What is a Beneficiary?
Naming beneficiaries is an integral part of the
estate planning process. Here’s a look at what
is a beneficiary.
A beneficiary is someone who has been named to receive a specific benefit upon certain conditions.
The most recognizable beneficiary is someone who’s been named to receive the proceeds from a life
insurance policy when the policyholder has deceased. Retirement accounts, even those offered by an
employer, typically ask for a beneficiary designation when you sign up.
Primary vs. Contingent Beneficiary
The primary beneficiary is the person who is designated to receive the benefit. It’s important to name
contingent beneficiaries who will receive the benefit if the primary beneficiary can’t be found, for
example, if that person has also passed away.
If neither your primary or contingent beneficiaries can be found, then your benefits will be passed to your
estate and then to your remaining heirs based on your state law. If your benefits have to go through your
estate, it will take longer for heirs to receive your benefits. If you have outstanding debts, the benefits
could be eaten up during probate and your heirs could end up with nothing.
Make it easy for your beneficiaries to be located by including their names and social security numbers.
Be specific when you’re naming your beneficiaries. For example, rather than using “spouse,” “husband,”
or “wife,” use their names, especially if you’ve been married before. Otherwise, your ex- could dispute the
inheritance and claim it as theirs.
Your beneficiary doesn’t have to be a single person. It can be multiple people, a business, a charity, a
trustee, or a combination of all the above.
It’s a good idea to define what you want to happen to your benefits if the beneficiary can’t be found. For
example, you might specify that your benefits be given to a charity in the case that your other
beneficiaries can’t be found.
Minor Children as Beneficiaries
You might choose to set a trust as your beneficiary for
minor children who typically can’t hold assets. Otherwise,
if your benefits go to a minor child, your estate will have
to find and name a financial institution as guardian of the
asset until the child reaches the age of majority (typically
18). At that time, all the money could be given to the child
who might squander it.
If you use a trust, you can specify at what age you want
the child to receive the benefit. You can even specify that
the benefit be disbursed in certain increments at certain
periods of time. That way, your child can get used to
managing smaller amounts of money rather than getting
a large, lump sum amount.
Your Parents as Beneficiaries
If you’re married without children, you might add your parents as your beneficiaries. Check with your
parents and their estate planner before doing this because your benefits could increase the size of their
estate, which would result in higher taxes on their total benefits.
Don’t forget to remove your parents as beneficiaries when you do get married, have children, or if one of
your parents passes away and the other doesn’t need the extra benefit.
When to Change Your Beneficiary
It’s a good idea to update your beneficiaries when your life changes. That way your retirement savings,
life insurance, and other assets will be passed on to the right people. When you get married or divorced,
or when you adopt or have a child, update your beneficiaries. Review your life insurance beneficiary
information periodically, e.g. once a year, to make sure you have the right people named.
You may not be able to change your beneficiary if you have an irrevocable beneficiary designation. You
might choose this type of designation if you want to make sure the right person gets the benefit. A
revocable beneficiary designation, on the other hand, can be changed.
Securities America and its representatives do not provide tax or legal advice. This information is
general in nature and is not intended to constitute specific tax, legal, or investment advice. Please
consult a tax or legal professional for answers to specific questions.
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