What’s a Beneficiary? Learn the Process and How it Works

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What’s a Beneficiary?

A beneficiary is a person or an entity that you designate to receive the proceeds of a life insurance policy, property or other investment after upon your death. You can name:

  • One or more people
  • The trustee of a trust you have established
  • A charity
  • Your estate

There are usually two levels of beneficiaries: primary and contingent. If your primary beneficiary cannot be located upon your death, the contingent beneficiary may receive the death payout. It’s important to list as much identifying information as possible so that your primary beneficiary can be found. It’s also important to keep this information up-to-date and make changes when they come up.

Beneficiaries can be revocable (able to be changed) or irrevocable (not able to be changed, unless the beneficiary agrees). The type you select depends on your circumstances and those of your beneficiary.

How to Choose a Beneficiary and Why it’s Important

You should choose a beneficiary for all of your important assets, including properties, insurance policies, retirement and investment accounts. By naming a beneficiary you are making it faster and easier for them to collect funds. When selecting a beneficiary consider:

  • Relationships with family members and friends and assess who may need financial assistance.
  • Organizations that you support and to which you wish to leave a legacy.

How to Name a Beneficiary

Designating someone as a beneficiary is usually a simple process but it’s important to let them know ahead of time. Sometimes a person can have a negative financial impact from an inheritance.

To name a beneficiary, you’ll need the person’s date of birth, social security number and address. Most financial institutions and insurance companies have an easy form to fill out, and in most cases, you can change or update beneficiaries as you wish.

Minors cannot typically be named as beneficiaries however, you can leave assets to them in a trust fund or name an adult as beneficiary who will manage the assets for the child.

Impact of Being a Beneficiary

When someone inherits money or property from someone there are things to consider:

  • The inheritance may be subject to taxation
  • Public benefits may be reduced because the recipient reaches a benefits cliff
  • Even if you’ve updated a will, beneficiary designation takes priority over it.

What Happens if a Beneficiary is Not Named?

  • The financial institution may hold on to the property or account and decide what to do with the proceeds
  • The probate court in your area may tie up the property or funds for years and decide how to distribute the assets

How Does a Beneficiary Collect a Payout?

If a beneficiary is collecting a payout from a life insurance policy,  most companies will issue a payment within a few days or weeks after receiving a death certificate.

While most bank accounts do not require you to name a beneficiary, you may wish to create a Totten Trust, or Payable Upon Death account, or create a joint account so that your funds will be transferred immediately to whomever you wish.

The beneficiaries of retirement accounts are subject to a variety of options and rules for payout depending on the type of account and how long it has been established. It’s best to check with the account institution to find out how to receive a payout.

It’s important to take time to name beneficiaries for all your assets so that your wishes will be honored and the recipients will receive the property or funds with little hassle.

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