All You Need To Know About Beneficiaries
You’ve probably been asked more than once to name a beneficiary. When opening a financial account, you’re usually required to name a beneficiary, which is the person who would be entitled to the benefits of the account upon your death.
Beneficiaries can be named for a wide range of accounts, including life insurance, retirement accounts, and 401(k)s. Here’s what you need to know to make beneficiary decisions that reflect your personal wishes and those benefit inheritors according to your plans.
What Is A Beneficiary?
Typically, a beneficiary is one person, but a beneficiary could also be more than one individual as well as entities such as your estate, a trustee, or an organization. As the owner of the asset, you can designate a person or a group as a beneficiary and set specific conditions regarding that asset. For example, you could specify that a child will not receive funds from a trust until they reach a certain age.
Spouses are often named as beneficiaries, but many financial institutions allow you to name the individual of your choice. Beneficiary identification information is often required, including a current address and Social Security number.
Why Is Choosing A Beneficiary Important?
Choosing a beneficiary helps to facilitate the process of dividing your assets as you wish among the individuals you’ve named. If you haven’t named a beneficiary, upon your passing, a court may assume the responsibility of dividing up and distributing your assets as it sees fit.
Naming a beneficiary can also serve to prevent conflict among relatives vying for what remains of your estate. When you designate a beneficiary, you set in motion a legally enforceable method of moving your assets to those you intend to have them. Specifying a beneficiary can also help prevent your assets from being reviewed and negotiated in probate court, a process that can sometimes take years depending on the assets involved.
Who Can Be A Beneficiary?
In general, beneficiaries fall into two categories: primary and contingent.
(1) Primary Beneficiary
Simply put, a primary beneficiary is first in line to receive any distributions from your assets. You can divide up your assets among as many primary beneficiaries as you wish and assign a percentage of your account to each designated beneficiary. Primary beneficiaries are first in line when it comes to asset distribution.
(2) Contingent Beneficiary
A contingent beneficiary receives a benefit if one or more of the primary beneficiaries is unable to collect their assigned allocation. You can designate the children of the primary beneficiary or indicate that you wish the assets to be divided among the remaining primary beneficiaries. Once the assets have been assigned and distributed, the contingent beneficiaries will have no further claim. In some cases, you may be presented with a third option, which involves naming a tertiary beneficiary who would be awarded assets if the primary or contingent beneficiaries are unable to collect or cannot be found.
(3) Minors As Beneficiaries
Because a minor usually can’t hold property, you’ll need to set up a specific structure if you would like a child to receive your assets. You can assign a guardian who will hold the assets in custody for the minor, or you can establish a trust that specifies which assets will be passed on to the beneficiaries when they reach a specific age.