What Is a Beneficiary, Beneficiary Definition, Types of Beneficiary

Anbarasan Appavu

A beneficiary is a person (or entity) designated to receive the benefits of another's property. These benefits are frequently an inheritance for the recipients.

What Is a Beneficiary, Beneficiary Definition, Types of Beneficiary

Beneficiaries can be named on life insurance policies, retirement accounts, brokerage accounts, bank accounts, and other financial products.

It is essential to name beneficiaries for your financial assets so that they can be distributed in accordance with your wishes after your death.

• A beneficiary is an individual who receives a monetary benefit, which is often by distribution.

• Distributions can have tax consequences.

• Beneficiaries who inherit a retirement account may have multiple options for disbursing its funds.

• Distribution options from inherited IRAs are contingent upon whether the beneficiary is an eligible designated beneficiary or a designated beneficiary.

Beneficiaries on financial accounts can be changed at any time, though the necessary paperwork must be completed and returned.

How Beneficiaries Work

Any individual or organization can be designated as a beneficiary to receive your property upon your death. The individual who owns the property or the benefactor can stipulate various conditions for the distribution of the property. Before taking control of the inherited property, a beneficiary may be required to reach a particular age or to be married.

There may also be tax implications for the beneficiary when inheriting particular financial assets. For instance, if someone is the beneficiary of a life insurance policy, it is useful to know that while the policy's principal is typically not taxed, the interest may be.

If you fail to designate beneficiaries on your financial accounts, the financial institution that holds the assets will be required to make distribution decisions.

The failure to name beneficiaries in a will can potentially prolong the probate process for years. It may allow the state in which you reside to determine how your assets are distributed.

In either case, it is possible that the beneficiaries of your posthumous financial support will not receive it. Or they may have to wait a considerable amount of time.

Beneficiaries designated on the documentation for financial accounts take precedence over those named in a will.

When you die without a will, you are considered intestate, and your assets are distributed according to state inheritance laws, not necessarily to your chosen beneficiaries.

Why Beneficiaries Are so Important

It is important to designate beneficiaries for your financial assets so that you can rest assured that the people to whom you've designated your assets will receive them.

• By naming beneficiaries, you have control over the disposition of your assets and provide clarity for all parties involved.

•Beneficiaries simplify the administration of your estate and reduce the likelihood of stressful situations for your heirs.

• Beneficiaries designated for financial accounts, like an insurance policy or retirement account, are unaffected by changes to a last will and testament. These direct designations are given priority.

•Beneficiary names in financial account documents are kept confidential. A will is a matter of public record and can subject heirs to scrutiny.

Types of Beneficiaries

Primary Beneficiary

The primary beneficiary is the beneficiary selected first by the account holder. While other beneficiaries may be listed in account or estate documents, this individual or organization will receive the entire account balance.

Contingent Beneficiary

Secondary beneficiary is a contingent beneficiary. They will only receive account benefits if the primary beneficiary is deceased or cannot be located. You can name multiple contingent beneficiaries and specify how the assets will be divided among them.

How to Choose a Beneficiary

Beneficiaries must be named for all of your significant assets, including real estate, insurance policies, retirement accounts, brokerage accounts, and bank accounts.

When selecting your beneficiaries:

Evaluate your familial relationships to determine who may need your financial assistance. Consider any family pets who may require your protection.

Consider those outside the family whom you would like to care for or reward for years of service.

Consider whether the organizations you've supported in the past could benefit from your financial assistance.

Designation Process

When you initially open your financial accounts, you are required to provide beneficiary information. You may request the documentation that allows you to designate one or more beneficiaries if you did not provide it at the time. Complete the form, sign it, and return it to the company. Typically, this can be done online or in person. Keep a copy for your records.

You can name a trust or the legal guardian of your minor children as a beneficiary of a life insurance policy instead of the children themselves.

Examples of Beneficiaries

Individual Retirement Account

A holder of an individual retirement account (IRA) has the ability to name a beneficiary or beneficiaries. Depending on whether the beneficiary is an eligible designated beneficiary or a designated beneficiary, the options for asset distribution vary.

If desired, each beneficiary type may receive a lump sum distribution of the proceeds. If not, the following options exist:

Eligible designated beneficiary

An eligible designated beneficiary is a spouse, the account owner's minor child, someone less than 10 years younger than the account owner (e.g., a family member or friend), or a chronically ill or disabled person.

Spouses and all other eligible designated beneficiaries can open an Inherited IRA for the assets they inherit. Then, they must take distributions in accordance with their life expectancy. The withdrawal amount is taxable. When they must begin taking distributions, specific distribution rules apply; therefore, you should conduct research or consult with a financial advisor.

Designated beneficiary

A designated beneficiary is a person who is listed as a beneficiary in the account's records, but who is not an eligible designated beneficiary.

• Establish an Inherited IRA for the assets. Access the funds at any time, but they must all be withdrawn within ten years. If not, a 50% penalty could be imposed. Withdrawn funds are taxable.

• If the account holder died on or after January 1, 2020, the stretch option that permitted beneficiaries to take distributions over their lifetimes is no longer available.

If the beneficiary is an estate or a trust (known as a non-designated beneficiary), the executor or trustee is responsible for distributing the assets. They may also open an Inherited IRA and distribute the funds according to the rules for non-designated beneficiaries.

Life Insurance Coverage

Life insurance proceeds are exempt from taxation and are not included in the beneficiary's gross income. However, interest received or accrued is subject to taxation.

Beneficiaries of life insurance can be individuals, like a spouse or adult child, or entities, like a trust. If you have minor children, for instance, you may choose to establish a trust and designate it as the beneficiary of your life insurance policy.

If you were to pass away, the trust would receive the policy's death benefit. The trustee would then administer these assets in accordance with the trust's terms for the benefit of the beneficiaries (e.g., your children).

Revocable Beneficiary vs. Irrevocable Beneficiary

Beneficiaries of life insurance may be revocable or irrevocable. Beneficiaries that are revocable can be changed whenever necessary during the policyholder's lifetime. This is comparable to a revocable living trust, which can also be modified as long as the grantor of the trust is still alive.

A beneficiary that is irrevocable is permanent. If there are multiple beneficiaries named on a life insurance policy (such as a primary beneficiary and several contingent beneficiaries), then all of them must agree to any changes involving an irrevocable beneficiary. Therefore, it is essential to choose recipients with care.

What is a Beneficiary?

A beneficiary is a person or organization that has been designated to receive property upon the demise of another. Typically, the recipient receives financial benefits related to the benefactor's financial accounts.

What Happens If I Don't Choose Beneficiary?

If you do not designate one or more beneficiaries for your assets, someone else, such as a financial institution or a court in your state of residence, will determine what happens to your money.

How Hard Is It to Designate a Beneficiary?

Once you've chosen who they should be, it's not difficult at all. In order to designate beneficiaries for your financial accounts, you must fill out a form with the names, social security numbers, and possibly other information. If your accounts are already established, simply request the beneficiary designation form(s), fill it out carefully and correctly, and return it to your financial institution.

Who Can Change a Life Insurance Policy's Beneficiary?

The beneficiary designations of a life insurance policy with one or more revocable beneficiaries can be changed at any time by the policyholder. This may be required if a beneficiary dies or if the primary beneficiary is a spouse and the couple divorces.

If irrevocable beneficiaries are named on a life insurance policy, the policyholder would need the beneficiary's and any contingent beneficiaries' consent to make a change. Therefore, it is essential to exercise caution when selecting policy beneficiaries.

How Many Beneficiaries Should I Have?

There is no hard and fast rule regarding the number of beneficiaries you should have, although some policies or accounts may impose a maximum (for example, 10 per asset). You must name a primary beneficiary, and you should have at least one, but preferably multiple, contingent beneficiaries. It is prudent to discuss your wishes with your beneficiaries in advance, if possible. Thus, if you need to have conversations about your decisions, you will have time to do so, reducing the likelihood that things will become complicated after your death.

Unfortunately, estate planning is a topic that many people resist or put off. However, it is essential because it allows you to preserve and protect your legacy and your loved ones. Choosing a primary and contingent beneficiary guarantees that your estate and assets will go to the intended recipients. If you fail to complete this crucial step, you will have no control over who receives what.

Can the Same Individual Serve as Both My Primary and Contingent Beneficiary?

It is a common Estate Planning error to name the same individual as both a primary and contingent beneficiary. Since the contingent beneficiary is a backup, it is essential to avoid naming the same individual in both capacities.

Bottom Line

Choosing beneficiaries for your financial accounts should be a top priority if you are concerned about the distribution of your assets after your death. By naming beneficiaries, you can ensure that your property goes to the correct individuals.

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