Naming a beneficiary is an essential step in estate planning that allows individuals to determine how their assets will be distributed in the event of their death.
By understanding the different types of beneficiaries and the importance of naming them, individuals can ensure that their assets are passed on to loved ones or causes that matter to them.
Read on for everything you need to know about beneficiaries.
What is a beneficiary?
A beneficiary is a person or entity legally designated to receive the benefits or proceeds of a trust, will, insurance policy or retirement account.
The specific rights and responsibilities of a beneficiary will depend on the type of instrument, which can include:
- A trust: Trusts are legal arrangements where grantors transfer property to trustees, managed for the beneficiary’s benefit. The trustee is legally obligated to manage the property and distribute the income to the beneficiary per the trust agreement terms.
- An insurance policy: The beneficiary may be a person, like a spouse or a child, or an entity, like a charity or living trust. The death benefit is paid out tax-free to the designated beneficiary and can be used to cover expenses such as funeral costs, outstanding debts or financial security.
- A will or estate: The person who writes the will, the testator, can specify who the beneficiaries will be and how much each will receive. If the testator dies with no will, the property will be distributed per the laws of the state where they lived.
- A retirement account: An IRA or 401(k) account will provide the beneficiary with the remaining account balance in the event of the account holder’s death.
- A bank account: Financial accounts, such as savings accounts, checking accounts and certificates of deposit, can be held in payable on death (POD) or transfer on death (TOD) designation. This allows individuals to name beneficiaries who will receive the funds in the account in the event of their death without going through probate court.
- Investment accounts: Investment accounts, like brokerage accounts, can be held in TOD designation. This allows individuals to name beneficiaries who will receive the assets in the account in the event of their death without going through probate court.
- Real estate: Real estate can be held in joint tenancy with the right of survivorship designation, which allows the surviving joint tenant to inherit the property in the event of the death of the other joint tenant.
In addition to that, different types of beneficiaries include:
- Primary beneficiary: The primary beneficiary is the person or organization receiving the benefits first. If the primary beneficiary dies before the owner, the secondary beneficiary will receive the benefits.
- Secondary beneficiary: The secondary beneficiary is the person or organization receiving the benefits if the primary beneficiary dies before the asset owner.
- Contingent beneficiary: The contingent beneficiary is the person or organization that will receive the benefits if the primary and secondary beneficiaries die.
- Per stirpes beneficiary: The per stirpes designation is a way to specify how the benefits will be distributed if the primary beneficiary dies before the asset owner. With a per stirpes designation, the benefits will be distributed to the descendants of the primary beneficiary.
- Per capita beneficiary: The per capita designation specifies how the benefits will get distributed if the primary beneficiary dies before the asset owner. With a per capita designation, the benefits will be distributed equally among the descendants of the primary.
- Totten trust beneficiary: A Totten trust is a type of savings account used to pass on small amounts of money to a named beneficiary after the account holder dies.
- Charitable beneficiary: A charitable beneficiary is a nonprofit organization that will receive the benefits of the asset after the owner dies.
- Special needs beneficiary: A special needs beneficiary is a person with a disability who will receive the benefits of the asset after the owner dies. The benefits may provide financial support while preserving the individual’s eligibility for government benefits.
- Business entities: Business entities, such as partnerships and corporations, can be named as beneficiaries. This can be useful for individuals who own a business and want to ensure its continuation after death.
What if a person does not name a beneficiary?
If an individual fails to name a beneficiary, their asset distribution will be determined by the laws of the state where they live.
This means that the assets will be distributed according to the state’s laws, which typically prioritize family members such as the spouse, children and other close relatives. If the individual has no relatives, their assets may be distributed to the state. Failing to name a beneficiary can also result in a loss of certain benefits and protections.
For example, if an individual has a retirement account but does not name a beneficiary, the assets may not be eligible for a tax-free rollover to the surviving spouse.
What are 5 reasons people assign beneficiaries?
1. Estate planning
Estate planning involves making arrangements for the distribution of property after death. By designating beneficiaries for their assets, individuals can ensure that their property is distributed according to their wishes, avoid probate and minimize estate taxes.
Probate is a court-supervised process used to settle a deceased person’s estate, which can be time-consuming and expensive. Minimizing estate taxes can help to ensure that more of the deceased person’s property gets passed on to their beneficiaries rather than being lost to taxes.
2. Insurance planning
Insurance planning involves making arrangements to provide financial protection for loved ones in the event of their death. By designating beneficiaries of insurance coverage, individuals can ensure that their loved ones receive the policy’s death benefit promptly.
The death benefit can cover expenses like funeral costs or outstanding debts or provide financial security for the beneficiary.
3. Retirement planning
Retirement planning involves making arrangements for financial security upon retirement. By designating beneficiaries of retirement accounts, individuals can ensure that loved ones receive the remaining balance of the account after their death.
The remaining balance of the account can be used to provide financial security for the beneficiary, like helping to pay for living expenses or education costs.
4. Charitable giving
By designating a charitable organization as a beneficiary, individuals can make a lasting impact and support a cause they care about.
5. Special needs planning
Special needs planning involves making arrangements for the financial security of a family member with special needs.
By designating a person with special needs as the beneficiary of their assets, individuals can provide for their beneficiary while still preserving their eligibility for government benefits.
What should you consider when naming a beneficiary?
- Purpose: Is it to provide for a loved one, support a charitable organization or fulfill a specific need or obligation? Knowing the purpose can help guide the decision-making process.
- Estate planning goals: Consider the individual’s estate planning goals, such as tax planning, creditor protection or avoiding probate, as these goals may impact the choice of beneficiary.
- Age and health: Consider the age and health of the potential beneficiaries, as younger beneficiaries may need the assets for a more extended period. In comparison, older beneficiaries may have more immediate needs.
- Family dynamics: It is essential to consider who may need the assets the most and who would be the best caregiver for any minor children.
- Trustworthiness: Will the beneficiaries be responsible for the assets and use them as intended?
- Flexibility: Can the designation be changed in the future if circumstances change?
How do you name a beneficiary?
The beneficiary naming process varies depending on the type of asset considered, but it typically involves a step-by-step process similar to this:
- Review the terms and conditions: Before naming a designated beneficiary, it is crucial to understand the asset’s terms and conditions with a financial advisor’s help. For example, the process for naming life insurance beneficiaries will differ from the process for naming a beneficiary for a retirement account.
- Identify potential beneficiaries: Once you have reviewed the terms and conditions, identify potential beneficiaries like family members, friends or charitable organizations.
- Choose the appropriate form of beneficiary designation: The appropriate form of beneficiary designation will depend on the type of asset. For example, life insurance companies typically require a written designation on the life insurance policy, while retirement accounts may allow for an electronic designation.
- Complete and sign the beneficiary designation form: Once you have chosen the appropriate form of beneficiary designation, you will need to complete and sign the form. This may involve providing legal documents, like Social Security Number and birth certificate, for your designated beneficiaries.
- Submit the completed form to the appropriate party: The completed form should be submitted to the relevant party, such as the insurance company or retirement plan administrator.
- Review and update your beneficiary designations regularly: It is essential to review and update your beneficiary designations regularly to ensure they are current and reflect your current wishes. Major life events, such as the birth of a child, the death of a spouse or a spouse becoming an ex-spouse, may require you to update your beneficiary designations.
What do you need to know about beneficiaries?
Beneficiaries play a crucial role in the distribution of assets after an individual’s death. When naming a beneficiary, it is vital to consider the different types of beneficiaries, the specific circumstances and the individual’s goals.
By understanding the importance of naming beneficiaries, individuals can ensure that their assets are passed on to their loved ones and the causes that matter most to them.