By Anne-Lyse Wealth, WCI Contributor
One of the most critical steps when it comes to estate planning—or the organization, management, and transfer of a person’s assets in the event of their death or incapacitation—is the selection of an estate beneficiary. Here's what to know about an estate beneficiary and how to choose one.
What Is an Estate Beneficiary?
An estate beneficiary is a person, business, charity, or trust that will inherit a person's assets upon their passing.
Estate beneficiaries are usually designated in a will or last testament. However, it's important to note that the estate is responsible for settling any outstanding debt of the deceased person with assets from the estate. As such, liabilities are deducted from the estate's assets, and the remainder constitutes the expected inheritance.
Why You Need a Beneficiary
You may have specific ideas of who you want to inherit your assets or how you want your assets distributed. Having one or more beneficiaries will help you ensure that your assets are passed down according to your wishes.
In addition to designating an estate beneficiary through your will for every asset you own, it's also key to designate a beneficiary for assets like retirement accounts, annuities, and life insurance. It will help your loved ones access the assets without having to go through the extensive and expensive legal proceeding known as probate.
When you designate beneficiaries for retirement accounts, pensions, annuities, and life insurance policies, the assets will pass through to the beneficiaries without going through probate.
However, if you have minor children, naming them as beneficiaries on your 401(k) or other assets will only complicate the process. Minors can't inherit as direct beneficiaries. Any inheritance that a minor receives will be managed by a legal guardian designated in your will or by the Court.
What Happens If You Don’t Name an Estate Beneficiary?
When a person dies without a will or without designating one or more estate beneficiaries, they leave the responsibility to the courts in their state to decide who should be the estate beneficiary. This process is usually costly, and it will likely delay access to your assets for your loved ones.
When a person dies without an estate beneficiary, an intestate succession process will begin in most cases. Though intestate succession laws vary from one state to the next, your assets, in most instances, will be distributed to your spouse and children first before considering any other relatives such as parents and then siblings.
Until the Court determines how your assets will be distributed after payment of estate taxes and debt, any asset that a deceased person owned without a right of survivorship will be frozen and inaccessible by their loved ones.
Types of Beneficiaries
There are two main types of beneficiaries: primary and contingent.
Primary Beneficiary
A primary beneficiary is the first person or organization in line to receive the proceeds from your estate, retirement accounts, life insurance policies, trust, etc. It's possible to select more than one primary beneficiary if you specify the allocation percentage for each beneficiary. In addition, if a person dies without designating beneficiaries, the first person to receive the assets under the state's intestacy laws is also identified as a primary beneficiary.
Contingent Beneficiary
A contingent beneficiary is second in line to receive the benefits from the inheritance. A contingent beneficiary will receive the benefits from an estate, retirement accounts, life insurance policies, trusts, etc. if they outlive the primary beneficiary, if the primary beneficiary refuses the inheritance, or if they can't be located. It's also an option to select more than one contingent beneficiary and specify which percentage of the proceeds should be allocated to each one.
In addition to selecting primary and contingent beneficiaries, you can go a step further and be specific about what you would want to happen if your beneficiary were to die before you.
Per Stirpes
A per stirpes distribution is a legal term to determine how your assets will be distributed if your beneficiary dies before you do. A per stirpes designation means that if a named beneficiary dies, the people down their family tree will receive the inheritance. The beneficiary's living children would receive the benefits. If the beneficiary didn't have living children, the benefits would go down the branch to their grandchildren and so forth.
If your goal is to leave an inheritance for your beneficiary's heirs, then a per stirpes designation on your beneficiary form might be fitting.
Per Capita
A per capita distribution means that a beneficiary receives their inheritance as long as they're alive at the time of the inheritance. If a beneficiary has passed before the vesting of the inheritance, the share that belonged to that beneficiary will be divided equally among the named beneficiaries still living.
Who Can Be Beneficiaries of an Estate?
A beneficiary of an estate can be a person, business, charity, or trust. In addition to having an estate beneficiary, it's also essential to designate an estate executor, the person responsible for administering a deceased person's estate. If you don't select an executor yourself in your testament, the Court will have to do that for you.
The estate beneficiary doesn't have to be the same person as the estate's executor. For instance, if you have minor children, they won't legally be able to act as executors of your estate. It's wise to select the person who, in your opinion, is the most appropriate to play that role, so courts don't have to interfere.
It's essential to designate your beneficiary and the executor of your estate.
How to Choose Your Estate Beneficiary
Many married couples designate their spouse as their estate beneficiary, so that's an option to consider if you are married. However, it's also important to name contingent beneficiaries if something were to happen to both of you.
If you would like to take care of family members beyond your spouse and kids—friends or a partner, for example—or if you want to donate to a specific charity, you have the option to designate more than one beneficiary.
When considering an estate beneficiary or beneficiaries, take the time to ask yourself a few questions to identify the right people. Here are some questions to help you find the right beneficiary for your estate.
- Is there anyone who depends on your financial help?
- Are your children minors? If so, who will be their guardian and the trustee of their inheritance until they reach the age of majority?
- How confident are you that your adult kids will be prepared to handle the inheritance?
- Are there any causes or organizations you would like to support financially?
Designating an estate beneficiary will significantly impact how your estate will be handled when you die. Taking the time to assess who will make suitable primary and contingent beneficiaries is a necessary step. It's also something that you should revisit every few years to ensure it's still the best option for your estate. Forgetting to update beneficiaries may result in you leaving assets to an ex-spouse or estranged child!
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What happens if a beneficiary – named an executor – wants to put investment accounts into the probate processs so their funds can be distributed to himself or another beneficiary. Is this lawful? Can the designated beneficiary simply go to the bank with a death certificate and get the proceeds from the account? Thanks
I don’t think so. That would be a gift from the beneficiary to an estate and I don’t think you can do that. But even if you could, why would you want to? You can always disclaim an inheritance which sounds like it is what you want to do.