Your thorough and comprehensive Estate Plan is a critical part of protecting your loved ones and your legacy. You’ve likely heard the term “beneficiary” before, but do you know what it really means in terms of an Estate Plan?
Estate Planning may seem (and feel) like a convoluted, confusing concept, but just like so many other things in life, knowledge is power - and when you understand what the different pieces of an Estate Plan are, they suddenly start to come together. Beneficiaries are just one part of your plan, and knowing how they fit into the big picture is half the battle. Today, we’ll discuss everything you need to know about beneficiaries, including:
What is a Beneficiary
A beneficiary is anyone you name in your Estate Plan who will ultimately benefit from your estate. The benefits could be in the form of money or anything else you pass down. Beneficiaries are an important part of your plan, as they give purpose and guidance for what you’re leaving behind. Beneficiaries are named in several places of your Estate Plan, including:
Life insurance policies
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
But while some beneficiaries are named directly in policies or plans, you’ll also have them in your Last Will and Testament, which is what we’ll focus on in this article .
Types of Beneficiaries
Primary Beneficiary: A primary beneficiary is the person or organization named as the first one to receive the death benefits from an asset. They can be named in a Will or Trust, or as we noted earlier, identified on a policy or account.
Contingent Beneficiary: A contingent beneficiary is named as the “second in line” to receive benefits. If the primary beneficiary should predecease the owner (who wrote the Will or held the policy), all proceeds would automatically go to any named contingent beneficiary.
How to Choose a Beneficiary
When figuring out who should be your beneficiary, if you are single or married could have an impact on your decision. It’s true, choosing a beneficiary can be difficult in some cases. For those with complicated family dynamics, or for anyone who may not be certain who they want to leave some or all of their estate to, it might not be so cut and dry. In these cases, trying to decide who should be my beneficiary can feel like a lot of pressure.
There is an unofficial order you can use to narrow down your list, though. Think about the following:
Does anyone depend on you financially?
Are you married?
Do you have children?
All of these factors could come into play when you’re deciding who will benefit from your estate as a beneficiary. But keep in mind, there are no hard and fast rules to naming beneficiaries. At the end of the day, it’s completely up to you.
One more note about choosing beneficiaries - they don’t necessarily have to be a person or people. Many Wills and Trusts name charities or organizations as beneficiaries.
What is the Role of a Beneficiary: Commonly Asked Questions
Understanding the role a beneficiary plays in Estate Planning is important, whether you’re just starting out creating your plan, or if you’re updating an old Estate Planning document. Knowing what a beneficiary is, what types there are and how to choose the right one(s) will all help you feel more confident in your decision.
But even if you understand all of that, there are still likely to be questions and issues that arise as you develop your plan. We cover some of the most common questions about beneficiaries below.
What Information is a Beneficiary of a Will Entitled to?
A beneficiary is entitled to more than just some portion of the monetary value of an estate. He or she also has the right to be informed in a timely manner about the basics of the estate, including accounting details if there is any reason to suspect anything. It’s also reasonable to expect to hear about dates for distributions, as well as explanations about any delays. Beneficiaries should be privy to the terms of the Will and they should receive a copy of it. Finally, if the estate is involved in any sort of litigation, a beneficiary has the right to be informed.
What Happens if a Minor is a Beneficiary?
If a minor is a beneficiary, it’s common that a trusted adult will be named to oversee any inheritance. A Living Trust is a great way to set up a substantial Estate Plan that allows provisions for how and when a minor beneficiary should receive specified assets.
What is a Secondary Beneficiary?
A secondary beneficiary is another name for a contingent beneficiary, who is essentially the second in line to receive death benefits. He or she would step in if the primary beneficiary should predecease the estate owner.
What is a Beneficiary Identification Code?
Beneficiary Identification Codes (BICs) are the codes used to identify what type of benefit(s) a recipient of Social Security is receiving. Because of the word “beneficiary” in the name, this term may be confused with a beneficiary you’d see in an Estate Plan, but really the two aren’t related.
How to Find Out If You Are a Beneficiary of a Trust
Most often, you would be informed by the Trustee if you’re a beneficiary of a Trust, upon the passing of the Trust owner. This generally happens within 60 days after a Trust owner’s death.
What Happens If You Do Not Name a Beneficiary?
If you do not name a beneficiary in your Will, or if a beneficiary predeceases you and you didn’t name an alternate, state law, along with how your Will is written, will dictate next steps. Assets and inheritances can go to your beneficiary’s descendants or, if you have them, to your own heirs.
Which States Have Beneficiary Deeds?
District of Columbia
What is a beneficiary deed? You may not have heard that term, but beneficiary deeds are also more commonly known as Transfer on Death, or TOD deeds - they’re used by some states to say who would inherit real estate after an owner passes away.
Who Has More Rights, a Trustee or the Beneficiary?
Both a Trustee and a beneficiary have rights when it comes to the Will or Trust in question. The biggest differences really are when we start talking about responsibilities. Obviously a Trustee has much more to handle in terms of what he or she is responsible for, but there is also a layer of protection for the enormous job they undertake as they work to settle an estate. While a beneficiary has the right to open communication, timely pay outs, financial recaps and reports and an explanation about any delays, a Trustee can feel assured that he or she isn’t responsible for debts of the estate. Nor would a Trustee be required to explain any of the factors that went into the writing of the Will or Trust.
How to Write a Beneficiary Letter
Beneficiary letters can really be whatever you’d like them to be. It’s common (though not required) to write them with a personal touch or feel, commenting on your hopes for their future or noting something special about your relationship. The most important thing to remember when writing a beneficiary letter is you want to be specific and clear to avoid any confusion. Other than that, it’s a personal choice.
How to Pay Beneficiaries of a Will
Before beneficiaries of a Will can be paid, a bank account is usually set up in the name of the estate. However, occasionally this step can be skipped. For example, in some states (like California) there are “small estate” versions of probate, which essentially allow a bank to write a check payable to the beneficiary.
With a full probate, it’s more common to see a short-term account set up for the estate that acts like an operating account. It will receive any income (like tax refunds) and also pay out expenses (like appraiser and cleanup fees), and then will make a final distribution to the beneficiaries of whatever is left.
Writing your Estate Plan now is a great way to ensure that those you one day leave behind are protected. In fact, it could just be the most important thing you ever do. A good Estate Plan identifies beneficiaries who’ll receive some or all of your estate. It ensures there’s no question about who, what and how you want to leave your estate.
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