From Rainman to The Bachelor to Knives Out, a myriad of films have been written around the subject of beneficiaries. You probably know how the story goes: A rich family member dies, and everyone scrambles to get their fair share.
In real life, the topic of estate planning is slightly less dramatic—but no less essential to understand. Naming beneficiaries is a big deal, so if you’re looking for more information on who they are and how to designate them, read on for a 101 crash course on beneficiaries.
What Is a Beneficiary?
A beneficiary is a person or organization who receives something from your estate after you die. This could be money, the title to a house, objects, a life insurance payout, or ownership of a retirement account. It’s your responsibility to name beneficiaries in your will, or within specific legal documents such as your life insurance policy or retirement account plan. With retirement accounts in particular, there are special rules if you want to name a beneficiary other than your spouse—see more below!
Primary vs. Contingent Beneficiary
A primary beneficiary means they are first in line to receive the designated benefits, whereas a contingent beneficiary is second in line—so if the primary beneficiary is no longer living or cannot be contacted, the contingent beneficiary will receive the assets. For example, a woman might list her husband as the primary beneficiary and her children as contingent beneficiaries; so that if her spouse predeceases her, assets will go directly to their children.
Choosing Beneficiaries
Naming beneficiaries can be complicated depending on your family dynamics. In general, it’s a good idea to consider who is financially dependent on you and would be left in a tough situation upon your death. This might be a spouse, children, or other family members you’re supporting. On the other hand, you may wish to name a charitable organization to receive your assets. Remember that there’s no specific rubric to follow. Ultimately, it’s your choice who benefits from your estate and financial holdings.
Retirement Account Beneficiaries
The rules for retirement savings accounts like the employer-sponsored 401(k) or an individual retirement account (IRA) are a bit different. In this case, the law stipulates that your spouse is automatically the beneficiary of these assets. If you are married and you want someone other than your spouse to receive ownership of a retirement account upon your death, you’ll need to take additional steps.
For an employer-sponsored account, get in touch with the plan administrator about changing this—and keep in mind that you’ll need your spouse’s signature to do so. With an IRA account, you don’t need written consent from your spouse, unless you live in a community property state. Again, contact your plan administrator to make a change or get more information on how to do this.
Naming Minors as Beneficiaries
Minors aren’t allowed to hold large-sum assets on their own, so it’s best to name an adult trustee who can look after the assets until the beneficiaries turn 18. Alternatively, you might create a living trust and name that as the beneficiary. You can design the trust to include detailed provisions about when and how the minor receives said assets—for example, you might specify that they don’t receive the proceeds of your estate until age 25.
Updating Beneficiaries
Once you’ve named your beneficiaries, you can update this information as many times as you like. It’s always a good idea to reassess your estate plan after major life events including marriage, divorce, the birth of a new family member or a death in the family. Again, remember that updating beneficiaries for an employer-sponsored retirement plan requires the additional step of getting a spouse’s signature.
Informing Beneficiaries
It’s a good idea to inform beneficiaries that they’ve been named to certain assets, as this can help them in planning their own financial future. Many people choose to write a letter to their beneficiaries. This letter is a good place to discuss why you’ve chosen them as a beneficiary and any particulars about the asset being passed down. You might also add a personal touch, or express your hopes for how they’ll use the inheritance.
