What Is a Beneficiary?
Naming beneficiaries allows you to pass on your assets beyond your lifetime. Learn how to choose them, as well as the different types here.
A large part of estate planning is ensuring your family members or heirs get your assets as smoothly as possible. This is often made possible by legal agreements, such as trusts, wills, and life insurance policies, where you name beneficiaries. In short, these are individuals — children, grandchildren, spouses, friends, etc. — or companies who receive assets from another party, known as a benefactor.
In this article, we’ll explain what it means to name someone as a beneficiary and the different types of agreements where you’d have one. We’ll also highlight factors you should think about when designating them, as well as answer common questions.
Beneficiaries are people who receive your assets either during your lifetime or upon your death. They exist in several types of legal agreements and documents used in estate planning, including:
- Life insurance policies
- Retirement accounts (e.g., IRAs, Roth IRAs, and 401(k)s)
- Transfer-on-death (TOD) assets
- Payable-on-death (POD) accounts
Naming someone means you intend to pass on some or all of what you own to them. Some examples of what you might leave to a beneficiary include investments (real estate, stocks, bonds, etc.), bank accounts, retirement accounts, and personal items.
Often, several question marks loom over an estate, with the biggest being “Who gets what and why?” Designating beneficiaries helps alleviate some of this conflict. And in many cases, the legal arrangements that allow you to do so, like trusts and life insurance policies, can avoid probate. This makes it easier to ensure a smooth transition of assets or inheritance to people you specifically select without drawn-out and expensive court proceedings.
Types of Beneficiaries
The two primary types of beneficiaries are primary and contingent:
- A primary beneficiary is any individual or entity entitled to receive assets or property upon your death, provided they’re around to receive them. There can be more than one, and each can receive a varying amount.
- Contingent beneficiaries, sometimes known as secondary beneficiaries, are next in the order if your primary beneficiaries have passed away or are unable to claim their benefits. For example, if you named your spouse as a primary beneficiary in your will, you could also name your children as contingent ones. This ensures your assets can pass on to them if your spouse isn’t alive when you die.
Choosing both primary and contingent beneficiaries is a common strategy. It ensures that you have a backup plan if, for any reason, your immediate heirs can’t receive their proceeds.
You can designate nearly anyone as a beneficiary of your estate. This could include:
- A spouse
- Charitable organizations
- A trust
- Your estate
Choosing beneficiaries isn’t something to take lightly, however. During the selection process, you’ll have a great deal to consider. But ultimately, it boils down to how much you think someone would benefit from receiving money or property from you. Here are some factors to consider:
- Are you married? Naming your husband or wife as a beneficiary is common and can often have tax advantages, such as being able to easily roll over assets into a tax-deferred account.
- Do you have children? Your children may be able to carry on your legacy long after you’re gone.
- Do you have minor children? Naming minors as beneficiaries can have some wrinkles. For instance, they can’t take life insurance payments. In this case, it may make sense to set up a trust with them as a beneficiary.
- Do you have others (such as those with special needs) who rely on you? Setting up a special needs trust, for instance, allows you to provide for a disabled beneficiary, while retaining their government aid.
- Not everyone can handle a sudden windfall. Ensure you select someone mature enough or able to manage an inheritance.
- Do you have a charity you want to support? It’s possible to allocate money to charities after your passing. This could be a good way to ensure your money goes to a good cause beyond your lifetime.
As mentioned, it’s also a good idea to consider adding secondary beneficiaries. Without any backup individuals or organizations to receive your assets if your primary selections can’t, everything will end up going to your estate. This spawns a both lengthy and costly probate process, which can be hard on family members or stakeholders in your estate.
If you need help picking beneficiaries, it’s smart to consult with an estate planner or financial advisor. To quickly find a vetted advisor, you can use matching quizzes, like this one. It’ll connect you with three fiduciary professionals near you.
How to Designate One
Just as deciding who to name as beneficiaries requires some care, so does the actual process of designating them. In general, though, it’s straightforward. When you set up a trust, will, life policy, or retirement account, you’ll have an opportunity to name a beneficiary. Often, you’ll be able to fill out a form, either online or with pen and paper.
It’s important to be as complete as possible when you name beneficiaries. Include their full names, contact information, and Social Security numbers. Otherwise, according to the Insurance Information Institute (III), it may be difficult to accurately identify the correct person(s). This can cause undue conflict, either legally, between family members, or both, as to who holds entitlement to your property.
You may need to adjust the beneficiaries in your estate for abundant reasons, whether it be divorce, death, or other significant life changes. Luckily, it’s normally easy to update information online.
With life insurance providers and retirement/bank accounts, you typically have to log in to your account and update the information. You can also contact the carrier over the phone. In some cases, just as you might for designations, you may have to fill out and send a form via the mail.
If you have a will, you can contact an attorney to help you with adding, removing, or updating beneficiaries. You’ll likely have to add a codicil. This is a document that shows that you’ve amended your will.
When you have a trust and want to make changes, things are a little harder. Whether you can make changes will depend on the type of trust you have. If you have a revocable (or living) trust, which can be retracted at any time, chances are you’ll be able to make changes to beneficiaries. However, if you have an irrevocable trust, you’re typically locked in and, unfortunately, can’t make any edits.
Frequently Asked Questions
What happens if you don’t name a beneficiary?
Failing to name beneficiaries (in wills, trusts, life insurance, etc.) means your assets will be subject to probate court. When this happens, the court will decide the dispersal of your assets against any outstanding debts. This can often be expensive and time-consuming. Your assets will also face estate taxes.
What is a revocable beneficiary?
Revocable beneficiaries have no claim to a death benefit while a benefactor is still alive. The benefactor also reserves the right to update or remove the beneficiary without giving them any notice.
What is an irrevocable beneficiary?
Irrevocable beneficiaries are much more difficult to update than revocable ones. Usually, they must give specific permission for their information to be updated or removed from an estate document. These people have specified rights to assets or money upon the benefactor’s death.
How many beneficiaries can you have?
In many cases, you can name as many beneficiaries as you want. However, some legal arrangements or accounts may limit the exact number you can designate. You’ll have to check with your life insurance carrier or financial services provider or ask a lawyer about your state’s laws to verify how many beneficiaries you can name.
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