DEFINITION
A beneficiaryis a person or entity you name to receive your assets upon your death. Your assets will be distributed to the next person in line if you do not name a beneficiary. This is determined by the state or institution holding your assets.
The Key Takeaways
- Beneficiaries are those who you name to receive your assets upon death.
- Review your beneficiary designations following major life events in order to ensure that your wishes are up-to-date.
- Minor beneficiaries are subject to special rules due to restrictions in contractual agreements and the type of property that they can legally own.
- The primary beneficiary is chosen by the account owner as their first choice, while contingent beneficiaries are a backup.
Beneficiary Definition and Example
A beneficiary is a person who receives your assets upon your death. For example, a death benefit received from a life-insurance policy. If you own one of the following types of accounts, you will be asked to choose a beneficiary.
- Annuity Contracts
- Individual retirement accounts, 401(k), or other retirement funds
- Life insurance policies
- Pension benefits1
Note:
Your beneficiary instructions may be different from the last wishes expressed orally or through your will. 2
What is a Beneficiary?
You will be asked to name a beneficiary when you open an account which will continue after your death. The paperwork for the account includes this designation.
The instructions of a will are usually overridden by a beneficiary designation, which means that the will is only applicable to assets without a beneficiary.
The beneficiary designations should be reviewed periodically, particularly after major life events like:
- Weddings
- Divorce
- Birth of a Child
- Death of spouse, partner or beneficiary that you have designated
You or your beneficiary may be affected by a major life event. It may be necessary to change your designations in order to ensure that your assets are distributed to the right person after your death.
In some situations, a beneficiary cannot be changed. This includes irrevocable Trusts and divorce agreements with certain conditions.
Minors Beneficiaries
In general, minors cannot legally enter into contracts or own property under their name. This prevents them owning certain accounts such as retirement funds or receiving your insurance payout. There are several ways to make sure that the money is used for the benefit of a minor. To designate a child as a beneficiary, you can create a trust. You will need to assign a trustee who will act for the benefit of the child.
Social Security Beneficiaries
If you are receiving Social Security benefits, it is also necessary to name a beneficiary.
| Social Security Benefits by Type | |
|---|---|
| Type of Benefit | ALLOWED BENEFICIARIES |
| Retired workers and their auxiliary beneficiaries | Spouse* of retired worker |
| Children of retired workers | |
| Survivor benefits | Child of a deceased employee |
| Widow (er) 60 years or older | |
| Widow (er) with minor child or disabled living at home under 60 years old | |
| Disabled widow (er) aged 50 or older | |
| Parents of the dependent child of a deceased worker | |
| Disability worker and auxiliary benefits | Spouse* of an employee with a disability |
| Child of a Disabled Worker |
In order to qualify as a beneficiary, an eligible child must fulfill one of three requirements:
- Minor Child under Age 18
- Before the age of 22, a child is considered disabled.
- High-school student under age 197
Do I need a beneficiary?
You can choose a beneficiary for a number of reasons.
Clarity
You can make sure that your assets are distributed to the right person in case of your death by naming a beneficiary. This eliminates any misunderstandings or disagreements among family members and close friends who may argue that you wanted someone else to inherit your assets.
Note:
Never assume you will know the distribution of your assets. Financial institutions have different methods and may default to one option even if the beneficiary designation form is not filled out.
Speed up
It is easier to distribute assets quickly after death if you choose a beneficiary. You can claim assets faster by naming a beneficiary, rather than waiting until the probate is completed. 8
A beneficiary named can claim assets once the death has been documented. This is usually done by submitting documents like a death certification and an affidavit proving residence.
Different Beneficiaries
There are two types of beneficiaries: primary, and contingent.
The primary language of the United States is English
The primary beneficiary is chosen by the account owner as their first choice. If the primary beneficiary is still alive, benefits are paid to him or her in the event of death.
Note:
In some cases, you can have more than one primary beneficiary. You could, for example, have three primary beneficiaries who would each receive 33.3%.
Contingent
Contingent Beneficiaries can be used in case there are no primary beneficiaries living or cannot be located.
As an example, suppose a person chooses his wife to be the primary beneficiary. She would inherit all of his assets upon his death. If both the husband and the wife die in the same auto accident, then there is no primary beneficiary. The assets will then go to the contingent beneficiary if there is one.
Other Options
You can also name beneficiaries in these two groups. You could:
- Choose an organization or entity to be your beneficiary rather than one person.
- Declare that assets will be distributed as ” per Stirpes” if you die before the beneficiary. This means that their children will become beneficiaries if they pass away.
- Decide whether your assets will be divided “per capita” or equally between the beneficiaries at the time of your death.
Understanding beneficiary designations and your options is important, especially when you consider children, multiple generations or the possibility of beneficiaries predeceasing you.
Consult your estate planning attorney or financial planner to ensure that you are recording your wishes correctly.
