You’ve seen those movies where the rich uncle dies without leaving a will, so there’s no beneficiary. The family erupts into so much chaos and tension it makes the reality TV shows seem like a kids’ program. You tell yourself you’d never let that happen to your family.
But what exactly is a beneficiary? Are there any special rules for choosing one? And when would you need to name a beneficiary? Doing the right thing for you and your family can be confusing, but it doesn’t have to be. We’ve cut through the legal jargon to give you the facts so you can be confident when you choose your beneficiary.
What Is a Beneficiary?
A beneficiary is someone who gets your stuff when you die. That’s the bare bones definition. Now, here’s the longer explanation: a beneficiary is a person or organization (nonprofit or charity) you name in certain legal documents—like a will or a life insurance policy—to receive all or some of your assets (money and other stuff you own) when you pass away. You can list more than one beneficiary, and you don’t have to choose a relative. Here are some examples of beneficiaries:
- A person (or multiple people)
- The trustee of a trust you’ve set up
- A charity or nonprofit
- A minor (child under 18 years of age)
- Your estate (in the case of a life insurance policy)
As the one giving your assets away, you are called the benefactor. And since it’s your stuff, you can put conditions on how and when someone receives their inheritance (like reaching a certain age or finishing high school). But you need to be specific about who gets what.
For example, Sara is a 54-year-old single mom of three grown kids. In her will, she has named all three of her children as beneficiaries. She stated that each of them would receive equal shares of her entire estate, except for her grandmother’s wedding ring and her grandfather’s antique watch. She named her sister Melba as the beneficiary for the ring and named her cousin James to receive the watch. Because she spelled out exactly who would receive those items, she can be sure her wishes will be followed.
Why You Need a Beneficiary
You work hard for your money, as the song goes. And you want to take care of your family and know they will be secure financially when you’re no longer with them. That’s the biggest reason you need to name a beneficiary. Here are some others:
1. Clarity. Unfortunately, grief makes some people go a little nuts. Family members start fighting over who gets Aunt Melba’s thimble collection, and before you know it, you’ve got a nasty brawl on your hands.
Naming beneficiaries makes your wishes crystal clear. And in most cases, ironclad legal. It also keeps the peace among family members so that next reunion won’t end up on YouTube.
2. Speed. When you name beneficiaries in your will, many of your assets will bypass probate altogether (probate is a court that proves a will is valid). That means your family will have access to the funds they need so they can take care of any emergencies—and they won’t spend a lot of time in probate court. Because who wants to spend their afternoons there?
Some of your assets may still go through probate after your death (like some property), but naming a beneficiary beforehand will make that process go so much faster. If you don’t name anyone, the court has to sort through who has the legal right to claim your stuff.
If you don’t name a beneficiary for your life insurance policy, the payout from that policy will become part of your estate (which is a fancy word for the money, property, and stuff you leave behind) and it will have to go through probate. And your family can’t touch it while it’s in probate.
3. Control. When you name beneficiaries in a will or life insurance policy, you control where your money goes—and who gets it. If you don’t name one, the state determines how your assets will be distributed to your heirs. And, get this, depending on the state you live in, that might even include ex-spouses. Yikes!
When You Would Name a Beneficiary
You would name a beneficiary for almost anything dealing with your money. Here are a few examples:
- Life insurance policy
- Your last will and testament
- Retirement plans like a 401(k), 403(b), IRA, or similar plans
- Social Security disability (in some cases)
- Savings and checking accounts
Most life insurance companies and investment firms won’t give you the option to put an age requirement for your beneficiaries (such as your kids who are still minors) when you list them. You have to put that in your last will and testament.
One other important thing to know: If you participate in an employer-sponsored retirement plan such as a 401(k), 403(b), or a similar account, the law says you have to get written consent from your spouse if you want to name someone other than your spouse as the beneficiary for that account. This law doesn’t apply to IRAs or Roth IRAs because those aren’t set up through your employer. Make sure you talk to an investing professional who can walk you through these differences with you.
Types of Beneficiaries
The primary beneficiary is the person (or people or organizations) you name to receive your stuff when you die. You’ll also need to name a contingent beneficiary (aka a secondary beneficiary) in case the primary beneficiary passes away.
Like the name sounds, the primary beneficiary is first in line to receive your assets when you pass away. To make the process as smooth as possible, provide as much specific information about this person (or people or organizations) as you can, including current address and contact information and social security number (or similar information for an organization).
Don’t just say, “my spouse gets everything.” That will tie up your assets in probate for a terrible, horrible, no-good, very long time—especially if you have an ex-spouse.
If you name more than one person, you need to be specific about how the money and other assets should be split up. Use percentages rather than a specific amount with any accounts that could earn interest, because you may have more (or less) money in the accounts when you pass away. And that mistake could land your loved ones an extended holiday at Probate World.
Here’s a real-world example: Stu is a single dad of two grown children. After his divorce, he updated his will and named each of his children as beneficiaries and named an animal shelter as another. His will states that 90% of his entire estate (not including personal items like heirlooms and keepsakes) will be divided equally between his two children, and the remaining 10% of all his assets will be given to the shelter.
With a contingent beneficiary, this person (or people or organizations) would receive your assets if one or all of your primary beneficiaries can’t be found or they pass away before you do. In the will or policy, you’ll need to lay out how your stuff would be given out to these beneficiaries. You have two options for this: per stirpes or per capital. Nice legal language, right?
Per stirpes. No, that’s not a typo. It’s from a Latin word for roots (like roots of your family tree). If you choose this option, you want your assets to be passed down to any children of the beneficiaries you choose.
In other words, if you leave your estate to your children but one (or all) of them passed away before you, their share of the estate would pass on to their children (your grandchildren) or even their grandchildren (your great-grandchildren).
Here’s an example for you: Grace is a single woman with three siblings. Her parents have already passed away, so her will states that each of her siblings should receive one-third of her assets when she passes away. But if one of them passes away, that sibling’s share of the estate would pass down to their children (Grace’s nieces or nephews) and the other two siblings would still receive their one-third of the estate.
Per capita: This is a Latin way of saying “for each head.” In this case, if one beneficiary passes away, their share of the inheritance goes back to the estate and gets divided among the other living beneficiaries.
For example: Shane is a widower with five children and has slated each of them to receive 20% of his estate (100% divided by 5 = 20%). If one of his children passes away, each of the others would receive 25% of his estate (100% divided by 4 = 25%) because only four remain. The money does not pass down to any descendants of Shane’s children.
If you’re super detailed, you have the option to name a tertiary beneficiary in some cases. Tertiarymeans “third,” or the third in line to receive your assets if the primary and secondary beneficiaries pass away before you. It’s not very common, but it is an option.
Some online insurance forms are simpler than others, and you may not be able to use the per capita or per stipes option. Just keep that in mind as you put your will together.
How to Choose Your Beneficiary
When choosing a beneficiary, you need to think about the people who depend on you financially. If you’re married, you’ll likely choose your spouse as the primary beneficiary, and your spouse would choose you. Together, you would name secondary beneficiaries in case something happens to both of you.
Keep in mind, people outside your immediate family may also depend on you. Do you help your parents pay their medical bills? Did you agree to pay for your niece’s education?
Since you can name more than one beneficiary, you can specify what (and how much) each of these people would receive when you die. This way, those who depend on you can still count on your financial support.
Here are some questions to answer as you choose a beneficiary:
- Who depends on your financial help? Make sure they’re included as a beneficiary.
- If you have children who are minors, who will be the trustee of their money until they turn 18?
- Will you set any conditions on when your children can receive your assets? (graduate from college, turn 25, pay off any debt they have, etc.)
- Do you want any assets to remain in the family? (heirlooms, property, etc.)
- Do you want to support any churches, charities or nonprofits?
No matter who you choose as beneficiaries, you need to review your documents on a regular basis. Because life happens. A marriage, death, divorce or broken relationship can mean a change in beneficiaries.
Naming a beneficiary in your will might sound like a huge, time-consuming monster—but it’s not! You don’t even need to go to a lawyer’s office or spend a fortune. You can create your own will online in less than 20 minutes. All you have to do is plug in your information, including your beneficiaries, and the rest is done for you.
Then, you can breathe easier knowing you’ve taken the steps to protect your assets, and you’ve spared your family unnecessary conflict and strife. Your loved ones will be grateful—and they won’t end up on some video gone viral.