What Is a Beneficiary, and What Role Do They Play in Estate Planning?

A beneficiary is someone designated to receive assets from an estate, financial account, or insurance policy. Naming beneficiaries ensures assets are distributed according to your wishes, avoiding legal complications and delays.

By Brad Nakase, Attorney

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Have a quick question? We answered nearly 2000 FAQs.

Table of Contents

1. What is the definition of a beneficiary?

2. Beneficiaries and Their Role

3. The Significance of Beneficiaries

4. Beneficiary Types

5. Methods for Choosing a Beneficiary

6. Procedure for Designation of Beneficiary

7. Beneficiary Examples

8. Beneficiaries and the Internal Revenue Service

9. Life Insurance Policy

10. Beneficiaries: Revocable and Irrevocable

11. If I Do Not Designate a Beneficiary, What Will Happen?

12. How Hard Is It to Choose a Beneficiary?

13. Who Has the Authority to Make a Change to a Life Insurance Policy’s Beneficiary?

14. In Conclusion

What is the definition of a beneficiary?

By definition, a beneficiary is an individual or organization named to reap the rewards of another’s property. It is common for beneficiaries to obtain these advantages when they inherit money.

Life insurance policies, retirement accounts, brokerage accounts, bank accounts, and other financial instruments can all have beneficiaries named in their corresponding paperwork.

If you want your money and possessions dispersed the way you want them when you die, you need to name someone to receive them.

Beneficiaries and Their Role

You have the option to choose any individual or entity as a beneficiary to receive your assets upon your death. When distributing assets, the owner or donor has the option to include certain conditions. For example, the inherited property may be subject to age or marriage restrictions before the beneficiary may claim it.

A beneficiary’s designation on financial account documentation takes precedence over a beneficiary’s designation in a will.

Certain financial assets may have tax implications for the recipient. If you are the beneficiary of a life insurance policy, for instance, you should be aware that, although the principle of the policy is often not taxed, the interest that has earned could be.

When you die without naming a beneficiary on your bank or savings account, the organization that controls your assets will get to decide how to divide them up.

If you don’t specify who will get your assets in a will, the probate process might drag on for a long time. Your home state may end up deciding how your assets are distributed.

Either way, the individuals you intended to receive your bequest money may not get it after you pass away. In any case, it might be a while before they get it.

The Significance of Beneficiaries

Making sure the individuals you’ve chosen to get your assets is a top priority, which is why it’s wise to include them as beneficiaries in your will or trust.

Nominating beneficiaries gives you authority over your assets and makes the situation clear for everyone concerned.

Having designated beneficiaries streamlines the process of settling an estate and lessens the burden on loved ones left behind.

Modifications to a will do not impact the beneficiaries named on financial accounts, such an insurance policy or a retirement account. Priority is given to these explicit designations.

Beneficiaries’ identities are not disclosed in financial records. Anyone can see a will, which means that heirs may be subject to public examination.

Beneficiary Types

1. Primary

An individual’s first preference among their designated beneficiaries is known as the primary beneficiary. This individual or entity will get all of the funds in an account, even if additional beneficiaries are named in the account or estate paperwork.

2. Contingent

One other kind of beneficiary is a contingent beneficiary. If the principal beneficiary passes away or cannot be located, they will get the account benefits. Multiple contingent beneficiaries can be named and their respective shares can be specified.

Methods for Choosing a Beneficiary

It is wise to name a beneficiary or beneficiaries for all of your valuable assets, such as real estate, insurance, retirement funds, stocks, bank accounts, and more.

When deciding who will receive your benefits:

Think about your ties to loved ones and anybody else who may be in need of your financial assistance. Think about the household pets who rely on you for survival.

You should think of those beyond your immediate family that you would like to take care of or who have served you faithfully throughout the years.

Review the causes you’ve already donated to and decide if they still have a need for your gifts.

Procedure for Designation of Beneficiary

You are required to supply beneficiary information when you initially open your financial accounts with certain companies. You can ask for the necessary documents to name a beneficiary or beneficiaries later on if you neglected to do so when you first submitted them. Get it filled out, put your signature on it, and send it back to the business. You can generally accomplish this in person or online. Keep an additional copy for your records.

A life insurance policy’s payout cannot go to a minor directly, but a trust or the guardian of a minor child can be named as a beneficiary.

Beneficiary Examples

1. Individual Retirement Account

It is possible for the owner of an individual retirement account (IRA) to name one or more beneficiaries. The recipient’s status as an eligible designated beneficiary or a designated beneficiary determines the distribution possibilities for the assets.

If desired, each kind of beneficiary may get the funds in one single payment.

Other than that, you have the following options.

2. Eligible Designated Beneficiary

The following individuals are qualified to be named as beneficiaries: the account owner’s spouse, any minor children, any relative or friend of the account owner who is fewer than ten years younger than the account owner, and any person who is chronically sick or incapacitated.

Transferring IRA assets to one’s own IRA is possible for a spouse (but not for any other qualified designated beneficiary).

Any qualified designated beneficiary, including spouses, can receive their inheritance in the form of an Inherited IRA account. The next step is to take distributions over a period of time that is proportional to their expected lifespan. Their withdrawals are subject to taxation.

Make sure you do your homework or consult a financial expert before they start taking distributions since there are certain restrictions about when they must begin.

Beneficiaries and the Internal Revenue Service

Designated Beneficiary

Unless they meet the criteria for qualified designated beneficiaries, the individuals named as beneficiaries in the account records are still considered designated beneficiaries.

It is possible for an heir to establish an individual retirement account (IRA) with the funds. They have unlimited access to the funds, but they must remove the entire amount within a decade. It might be subject to a 50% penalty if it isn’t. There will be taxes due on the withdrawal.

Account holders whose deaths occurred on or after January 1, 2020, will no longer have access to the stretch option, which formerly permitted beneficiaries to draw dividends during their entire lives.

When an estate or a trust is named as the beneficiary (also called a non-designated beneficiary), the distribution of assets is directed by the executor or trustee. According to the regulations for a non-designated beneficiary, they can receive assets through an inherited IRA account.

Life Insurance Policy

The money from a life insurance policy doesn’t count as gross income and isn’t taxed when given to a recipient. Nevertheless, interest—whether earned or received—is subject to taxation.

Anyone, such as a spouse or adult child, or any legal organization, like a trust, can be named as the beneficiary of a life insurance policy. When you have young children, one option is to set up a trust and make it the beneficiary of your life insurance.

According to the policy, the trust would get the death benefit if you died. On behalf of the beneficiaries (your children, for example), the trustee would oversee the management of those assets in accordance with the provisions of the trust.

Beneficiaries: Revocable and Irrevocable

The beneficiaries of a life insurance policy might be either revocable or irrevocable. The policyholder has the freedom to modify the revocable beneficiaries whenever they see fit during their lifetime. This is analogous to a revocable living trust, which allows the grantor to make changes to it while they are alive.

Permanence is the hallmark of an irrevocable beneficiary. To make a modification affecting an irrevocable beneficiary, all of the designated beneficiaries (main beneficiary plus numerous contingent beneficiaries, for example) must provide their agreement. Hence, picking beneficiaries wisely is essential.

If I Do Not Designate a Beneficiary, What Will Happen?

If you do not name a beneficiary or beneficiaries, a financial institution or the court in your home state will decide how to distribute your assets.

How Hard Is It to Choose a Beneficiary?

As soon as you choose a beneficiary or beneficiaries, the process is straightforward. To identify someone as a beneficiary on your bank account, you’ll need to fill out a form when you create the account, which may ask for your Social Security number, among other details. If you have already established an account with your bank, all you need to do is ask for the beneficiary designation form, fill it out, and send it back.

Who Has the Authority to Make a Change to a Life Insurance Policy’s Beneficiary?

The policyholder has the right to alter the beneficiary designations of a life insurance policy with revocable beneficiaries whenever they see fit. When a beneficiary dies or if a spouse is a principal beneficiary and the marriage breaks down, this may be required.

To make a modification to a life insurance policy that names irrevocable beneficiaries, the policy owner must obtain the permission of both the beneficiary and any contingent beneficiaries. Because of this, picking policy beneficiaries requires considerable consideration.

In Conclusion

Picking out who will get your money when you die ought to be high on your list of priorities if such distribution is important to you. Make sure your assets go to the correct people by naming them as beneficiaries.

Have a quick question? We answered nearly 2000 FAQs.

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151

What Is a Beneficiary, and What Role Do They Play in Estate Planning?

What is the definition of a beneficiary?

Beneficiaries and Their Role

The Significance of Beneficiaries

Beneficiary Types

Methods for Choosing a Beneficiary

Procedure for Designation of Beneficiary

Beneficiary Examples

Beneficiaries and the Internal Revenue Service

Life Insurance Policy

Beneficiaries: Revocable and Irrevocable

If I Do Not Designate a Beneficiary, What Will Happen?

How Hard Is It to Choose a Beneficiary?

Who Has the Authority to Make a Change to a Life Insurance Policy’s Beneficiary?

In Conclusion

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