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What Should I Know about Beneficiaries?

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When you open a financial account, you’re often asked to name a beneficiary. Simply stated, a beneficiary is someone who is entitled to the benefits of the account on the death of the account holder. For example, if you’ve purchased life insurance, you name a beneficiary who receives the benefits of the policy when you pass away.

When you open most financial accounts, like a bank account, life insurance, a brokerage account, or a retirement account (e.g., a 401(k) or IRA), the institution will ask you to fill out a beneficiary designation form to name a beneficiary. You also establish beneficiaries when you draft a will or other legal contracts that require you to specify someone to benefit in your stead. With some trusts, the beneficiary may be you and your spouse while you’re alive.

Bankrate’s article entitled “What is a beneficiary?” explains that the beneficiary is usually a person, but it could be any number of individuals or other entities, like a trustee of your trust, your estate, or a charity or other such organization.

When opening an account, many people forget to name a beneficiary because it’s not needed as part of the process to create many financial accounts. However, naming a beneficiary allows you to direct your assets as you want, avoid conflict and reduce legal issues. Failing to name a beneficiary may create big headaches in the future for those who have to deal with sorting out your affairs.

There are two types of beneficiaries. A primary beneficiary is first in line to receive any distributions from your assets. You can disburse your assets to as many primary beneficiaries as you want. You can also apportion your assets as you wish, with a certain percentage of your account going to each primary beneficiary. A contingent beneficiary receives a benefit if one or more of the primary beneficiaries is unable to collect, such as if they’ve died.

After you’ve named your beneficiaries, it’s important to review the designations regularly. Major life events (death, divorce, birth) may modify who you want to be your beneficiary. You should also make certain that any language in your will doesn’t conflict with beneficiary designations. Beneficiary designations generally take precedence over your will. Check with an elder law or experienced estate planning attorney.

Finally, it is important to understand that minors (those typically under age 18 in most states) usually cannot hold property, so you will need to set up a structure that ensures the child receives the assets. One way to do this is to have a guardian that holds assets in custody for a minor. You may also be able to use a trust with the same result but with an added benefit: in a trust, you can instruct that the assets be given to beneficiaries for specific purpose or only when they have reached a certain age or upon some other event.

Reference: Bankrate (July 1, 2020) “What is a beneficiary?”