What Is a Beneficiary? Everything You Need to Know
When it comes to managing your assets and planning for the future, understanding the term beneficiary is crucial. Whether you’re drafting a will, setting up a trust, or purchasing life insurance, knowing what a beneficiary is and how they function can help ensure your wishes are honored. In this post, we’ll answer the key question: What is a beneficiary? We’ll also cover the different types of beneficiaries, how to choose one, and why they’re essential in estate planning.
What Is a Beneficiary?
A beneficiary is an individual or entity designated to receive assets, benefits, or funds upon the death of another person or after a specific event, such as retirement. Beneficiaries are commonly named in legal documents like wills, life insurance policies, trusts, and retirement accounts.
In simple terms, a beneficiary is the person who inherits your assets or receives financial benefits after you pass away or reach a milestone, depending on the type of account or policy.
Types of Beneficiaries
There are several types of beneficiaries to consider:
Primary Beneficiary: This is the first in line to receive the designated assets. If the primary beneficiary is unable or unwilling to accept the inheritance, the assets then go to the contingent beneficiary.
Contingent (Secondary) Beneficiary: This person or entity receives the assets if the primary beneficiary is deceased or otherwise disqualified.
Revocable Beneficiary: You can change this beneficiary at any time without their consent.
Irrevocable Beneficiary: Once designated, this beneficiary cannot be changed without their permission.
Why Is Naming a Beneficiary Important?
Naming a beneficiary helps ensure your assets go exactly where you intend. It also avoids probate, a lengthy and expensive legal process that determines asset distribution if no beneficiary is named. Additionally, clearly designated beneficiaries can help prevent family disputes.
Common Beneficiaries
When deciding who should be your beneficiary, consider the following:
Your relationship with the person: It’s common to name a spouse, children, other family members, or close friends.
Financial needs and circumstances: Consider how your assets will impact their financial situation.
Age and legal status: If your beneficiary is a minor, you may need to appoint a guardian or set up a trust.
Tax implications: Some inheritances have tax consequences. Consulting with a financial advisor, estate planner, or CPA is advisable.
Can You Change a Beneficiary?
Yes, but it depends on the type of beneficiary. Life changes like marriage, divorce, or the birth of a child are common reasons to update beneficiaries.
Common Mistakes to Avoid
Not updating beneficiaries: Failing to update beneficiaries after significant life events can lead to unintended inheritance.
Naming minors without a guardian or trust: This can lead to legal complications.
Ignoring contingent beneficiaries: Always name a backup in case the primary beneficiary cannot accept the assets.
What is a Contingent Beneficiary?
A contingent beneficiary is a person or entity that receives the assets if the primary beneficiary is deceased or otherwise disqualified.
Which Assets Can Have Beneficiaries?
Here are a few of the accounts that you can have beneficiaries listed as. These are just some of many accounts out there.
Bank Accounts
401ks
Roth IRAs and Traditional IRAs
Trusts
Taxable Brokerage Accounts
Life Insurance Policies
Final Thoughts on Beneficiaries
Understanding what a beneficiary is and the different types available is vital for effective estate planning. It ensures your assets are distributed according to your wishes, reduces family disputes, and may offer tax benefits.
Do you need help planning your estate or updating your beneficiaries? Consider consulting with IntelliVest Wealth Management who can help assist with questions you may have. Reach out to us here.
Disclosure
IntelliVest Wealth Management is a Registered Investment Advisor Headquartered in Spartanburg South Carolina. This is not a solicitation or financial advice. Please note that this information may not be accurate as changes to laws and regulations change from day to day. This article should only be used for educational purposes. Please consult with IntelliVest Wealth Management about your personal financial situation.
