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Per Capita vs. Per Stirpes: A Family Divided by Equal Love, Part I


Per Capita vs. Per Stirpes: A Family Divided by Equal Love, Part I

I’ll bet you’ve never given it any thought, but two seemingly unrelated things - making annual exclusion gifts and an innocuous Latin phrase your lawyer puts in your will - can dramatically affect family relationships for generations. Both have to do with the concepts of “per capita,” which means equally to each person, and “per stirpes,” which means equally to each family line.
 
Here’s an example. Grandma and Grandpa ("GG") have two children, Craig and Jane. Craig has five kids and Jane has two. As their estate planning advisors recommend, GG use their $12,000 annual gift exclusions by giving a combined $24,000 of their family business stock to each of their children and grandchildren. These gifts are "per capita" – equal by person.
 
GG have two motivations for the gift amounts. One motivation is to give the maximum possible without Uncle Sam extorting a gift tax. The other is equal love. GG love Craig and Jane equally, so they each get $24,000. They also love their grandchildren equally, so each grandchild gets an equal amount of stock.
 
The side effect of beating Uncle Sam and equal love is to skew business ownership to Craig’s family. Each year, Craig’s family gets $144,000 (six people times $24,000) worth of stock, while Jane’s family gets only $72,000 (three people times $24,000). Jane might question the fairness of this "equal" treatment and think her parents love her brother’s family more.

Table 1: Per Capita Effect on Family Line of Ownership



Table 2: Per Capita Effect on Grandchild Ownership



Table 3: Per Stirpes Effect on Grandchild Ownership



Inconsistent Wills
 
Let’s take this analysis a step further. I bet GG’s wills contain an interesting dichotomy. Most likely, since they love their children equally, any stock remaining at death goes equally to their children. And, their wills probably contain a “per stirpes” provision that leaves a deceased child’s one-half share to his or her children. Table 1 shows what happens if GG die partway through their per capita gift program and then leave the remaining stock to their children (or per stirpes to the grandchildren).
 
The sooner GG die, the less skewing of ownership to Craig’s family. Conversely, the skewing towards Craig’s family increases as GG live longer and accomplish more of their per capita gift program. If they complete the gift program before they die, Craig’s family will own two-thirds of the business. Jane certainly could question why business ownership should be dependent upon how long her parents live.
 
The skewing demonstrated in Table 1 may not seem all that significant. However, it can create great tension between Craig and Jane, especially if they view themselves as equal "partners" in the business. In fact, their families are unequal in voting, dividend and appreciation rights.
 
Interestingly, Craig’s family does not get the last laugh with their disproportionately large ownership. Table 2 shows how much stock each of GG’s grandchildren owns after Craig and Jane die.
 
Individually, Craig’s children own about half as much stock as each of their cousins. The reason is that Craig’s family divides a bigger "pie" into more pieces than Jane’s family divides its smaller "pie." Jane’s children individually will have more vote, dividends, etc. Individually, they are wealthier than their cousins, all because Jane had the foresight to have fewer children. By the next generation (GG’s great-grandchildren), Craig’s descendants may become the "poor relations" relative to Jane’s descendants.
 
Per Stirpes Gifts
 
Could GG have avoided the issue by giving per stirpes - $72,000 to each of Craig’s and Jane’s families? Split six ways, each of Craig and his children would receive $12,000 of stock, while Jane and her children each receive $24,000. Might Craig’s children wonder why GG love Jane’s children more? "After all," one of Craig’s children might say, "It’s not my fault that my parents had so many kids. Why should my cousins get more stock than me?" Plus, GG have failed to maximize available tax savings by giving Craig’s family only half of the available annual exclusion amounts.
 
Even without the annual gifts, the per stirpes approach raises many of the same issues beginning with the grandchildren’s generation. The situation would look like Table 3.
 
At this point, you probably are totally and justifiably confused. I’ll provide some recommendations next month.
 
Ross Nager is Senior Managing Director of Sentinel Trust Company of Houston, Texas.
 

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