Who—or what—is a beneficiary?
Your life insurance policy and retirement plan have asked you to name a beneficiary—but what does that really mean? What happens if you don’t? Do you need beneficiaries for anything else? Although it’s critical to name beneficiaries, it’s pretty easy to do. We’ll explain the what, why, and how of beneficiaries to help you protect your loved ones and your assets.
Who can be named as a beneficiary?
A beneficiary is a person or entity, such as a trust or charity, who you choose to receive certain financial assets and accounts when you pass away. So, who can be named a beneficiary?
- An individual person
- Multiple people
- A charity of your choice
- A trust that you established
- Your estate—this is also the default option if you don’t assign a beneficiary to your financial account
You can have different beneficiaries for different accounts. You may choose your brother as the beneficiary of your life insurance policy and your sister for your 401(k) account. In this case, your brother will receive the death benefit of the insurance policy and your sister will receive your 401(k) account balance when you pass away.
You can also split how an account gets distributed, such as 50% to your son and 50% to your daughter.
Why are beneficiaries important?
To put you—not the court—in control of where your assets go when you’re no longer here.
Not only do beneficiary assignments determine who receives your assets, but they also help reduce the portion of your assets that have to go through the probate court process when you die. Probate court can be a lengthy, costly, and public forum for hashing out where your belongings go when you’re not here. For these reasons, it may be in your best interest to avoid probate altogether or reduce your exposure to it as best you can. Choosing your beneficiaries in advance is the best way to try to avoid probate.
Primary versus secondary beneficiaries
Sometimes, you’ll be asked to name primary and secondary beneficiaries. Why? Because you need to make arrangements for a few different circumstances.
The primary beneficiary is the first in line to receive your asset when you pass away. If you’re married, the primary beneficiary is often your spouse.
Secondary, or contingent, beneficiaries are the next in line, and will only receive your asset if there are no living primary beneficiaries. Having a secondary beneficiary will allow your asset to pass to your second choice without going through your probate estate (more on the probate estate process below).
How does your marital status affect beneficiary assignments?
Your marital status only matters if you’re married and want to choose someone other than your spouse to be the beneficiary. In this case, you typically need to have written consent from your spouse. Single people can choose whoever they want as a beneficiary.
Regarding family members, you should carefully consider what it means to designate any minor children as a beneficiary. Is the child responsible enough to manage the money they’d receive? Do your state’s laws even allow for minors to receive your assets? You may want to think about setting up a trust on your minor child’s behalf if you want to grant your assets to them. Trusts are legal containers for assets, are managed by a responsible trustee you choose, and can distribute their contents over your preferred timeline.
Life happens—loved ones pass away, new ones are born, and relationships evolve.
Review your beneficiary selections periodically to ensure they still align with your wishes. Make the review part of your overall financial plan’s routine care. If you get divorced, you may want to remove your ex-spouse as a beneficiary and add someone else. If you’ve had children since you last chose beneficiaries, you may want to set up a trust for your kids and make it a beneficiary.
Secondary beneficiaries are a good backup plan for managing life events, but reviewing all your beneficiaries from time to time is best practice.
Beneficiaries: estate planning 101
Choose beneficiaries for as many of your financial accounts and assets that allow it. This part of estate planning puts you in control of your money and can save your loved ones time, money, stress, and publicity by avoiding probate court. And don't forget to check it from time to time—life changes and your beneficiaries may need to as well.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
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