What is a Beneficiary & How to Choose One
A beneficiary is the individual or entity you name to receive a certain asset. You don’t have to choose a close relative as a beneficiary — it could be a friend, business partner or even a non-person, such as an organization, a favorite charity or a trust. The key word to remember is benefit — beneficiaries stand to benefit from being the person or entity you choose to receive the distribution.
A primary beneficiary is the person (or persons) first in line to receive the death benefit from your life insurance policy — typically your spouse, children or other family members.
If the primaries pass away with or before you, the contingent beneficiaries receive the distribution. Contingent beneficiaries don’t share in the distributions if there are surviving primaries — their purpose is to ensure someone receives the benefit if your first options are no longer living.
You could save yourself time and effort in having to change beneficiaries down the road by designating primary beneficiaries and backups.
Accounts and Policies You Can Name a Beneficiary
Beneficiaries are commonly used in life insurance policies. Say you have a $1 million life insurance policy. Who will receive the million-dollar death benefit after you pass away? The person(s) you choose would be known as the beneficiary.
Social Security is one of the few types of accounts that limit who can receive a payout after you pass. Your monthly retirement or disability SS benefits are typically paid to spouses and children.
Qualified Retirement Plans
Naming a beneficiary is necessary since no one can predict how long you’ll live. If you don’t spend all your retirement money, the remainder will go to the beneficiaries of your choice.
Investments and Brokerage Accounts
Brokerages that hold your investments in stocks, mutual funds or in a cash account ask you to name beneficiaries. The stock or investment will be transferred to the beneficiary after your death. A transfer may be ideal since it doesn’t require selling the stock and cashing out. The beneficiary can continue to hold the shares and allow them to continue to grow in value without having to sell them.
Checking and Savings Accounts
Some assets, such as checking and savings accounts do not require you to name beneficiaries. However, many banks allow it if you request it. Ask your bank for a beneficiary form to fill out. Your account may be converted into a Payment on Death (POD) account. There won’t be many changes to how your bank account works, except the funds will be assigned after your death to the beneficiaries you named.
Revocable vs. Irrevocable Beneficiary
Understanding a revocable vs. irrevocable beneficiary is fairly easy. As mentioned, you can generally add or remove beneficiaries as often as you’d like. For the ultimate control, you can revoke or take away a revocable beneficiary. You don’t have to notify them if you cancel a life insurance policy, remove them as beneficiary or change the amount you plan on leaving them.
In contrast, irrevocable beneficiaries are harder to remove once they’re named. For example, a spouse in a community property state is considered irrevocable. You’ll need their written permission to remove them as beneficiaries, add others, change the amount of their distribution or cancel an insurance policy.
You may want or need an irrevocable beneficiary if there is a key decision-maker or partner you want to continue your business. Or you may be required to name an ex-spouse on your retirement accounts or life insurance as part of a divorce agreement.
Most policies and accounts automatically assign revocable beneficiaries. You could always request to add an irrevocable beneficiary — just remember you’ll need their consent if you’d like to make changes in the future.
How to Choose Your Beneficiary
When choosing a beneficiary, consider what you would like the asset or payout to be used for. You may want to leave an account to someone in charge of paying your debts with the funds after you pass, or for a child to use to fund college. In most cases, there is no right or wrong way to choose beneficiaries, as long as you’re specific.
Although the process is generally straightforward, you may want to consult with an advisor, estate planner or attorney if you intend on leaving money or assets to a trust or a minor child.
Leaving assets to a child under 18 (or 21, depending on the state) can be an issue since a minor cannot legally access or manage assets. Probate court will likely step in to name a guardian or trustee on behalf of the child until he or she is of legal age.
If you’d like to avoid probate and designate a minor child to receive your assets, it’s best to name an adult you can trust on behalf of the child. You could always add a provision in your will to make it clear that the funds are to be managed by the adult until the child is of legal age. Or you could create a trust for your child and name the entity as the beneficiary.
Naming a trust as a beneficiary can give you added control, especially if you have minors or disabled dependents you worry could end up in probate or misuse the funds. A trust allows you to set additional conditions on how the asset is disbursed. However, it has its drawbacks.
A trust is more expensive since it requires an attorney to set it up. In addition, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, which orders non-spousal beneficiaries of IRAs to take full distribution of all amounts within ten years of the benefactor’s death. If a beneficiary is extremely young at your passing, such as infant to seven years old, they may not be of legal adult age by the time the 10-year distribution deadline comes up, putting them back in the hands of probate.
How To Add Beneficiary
Setting up beneficiaries is fairly simple. You’ll typically need to contact the insurance company or plan administrator to request, fill out and return a beneficiary designation form. Financial institutions typically make it easier by allowing you to log in to your account, navigate to beneficiary designation and enter the individuals or organizations of your choice.
Include the beneficiary’s name, relationship, contact information and Social Security or Tax Identification number (if available). If you’re adding multiple primary and contingent beneficiaries, enter the amount you’d like each beneficiary to receive, such as a set amount or percentage.
Once beneficiaries are set up, you can change, add or remove them. The asset will be transferred or disbursed to the beneficiaries after you pass.
Do I Need to Name A Beneficiary?
Assigning beneficiaries is a good idea, especially if you don’t have a will ready and want to keep your loved ones out of lengthy and costly probate court after you die. If you don't name one and you don’t have a will executed, your estate will be named the beneficiary.
You want to avoid this since the estate will have to go through probate which involves lawyers, hearings and ends up being long and expensive. Not to mention, the courts will decide who receives your assets for you — and it may not be someone you hoped for.
Can I Have More Than One Beneficiary?
You could name more than one person as the beneficiary. In such circumstances, you will need to be specific about how the multiple beneficiaries will share the assets or proceeds. Using the life insurance example, if you name a spouse and your adult child as your two beneficiaries, you will have to decide what amount or percentage goes to each beneficiary. You could assign 50% to each, $10,000 to the child and the remainder to your spouse or whatever combination you decide.
Keep in mind that you can generally change beneficiaries whenever you’d like. However, the community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin have limitations when it comes to a spouse. The spouse may need to provide written permission before you name another party or ask them to share the benefit with someone else after you’re gone.
Should I Name Beneficiaries If I Have a Will?
When deciding on whether you should bother with this level of estate planning, the most important point to remember is that beneficiaries typically override a will. If your will and account beneficiaries don’t agree, the courts will typically go with the named beneficiaries over your will’s statements, even if the will is the more recent of the two. Keeping your last will and testament and designations up to date will save your survivors from confusion and probate court.