A beneficiary is the person or entity who receives the assets of an individual after they pass away. Beneficiaries can be named as inheritors for retirement accounts, trust funds, life insurance, and more.
Choosing a beneficiary — and understanding how it all works — is one of the most important steps when planning your estate. Let’s take a closer look at the process.
What does beneficiary mean?
Simply put, the beneficiary is the one who receives an inheritance, in whatever form it may take. Most beneficiaries are people, but they can also be organizations, referred to as “entities.” Entities can also refer to financial accounts if you want to put money into a trust.
Designating a beneficiary ensures your property is distributed according to your wishes after you die. This usually means naming beneficiaries in your will, but it can also apply to:
- Life insurance: Choosing a beneficiary ensures your life insurance policy’s death benefit is disbursed according to your wishes. Life insurance beneficiaries can be revocable, meaning subject to change, or irrevocable, meaning they’re a permanent heir. Only the owner of a life insurance policy can change revocable beneficiaries. If they wish to change an irrevocable beneficiary, it has to be done with the consent of that beneficiary.
- Retirement accounts: There are two types of beneficiaries related to retirement accounts:
- Eligible designated beneficiaries: These can be a surviving spouse, minor child of the account holder, friend/family member not more than 10 years younger than the account owner, or a disabled/chronically ill person.
- Designated beneficiaries: These are entities or persons who don’t fit into the eligible beneficiary category. Eligible designated beneficiaries have priority over designated beneficiaries.
- Living trusts: In this case, the beneficiary is the person or entity you choose to take ownership of the trust’s proceeds after you die.
Beneficiaries can also be conditional. In this situation, a beneficiary only receives their inheritance if a specific condition is met. This can be a way to ensure certain wishes — such as the care of an elderly family member — are met after your death.
Conditions must be clearly described in your will. As long as they don’t involve breaking any laws or encouraging harmful behavior, the probate court will do its best to enforce these conditions.
If you don’t name any beneficiaries, the assets you leave behind could be stuck in probate court. It may fall to the state or relevant financial institution to decide how to distribute them.
Types of beneficiaries
Beneficiaries fall into two broad categories: primary beneficiaries and contingent beneficiaries. Their basic function is the same, but they’re subject to different rules.
This refers to your “first choice” for who or what will inherit your financial assets. Naming a primary beneficiary is important for two reasons. Firstly, it overrides any changes made to a will — if your estate is contested, the primary beneficiary attached to your financial account will still receive the inheritance. Secondly, primary beneficiaries are kept private, while wills enter into public record.
These are secondary beneficiaries, named as inheritors only if the primary beneficiary can’t claim the assets. You can add multiple contingent beneficiaries to a financial account, as well as specify how your money should be divided amongst them.
Designating a beneficiary
Choosing your beneficiaries is a simple process. Whenever you open a financial account — be it a retirement account or life insurance — you'll likely be asked to name primary and secondary beneficiaries as part of the process.
Deciding who to name as a beneficiary is a more personal process. Take stock of your family and friends, as well as any organizations you might be passionate about, and consider how your assets could be used to support them.
Updating or changing beneficiaries
You can generally update or change your beneficiaries as you see fit. In fact, it’s a good idea to review and update assignments regularly. You may plan to update your beneficiaries every few years, or after major life events — such as the birth of a child, marriage, or death of a family member.
Keeping your assignments updated will ensure your wishes are carried out following your death. It’s also a good idea to notify your beneficiaries and provide them with your insurance company’s contact information. In doing so, you’ll ensure a smooth transition and payout process.
Ultimately, who receives your assets is up to you. It may seem like a daunting question, but you don’t have to face it alone. Consulting with an estate attorney can help you take inventory of your assets and decide how you want them distributed.