estate?

• What is the process of gifting your house with a life estate?

• How does the life estate protect your assets from the Medicaid spend-down process?

• Tax issues associated with a life estate

• Control issues associated with a life estate

• Comparing the life estate strategy to setting up a Medicaid Trust to own your house

3 Asset Protection Strategies

There are three main asset protection strategies when it comes to protecting your house from the Medicaid spend-down process triggered by a long-term care event:

1. Gifting your house to your children

2. Gifting your house to your children with a life estate

3. Gifting your house to a Medicaid Trust 

Gifting Your House To Your Children

Gifting your house outright to your children without a life estate is probably the least advantageous of the three asset protection strategies.  While gifting your house to your kids may be a successful strategy for getting the house out of your name to begin the Medicaid 5-Year Lookback Period, it creates a whole host of tax and control issues that can arise both while you are still alive and when your children inherit your house after you pass away.

Note: The primary residence is not usually a countable asset for purposes of Medicaid BUT some counties may place a lien against the property for any payments that Medicaid makes on your behalf for long-term care services.  While Medicaid can’t make you sell the house while you are still alive, once you pass away, Medicaid may be waiting to recoup the money they paid, so your house ends up going to Medicaid instead of passing to your children.

Here is a quick list of the issues:

No Control:  When you gift your house to your kids, you no longer have any control of that asset, meaning if the kids wanted to, they could sell the house whenever they want without your permission.

Tax Issue If You Sell Your House:  If you gift your house to your kids and then you sell your house while you are still alive it creates numerous issues.  First, from a tax standpoint, if you sell your house for more than you purchased it for, your children have to pay tax on the gain in the house.  Normally, when you sell your primary residence, a single filer can exclude $250,000 of gain and a married filer can exclude $500,000 of gain from taxation. However, since your kids own the house, and it’s not their primary residence, you lose the exclusion, and your kids have to pay tax on the property as if it was an investment property.

No Step-up In Cost Basis:  When you gift an asset to your kids while you are still alive, they inherited your cost basis in the property, meaning if you paid $100,000 for your house 30 years ago, their cost basis in your house is $100,000.  After you pass away, your children do not receive a step-up in cost basis, which means when they go to sell the house, they have to pay tax on the full gain amount of the property.   If your kids sell your house for $500,000 and you purchase it for $100,000, they could incur a $60,000+ tax bill.

Life Estate Option

Now let’s move on to option #2, gifting your house to your kids with a life estate.   What is a life estate?  A life estate allows you to gift your house to your children but you reserve the right to live in your house for the rest of your life, and your children cannot sell the house while you are still alive without your permission.

Here are the advantages of gifting your house with a life estate versus gifting your house without a life estate:

More Control: The life estate gives the person gifting the house more control because your kids cannot make you sell your house against your will while you are still alive. 

Medicaid Protection:  Similar to the outright gift your kids, a gift with a life estate, allows you to begin the Medicaid 5-year look back on your primary residence so a lien cannot be placed against the property if a long-term care event occurs.

Step-up in Cost Basis:  One of the biggest advantages of the life estate is that the beneficiaries of your estate receive a step-up in costs basis when they inherit your house.   If you purchase your house for $100,000 30 years ago but your house is worth $500,000 when you pass away, your children receive a step-up in the cost basis to the $500,000 fair market value when you pass, meaning if they sell the house the next day for $500,000, there are no taxes due on the full $500,000.   This is because when you pass away, the life estate expires, and then your house passes through your estate, which allows the step-up in basis to take place.

Lower-Cost Option:  Gifting your house to your children with a life estate only requires a simple deed change which may be a lower-cost option compared to the cost of setting up a Medicaid Trust which can range from $1,500 - $5,000. 

Disadvantages of Life Estate

However, there are numerous disadvantages associated with life estates:

Control Problems If You Want To Sell Your House:  While the life estate allows you to live in the house for the rest of your life, you give up control as to whether or not you can sell your house while you are still alive.  If you want to sell your house while you are still alive, you, and ALL of your children that have a life estate, would all have to agree to sell the house.  If you have three children and they all share in the life estate, if one of your children will not agree to sell the house, you won’t be able to sell it.

Tax Problem If You Sell It: If you want to sell your house while you are still alive and all of your children with the life estate agree to the sale, it creates a tax issue similar to the outright gift to your kids without a life estate.   Since you gifted the house to your kids, they inherited your cost basis in the property and would not be eligible for the primary gain exclusion of $250,000 / $500,000, so they would have to pay tax on the gain. 

One slight difference, the life estate that you retained has value when you sell the house, so if you sell your house for $500,000, depending on the life expectancy tables, your life estate may be worth $50,000, so that $50,000 would be returned to you, and your children would receive the remaining $450,000.    

Medicaid Eligibility Issue:  Building on the house sale example that we just discussed, if you sell your house, and the value of your life estate is paid to you, if you or your spouse are currently receiving Medicaid benefits, it could put you over the asset allowance, and make you or your spouse ineligible for Medicaid.  

Even if you are not receiving Medicaid benefits when you sell the house, the cash coming back to you would be a countable asset subject to the Medicaid 5-Year Lookback period, so the proceeds from the house may now become an asset that needs to be spent down if a long-term care event happens within the next 5 years.

Your Child’s Financial Problems Become Your Problem:  If you gift your house to your children with a life estate, similar to an outright gift, you run the risk that your child’s financial problems may become your financial problem.  Since they have an ownership interest in your house, their ownership interest could be exposed to personal lawsuits, divorce, and/or tax liens.

Your Child Predeceases You:  If your child dies before you, their ownership interest in your house could be subject to probate, and their ownership interest could pass to their spouse, kids, or other beneficiaries of their estate which might not have been your original intention.

Medicaid Trust

Setting up a Medicaid Trust to protect your house from a long-term care event solves many of the issues that arise compared to gifting your house to your children with a life estate.

Control:  You can include language in your trust documents that would allow you to live in your house for the rest of your life and your trustee would not have the option of selling the house while you are still living.

Protection From Medicaid: If you gift your house to a grantor irrevocable trust, otherwise known as a Medicaid Trust, you will have made a completed gift in the eyes of Medicaid, and it will begin the Medicaid look back period.

Step-up In Cost Basis:  Since it’s a grantor trust, when you pass away, your house will go through your estate, and your beneficiaries will receive a step-up in cost basis. 

Retain The Primary Residence Tax Exclusion:  If you decide to sell your house in the future, since it’s a grantor trust, you preserve the $250,000 / $500,000 capital gain exclusion when you sell your primary residence.

Ability to Choose 1 or 2 Trustees: When you set up your trust, you will have to select at least 1 trustee, the trustee is the person that oversees the assets that are owned by the trust.   If you have multiple children, you have the choice to designate one of the children as trustee, so if you want to sell your house in the future, only your child that is trustee would need to authorize the sale of the house.  You do not need to receive approval from all of your children like you would with a life estate.

Protected From Your Child’s Financial Problems:   It’s common for parents to list their children as beneficiaries of the trust, so after they pass, the house passes to them.  But the trust is the owner of the house, not your children, so it protects you from any financial troubles that could arise from your children since they are not currently owners of the house.

Protect House Sale Proceeds from Medicaid:  If your trust owns the house and you sell the house while you are still alive, at the house closing, they would make the check payable to your trust, and your trust could either purchase your next house, or you could set up an investment account owned by your trust. The key planning item here is the money never leaves your trust.  As soon as the money leaves your trust, it’s no longer protected from Medicaid, and you would have to restart the Medicaid look back period.

A Trust Can Own Other Assets: Trusts can own other assets besides real estate. A trust can own an investment account, savings account, business interest, vehicle, and other assets.  The only asset a trust typically cannot own is a retirement account like an IRA or 401(k) account. For individuals that have more than just a house to protect from Medicaid, a trust may be the ideal solution.

Comparing Asset Protection Strategies

When you compare the three Medicaid asset protection options:

• Gifting your house to your children

• Gifting your house to your children with a life estate

• Gifting your house to a Medicaid Trust

The Medicaid Trust tends to offer individuals a higher degree of control, flexibility, tax efficiency, and asset protection compared to the other two options.  The reason why people will sometimes shy away from setting up a trust is the cost.  You typically have to retain the services of a trust and estate attorney to set up your trust which may cost between $1,500 - $5,000. The cost varies depending on the attorney that you use and the complexity of your trust.

Does A Trust Have To File A Tax Return

For individuals that are using the Medicaid trust to protect just their primary residence, their only cost may be to set up the trust without the need for an annual trust tax filing because a primary residence is usually not an income-producing property.  However, if your trust owns assets other than your primary residence, depending on the level of income produced by the trust assets, an annual tax filing may be required each year.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions (FAQs):

What is a life estate?
A life estate is a legal arrangement where you transfer ownership of your home to your children but retain the right to live in and use the property for the rest of your life. After your death, the property passes automatically to your children, avoiding probate.

How does gifting your house with a life estate work?
When you gift your house with a life estate, your name and your children’s names appear on the deed. You retain the right to live in the home for your lifetime, but your children become partial owners. They cannot sell or mortgage the property without your consent while you’re alive.

Does a life estate protect your home from Medicaid?
Yes—if you gift your home with a life estate and survive the five-year Medicaid look-back period, the home is generally protected from Medicaid recovery. However, if you sell the home or receive proceeds from your life estate share, those funds may become countable assets that affect Medicaid eligibility.

What are the tax implications of a life estate?
A major benefit of a life estate is that your heirs receive a step-up in cost basis upon your death, which can eliminate capital gains tax if they sell the property immediately. However, if the home is sold during your lifetime, your children may owe capital gains tax since they do not qualify for the $250,000/$500,000 primary residence exclusion.

What are the disadvantages of a life estate?
Disadvantages include:

• You need all children’s consent to sell or refinance the home.

• If a child faces divorce, bankruptcy, or lawsuits, their share could be at risk.

• If a child dies before you, their ownership interest could pass to unintended heirs.

• Sale proceeds can impact Medicaid eligibility if received personally.

How does a Medicaid trust compare to a life estate?
A Medicaid trust offers greater control and flexibility. It can protect your home (and other assets) from Medicaid while preserving your right to live there, maintaining the step-up in basis, and allowing you to keep the home’s primary residence exclusion if sold. Only the trustee—often one child—needs to approve a sale, simplifying decisions compared to a life estate.

Can a Medicaid trust own other assets besides a home?
Yes. A Medicaid trust can also own investment accounts, savings, or business interests, though it generally cannot hold retirement accounts such as IRAs or 401(k)s. This makes it a comprehensive asset protection tool for individuals with multiple assets to safeguard.

Does a Medicaid trust require annual tax filings?
If the trust only holds your primary residence and the property doesn’t generate income, annual tax filings are typically not required. However, if the trust owns income-producing assets, it may need to file a separate trust tax return each year.