Beneficiary - Definition and Benefits
The Recipient of an Annuity, IRA, or Death Benefit
A beneficiary is somebody who receives assets at your death. With some types of accounts, you are allowed to designate who that person (or entity) is. This is an important decision because your beneficiary instructions can be separate from any last wishes you express verbally – or even in your will.
Beneficiaries are generally only available for certain types of accounts, such as:
Why have a beneficiary?
Whether or not you choose a beneficiary is a personal decision. Explore all of the options with your financial planner and an estate planning attorney.
Clarity: by assigning a beneficiary, you make it clear who should receive your assets in the event of your death. This eliminates any questions or disputes among remaining family members and friends who might contend that the deceased would have wanted somebody else to receive the assets.
Speed: choosing a beneficiary also speeds things up for the chosen beneficiary – it is often faster and easier to claim assets as a designated beneficiary. There is no need to wait for probate processes (which could take months or longer and require waiting for other assets to be dealt with). Instead, a named beneficiary can typically claim assets as soon as the decedent’s death is documented, usually by providing documents such as a death certificate and affidavit of domicile. Moreover, a beneficiary designation usually supersedes (or overpowers) the instructions in a will – so the will only applies to assets that do not have a named beneficiary.
Types of beneficiaries
There are two basic types of beneficiaries:
- Primary beneficiaries
- Contingent beneficiaries
Primary beneficiaries are the account owner’s first choice for a beneficiary. In the event of death, the first person who can claim the assets is the primary beneficiary. Note that you can have multiple primary beneficiaries in some cases. For example, you could have three primary beneficiaries, all of which receive 33.3% of assets (assuming they are all still living at the time of your death).
Contingent beneficiaries are used as a backup. In the event that there are no living primary beneficiaries, the contingent beneficiary claims the asset. A common example is this:
An account owner picks his wife as the primary beneficiary. She would receive all assets at his death. However, the husband and wife are killed together (at the same time) in an auto accident. Therefore, there is no living primary beneficiary. As a result, assets will go to a contingent beneficiary (if any).
State law dictates how assets are handled when there is no contingent beneficiary, or when none of the contingent beneficiaries claim the assets.
Within those two basic categories, there are other choices that can be made (again, speak with a local attorney and financial planner before making any decisions). You can name individual beneficiaries, or you can use other methods, including:
- Naming an organization or entity as your beneficiary
- Per stirpes designation
- Per capita designation
Especially when considering children, multiple generations or the possibility of beneficiaries who predecease you, it’s essential to understand how beneficiary designations work and what your options are. This page does not get into those details enough to guide you – but hopefully, you’ll get ideas on what needs to be discussed with your financial planner.
Never assume that you know how your assets will be distributed. Different financial institutions use different approaches, and they might default to a certain option even if you don’t request that option on a beneficiary designation form.
If you’re going to leave money to minors, it’s even more important to speak with an estate planning attorney. Minors (often people under the age of 18) are not allowed to own certain accounts on their own. However, there are ways to ensure that money goes to a minor or is spent for their benefit – even if an adult handles the money.
Setting up beneficiaries isn’t a one-time thing. Be sure to review your beneficiary designations every few years – and especially after life events such as marriages, divorces, births, and deaths. Things might have changed for you or your beneficiaries, and it might make sense to make changes.
Some types of accounts don’t allow you to change your beneficiary, but many do.