Key Takeaways

• A beneficiary 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, annuities, and retirement accounts, as well as estate planning documents such as wills and trusts.
• Naming loved ones as beneficiaries is a way of protecting their financial future.
• When minor children or special needs individuals are beneficiaries, setting up a living trust for them might be necessary.
• Naming beneficiaries in a will, life insurance policy, bank, or retirement account, keep that asset out of the probate court.

Understanding Beneficiaries

The beneficiaries are the entities or people who receive the payments or disbursements from your will or accounts. You can name any individual or entity as a beneficiary. When drafting a will, you can assign certain people or entities to receive distributions upon your death. Other assets, such as life insurance policies and retirement accounts, allow you to designate beneficiaries to be paid directly and avoid the time and expense of the probate process. 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, revocable or irrevocable 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 transfer on death (TOD) bank accounts or brokerage accounts and want to name someone to receive those accounts.
• You have a retirement account and want 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 after 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 consider whether people in your life would be in financial hardship if you passed 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 so their loved ones can still handle everyday expenses after they are gone. Many parents buy life insurance as a security net to provide for their minor or adult children.

As we discuss later, retirement plans and some annuities allow you to name beneficiaries. That way, your loved ones are provided for if you pass away before using your full retirement or annuity benefits. 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, be as detailed 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 during the estate planning process avoids later disputes among loved ones.

What if Your Beneficiaries Are Minor Children?

If you have minor children, there are special considerations to naming beneficiaries. Minor children cannot receive life insurance payouts or inheritances as adults would. If minor children are the designated 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 create a revocable living trust. You can then make the trust the beneficiary of your life insurance policy or will. That way, the death benefits go into the trust for your child. Your trustee, as a fiduciary, manages those trust funds for your minor child. In cases of a loved one with special needs, designating a trust rather than an individual as beneficiary may be appropriate. If you choose this option, select a trustee you think can handle this responsibility. It would be best to consider whether this person is reliable in managing 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. You may also create a will using our stream-lined DIY form, in which case you’ll want to ensure that any retirement fund beneficiaries you name in your will do not conflict with the beneficiary designations on your retirement fund account.

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. But there are other options too. You will usually pay higher fees for annuities than 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. Review the payout plan options in the initial contract you sign.

Suppose you are looking for an annuity that will continue to provide for your surviving 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 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, there would be money for their children. When parents name their children as beneficiaries of their life insurance policies, the assets are paid directly to the children without going through the often-burdensome probate process. 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 depends on the types of life insurance beneficiaries you have (either revocable or irrevocable).

• Revocable Beneficiaries: Most life insurance policies list revocable beneficiaries meaning the policyholder can change the beneficiaries and cancel the policy 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 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 more complicated. You can’t change beneficiaries without their consent if you have an irrevocable beneficiary. Your current and 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 their removal. 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.

Suppose you change your designated beneficiaries on a life insurance policy and wish to reflect these changes in your will. In that case, our DIY will allows you to make free revisions and changes to your will for a full year after purchase.

Primary Beneficiaries and 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. Your trustee 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.

You Control Beneficiary Designations

You are in the driver’s seat when naming beneficiaries for life insurance policies, annuities, and retirement accounts. However, you can make cash gifts and leave your personal property to beneficiaries in your will. For example, if you wanted to leave your wedding ring to your daughter or give a sum to charity.

With the convenience of online DIY estate planning services, you can create your own last will and testament and provide for your beneficiaries. And if you change your mind about your beneficiaries, it is easy to update the information without a trip to a lawyer’s office.