What Is a Beneficiary?

What is a beneficiary?

A beneficiary is a person (or entity) who is designated to receive the benefits of property owned by someone else. Beneficiaries often receive these benefits as part of an inheritance.

A beneficiary can be named in documents relating to a life insurance policy, retirement account, brokerage account, bank account and other financial products.

It is important to designate beneficiaries for your financial assets so that they can be distributed according to your wishes upon your death.

Key points to remember

  • A beneficiary is a person who receives a benefit which is often a monetary distribution.
  • Distributions may have tax consequences.
  • Beneficiaries who inherit a retirement account may have various options for distributing its funds.
  • Options for distributions of Legacy IRAs depending on whether the beneficiary is an eligible designated beneficiary or a designated beneficiary.
  • You can change the beneficiaries of financial accounts at any time, but this requires completing and returning the relevant documents.

How Beneficiaries Work

Any person or organization can be named as a beneficiary to receive your assets after your death. The person who owns the property, or the benefactor, can put various stipulations on the disbursement of property. These could include requiring a beneficiary to reach a certain age or be married before taking control of the inherited property.

In addition, there may be tax consequences for the beneficiary when he inherits certain financial assets. For example, if someone is the beneficiary of a life insurance policy, it is useful to know that although the principal of most policies is not taxed, the increased interest could be.

If you do not name beneficiaries on your financial accounts, the financial institution that holds the assets may have to make asset allocation decisions.

Failure to name beneficiaries in a will can tie one’s assets to probate potentially for years. This may leave the decision to distribute your assets up to the state in which you live.

Either way, the people you wanted to support financially after your death may not receive it. Or they may have to wait a long time for it.

Beneficiaries named on documents for financial accounts supersede any beneficiary listed in a will.

Warning

When you die without a will, you are deemed intestate and your assets are not necessarily distributed to your designated beneficiaries, but in accordance with state inheritance laws.

Why Beneficiaries Matter

It is important to designate beneficiaries for your financial assets so that you can be sure that the people you have decided to give your money to are certain to receive it.

  • By naming beneficiaries, you control what happens to your money and provide clarity for everyone involved.
  • Having beneficiaries simplifies settling your estate and can reduce the potential for stressful situations for those you leave behind.
  • Beneficiaries named for financial accounts, such as an insurance policy or a retirement account, are not affected by changes to a will. These direct designations prevail.
  • Beneficiary names in financial account documents remain confidential. A will becomes a public document and can expose heirs to public scrutiny.

Types of beneficiaries

Primary

The primary beneficiary is the first choice of beneficiary made by a financial account holder. Although other beneficiaries may also be listed in account or estate documents, that person or organization will receive all assets of an account.

Quota

A contingent beneficiary is a secondary beneficiary. They only receive account benefits if the primary beneficiary is no longer living or cannot be found. You can name more than one contingent beneficiary and how the assets would be divided between them.

How to choose a beneficiary

Beneficiaries should be named for all of your significant assets, including property, insurance policies, retirement accounts, brokerage accounts, bank accounts, etc.

When selecting your beneficiaries:

Assess the relationships you have with family members who may need your financial help. You may want to consider pets that may need your protection.

Review the people outside the family that you would like to take care of or reward their loyal service over the years.

Review the organizations you have supported over time and whether they can use your financial support.

Designation process

When you first open your financial accounts, companies ask you to provide beneficiary information. If you have not provided it at this time, you can request the documents allowing you to designate one or more beneficiaries. Complete it, sign it, date it and return it to the company. This can usually be done online or in person. Keep a copy for your records.

Minor children cannot directly receive proceeds from a life insurance policy, but you can name a trust or your children’s legal guardian as the beneficiary.

Examples of beneficiaries

Individual Retirement Account

A individual retirement account (IRA) gives the account holder the option of designating one or more beneficiaries. The asset allocation options are different depending on whether the beneficiary is an eligible designated beneficiary or a designated beneficiary.

Each type of beneficiary can accept a lump sum distribution of the proceeds if they wish. Otherwise, the choices are as follows.

Eligible Designated Beneficiary

An eligible designated beneficiary is a spouse, minor child of the account holder, someone less than 10 years younger than the account holder (for example, a family member or friend), or someone suffering from chronic illness or disability.

  • A spouse (but no other eligible designated beneficiary) can transfer IRA assets to their own IRA.
  • Spouses and all other eligible designated beneficiaries can open an inherited IRA account for the assets they receive. Then they must take distributions over time, as determined by their life expectancy. The money they withdraw is taxable. Specific distribution rules apply when they should start receiving distributions, so be sure to do your research or discuss this with a financial advisor.

Designated beneficiary

A designated beneficiary is someone who appears on the account records as a beneficiary but does not fall within the category of eligible designated beneficiary.

  • Open a legacy IRA account for assets. Access any amount of money at any time, but everything must be withdrawn within 10 years. If not, a 50% penalty may apply. Money withdrawn is taxable.
  • The stretch option that allowed beneficiaries to receive lifetime distributions is not available if the account holder died on or after January 1, 2020.

If the beneficiary is an estate or trust (called an unnamed beneficiary), the executor or trustee directs the distribution of the assets. They can also open an inherited IRA account and distribute according to the rules applicable to undesignated beneficiaries.

life insurance policy

Life insurance proceeds are tax exempt for the beneficiary and are not reported as gross income. However, any interest received or accrued is taxable.

Beneficiaries of life insurance can be individuals, such as a spouse or adult child, or entities, such as a trust. For example, if you have minor children, you can choose to establish a trust and name it as the beneficiary of your life insurance policy.

If you were to die, the policy death benefit would be paid into the trust. The trustee would then manage these assets under the terms of the trust on behalf of its beneficiaries (for example, your children).

Revocable beneficiary vs. Irrevocable beneficiary

Beneficiaries of life insurance can be revocable or irrevocable. Revocable beneficiaries can be changed if necessary at any time during the lifetime of the contract holder. This is similar to a revocable living trust, which can also be modified as long as the settlor of the trust is still alive.

A irrevocable beneficiary is permanent. If there are multiple beneficiaries named to a life insurance policy (for example, a main beneficiary and several potential beneficiaries), then they would all have to consent to any changes involving an irrevocable beneficiary. It is therefore important to choose the beneficiaries carefully.

What is a beneficiary?

A beneficiary is a person or organization that has been designated to receive the property of another in the event of death. Often, the benefits received are financial benefits related to financial accounts held by the benefactor.

What happens if I don’t choose a beneficiary?

If you do not choose one or more beneficiaries for your assets, the decision on what happens to your money will be made by someone other than you, such as a financial institution or a court in the state in which you live.

Is it difficult to designate a beneficiary?

Not difficult at all, once you’ve decided who they should be. Designating beneficiaries of your financial accounts involves providing names, social security numbers, and perhaps other details on a form when you open your account. If your accounts are open, simply request the appropriate beneficiary designation form(s), complete them carefully and correctly, and return them to your financial institution.

Who can change the beneficiary of a life insurance policy?

In the case of a life insurance contract with one or more revocable beneficiaries, the contract holder may modify the beneficiary designations at any time. This is something that may be needed if a beneficiary dies or if the primary beneficiary is a spouse and the marriage ends in divorce.

If irrevocable beneficiaries are named to a life insurance policy, then the policy owner would need the consent of the beneficiary and any contingent beneficiaries to make a change. For this reason, it is important to think carefully when choosing policy beneficiaries.

The essential

If you care about the distribution of your financial assets after you leave, choosing the beneficiaries of your financial accounts should be a priority. By designating beneficiaries, you can ensure that your property ends up in good hands.

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