Key Takeaways

• A beneficiary is someone who receives the benefits of something left to them by someone else.
• Individuals or entities (such as charities, nonprofits, or trusts) can be beneficiaries.
• There are beneficiaries for life insurance plans, wills, trusts, and sometimes retirement accounts.
• Naming loved ones as beneficiaries is a way of protecting their financial future.
• When minor children are beneficiaries, it might be necessary to set up a trust for them.

Understanding Beneficiaries

You can name any individual or entity as a beneficiary. The beneficiaries are the entities or people who receive the payments or disbursements from your will or accounts. You can put various conditions on the payments of funds, such as a minimum age requirement. Beneficiaries don’t have to be natural persons. They can be entities like charities, trusts, or nonprofit organizations.

You may need to name beneficiaries for the following reasons:

• You have a life insurance policy and need to designate someone to receive the proceeds.
• You would like to name someone to receive trust fund distributions.
• You have a retirement account, and you want someone to name someone to inherit the funds.
• You need to choose who will receive your assets through a will.
• You want to name someone to receive annuity payments in the event of your death.

Who Should You Name as a Beneficiary?

People usually name those who are closest to them as beneficiaries. Some examples of beneficiaries are:

• Close family members like a spouse or children
• Other loved ones or friends
• Your children’s guardians
• A trust
• A charity or nonprofit organization you would like to support

When naming beneficiaries, you should think about whether people in your life would be in financial hardship if you were to pass away. If they would, this is an excellent reason to take care of them by naming them as a beneficiary. This is especially true in the case of life insurance. One of the reasons people commonly pay for life insurance is to be sure that their loved ones can still handle everyday expenses in the event of their death. Many parents buy life insurance as a security net to provide for their children, whether minor or adult.

As we discuss later, retirement plans and some annuities allow you to name beneficiaries. That way, if you pass away before using your full retirement or annuity benefits, your loved ones are provided for. This is another way to create financial security for your family. Further, you will benefit from the peace of mind it will give you.

When you list beneficiaries, you should be as explicit as possible. This helps to avoid confusion or mistaken identity. To ensure you are leaving no doubt, you should include your beneficiaries’ full names and social security numbers. You want to ensure no mix-ups if you have a former spouse, adopted children, stepchildren, or other particular circumstances. Being clear about your wishes can help avoid disputes amongst loved ones later.

What if Your Beneficiaries Are Minor Children?

If you have minor children, there are special considerations to naming beneficiaries. Minor children cannot just receive life insurance payouts or inheritances as adults would. If minor children are beneficiaries of a life insurance policy, the proceeds go to their legal guardian. Depending on state laws, the same is often true when minor children are beneficiaries of large inheritances.

To work around this problem, you might choose to create a trust. You can then make the trust the beneficiary of your life insurance policy or will. That way, the proceeds would go into the trust for your child. Your trustee would then manage those trust funds for your minor child. If you go with this option, make sure you choose a trustee you think can handle this responsibility. It would be best if you considered whether this person is reliable to manage your child’s finances.

Retirement Plan Beneficiaries

Retirement accounts typically allow account holders to name a beneficiary. This way, if the account holder passes away before using the funds, they can name someone else to receive the proceeds.

Becoming a beneficiary of a retirement account comes with tax considerations. A spousal beneficiary of a qualified retirement plan like a 401(k) or an individual retirement account (IRA) might be able to roll retirement plan inheritance into their retirement account for tax benefits.

For non-spousal beneficiaries, the options are more limited. There was a change in the law in 2019 called the SECURE act. The law now requires non-spouses who inherit qualified retirement accounts to take distributions equal to the entire account value within ten years.

The tax laws for inherited retirement plans can get complicated, especially after the passage of the SECURE act. Tax laws are constantly evolving, so these rules may change again. If you have inherited a retirement plan and have concerns about handling it, it is a good idea to talk to an attorney.

Annuity Beneficiaries

An annuity is technically an insurance product that provides a regular source of income during retirement. Annuities allow you to invest money now and receive payments at later dates. The premiums you pay for your annuity are usually invested into mutual funds. But there are other options too. You will usually pay higher fees for annuities than you will for other retirement planning tools.

Different annuities offer varying types of payout plans. With some annuities, payments stop when the annuity’s owner dies. With other annuities, there is an option for a spouse or beneficiary to receive payments after the annuity owner’s death. This is something to keep in mind when you are looking for an annuity. The payout plan options will be laid out in the initial contract you sign.

Suppose you are looking for an annuity that will continue to provide for a spouse or other beneficiary after your death. In that case, you should talk to your financial advisor or another financial professional. If the account increases in value, there can be taxes due for annuity beneficiaries. This is an area where an estate planning attorney’s expertise can come in handy.

Life Insurance Beneficiaries

Life insurance is an important estate planning tool. For parents, having life insurance offers peace of mind. They know that if they were to pass away, their children would be provided for. Life insurance also provides tax benefits over other types of inheritance. Proceeds from life insurance are not taxed because they are not considered income.

Can You Change Life Insurance Beneficiary Designations?

The answer to this question might be either yes or no. It depends on the types of life insurance beneficiaries you have (either revocable or irrevocable).

Revocable Beneficiaries Versus Irrevocable Beneficiaries

Revocable Beneficiaries: Most life insurance policies list revocable beneficiaries. This means that the policyholder can change the beneficiaries and cancel the policy entirely if they choose to. They would have to file some paperwork with their life insurance company. Changing beneficiary designations is a crucial thing to do when circumstances change in your life. You might need to change a beneficiary designation if you go through a divorce, if a beneficiary dies, or if you start a trust. If you have experienced a significant life event or an extended period has passed since you named your beneficiaries, it might be time to review your choices and your plans for the future.

Irrevocable Beneficiaries: Life insurance policies with irrevocable beneficiaries are a little bit more complicated. If you have an irrevocable beneficiary, you can’t change beneficiaries without their consent. Your current beneficiary and any contingent beneficiaries would need to agree to the change. In this sense, irrevocable beneficiaries are virtually guaranteed to receive proceeds from the life insurance policy unless they agree to be removed. If you add irrevocable beneficiaries to your life insurance plan, you should be sure about them. For this reason, people sometimes name their children as irrevocable beneficiaries.

Primary Beneficiaries Versus Contingent Beneficiaries

The two main types of beneficiaries are primary beneficiaries and contingent beneficiaries. A primary beneficiary is the first person (or entity) in line to receive the payments from a life insurance policy, retirement account, will, and so on. If this person is available to receive a payout or inheritance, it will go to them.

Contingent beneficiaries (or secondary beneficiaries) are the backup beneficiaries. They receive the proceeds only if the primary beneficiary is deceased, unavailable, or refuses to receive the proceeds. People often name charities as contingent beneficiaries. This way, if your intended beneficiary passes away before you, your favorite charity can receive the proceeds.

It’s a good idea to list contingent beneficiaries because it can prevent family strife after your passing. Take, for example, a situation where your primary beneficiary is your spouse. If your spouse dies before you and you have named a trust the contingent beneficiary, it will prevent your children from arguing over the proceeds. The proceeds will be in the trust that you named as a contingent beneficiary. The trustee you chose will then disburse the trust funds in the best interests of the trust’s beneficiaries.

You can list more than one contingent beneficiary on life insurance or a retirement plan. If you do this, you must list the percentages that each contingent beneficiary should receive. Of course, the total percentage should add up to 100.

How an Attorney Can Help

Tax laws on inheritance, life insurance, and retirement accounts can get complicated. The laws are also constantly changing. Whether you are the beneficiary of an inheritance or are planning for your family’s future, an estate planning attorney can help.