What is a Beneficiary?
A Beneficiary is someone or something that you name in your Estate Plan to receive the assets or distributions in your Estate. While Estate Planning, your Beneficiaries should be named in full, with details confirming their identity like a Social Security Number. Commonly, a Beneficiary could be:
- A person
- More than one person
- The Trustee of your Trust
- Charity
Types of Beneficiaries
There are five types of Beneficiaries. This is primarily to ensure that your Estate doesn’t pass into probate, even in the face of any challenges or emergencies—
Irrevocable Beneficiary
An Irrevocable Beneficiary has guaranteed rights to the distributions of your Estate for as long as they agree to be removed from your plan. Appointing an Irrevocable Beneficiary makes it difficult to change or update your Beneficiary Designations.
All your Primary and Contingent Beneficiaries will have to come to a consensus to apply for the removal of an Irrevocable Beneficiary. This could lead to legal troubles that you’d ideally want to avoid.
Revocable Beneficiary
A Revocable Beneficiary would give you greater flexibility to update and change Beneficiaries based on different situations and times. Unlike an Irrevocable Beneficiary, where you need their consent to change them, naming someone a Revocable Beneficiary is not completely permanent.
You can change or remove someone as your Beneficiary without their consent if you appoint them as a Revocable Beneficiary. This is usually considered a better practice, since it helps avoid legal issues that usually occur when you have an Irrevocable Beneficiary.
Primary Beneficiary
As the name suggests, a Primary Beneficiary is the first in line to receive the distributions from your Estate. You can name more than one Primary Beneficiary and your Primary Beneficiaries could be either Revocable or Irrevocable.
For example, if you name two Primary Beneficiaries, each of them would receive 50% of your Assets.
Contingent Beneficiary
A Contingent Beneficiary inherits your assets only if your Primary Beneficiaries can’t be found, or have passed away. You can have multiple Contingent Beneficiaries too, Revocable or Irrevocable.
For example, if both your Primary Beneficiaries cannot be found, your Assets would go to your Contingent Beneficiaries.
If you do not have Contingent Beneficiaries, your Estate will go through the intestacy guidelines of your State in case your Primary Beneficiaries cannot be found.
Third-Party Beneficiaries
A Third-Party Beneficiary receives the distributions of an Estate from a contract made between two other parties. The rights to compensation of a Third-Party Beneficiary have more authority if the contract explicitly mentions the Beneficiary.
For example, you draw up a contract with a car retailer to gift a vehicle to your daughter. Mentioning your daughter as a Third-Party Beneficiary in the contract would give her the rights to sue them if the retailer refuses the sale even after a down payment.
Why You Need to Name a Beneficiary
Naming a Beneficiary lets your executor and the courts know who should be the legal owner of your assets after you pass away. Not naming one would make your Estate go through intestacy guidelines. This means your assets would be distributed to your next-of-kin—spouses, children, parents, or grandchildren.
It is important to note that the court doesn’t recognize some relations as legal, which means in the absence of appointing a Beneficiary, your Estate will not be distributed with them, even if you wanted to. These relations include non-marital relations like unmarried couples, non-blood relations like friends, and charities.
In most cases, not naming a Beneficiary would lead to lengthy and expensive court battles for your loved ones, and even conflicts within your family.
Rights of a Beneficiary
The primary goal of Estate Planning is to ensure that your Beneficiaries continue to live a life of comfort and financial security. Estate Planning recognizes this and gives Beneficiaries multiple rights to guarantee this. These include the Right to:
- Receive assets assigned in the Estate Plan
- Receive information about the administration like Estate Accounts
- Request to remove an Executor
- See a copy of the Will
- Be treated impartially
- Know the rights and role of the Executor
- Hold responsibility for any taxes, if applicable
How to Choose a Beneficiary?
Before choosing Beneficiaries for your Estate, you need to understand why you want to create an Estate Plan. For most people, this is to ensure their loved ones inherit their assets.
Before deciding who should get your assets, here’s some questions to ask yourself—
- Who depends on you directly for financial support?
- Are these people minors?
- Do you trust these people to take care of your Assets after you’re gone?
- Are they responsible?
- Do you want to set any conditions for your Beneficiaries to receive your Estate distributions?
- Do you want your assets to remain in the family?
- Do you want to transfer your assets to a charity?
- Who would receive your assets if your primary Beneficiaries are unavailable?
If you have answers to all these questions, you probably know who your Beneficiaries should be.
Remember, the Beneficiary Designations of your IRAs and bank accounts override the Beneficiaries you list in your Estate Plan. So, make sure you update both your Estate Plan and Beneficiary Designations, where it concerns your Beneficiaries.
Beneficiaries for Digital Assets
Very often, people tend to overlook planning for their Digital Assets while Estate Planning. Planning on what happens to your photos, audio files, videos, documents, payment accounts, and cryptocurrency is an integral step to Estate Planning for your Digital Assets.
You can assign Beneficiaries in your Digital Estate Plan (or Estate Plan for Digital Assets). These Beneficiaries can then receive emotional and financial benefits from your accounts.
For example, you have instructed your Executor to download all photos in your Cloud and share them with your family. Your Beneficiaries can now cherish those memories for a long time. Otherwise, your digital data is likely to be lost forever.
Now that you know what a Beneficiary is, create your own Digital Estate Plan and share it securely with your Beneficiaries.
