One of the most important aspects of your estate plan is ensuring that your loved ones will be taken care of after your death. There are many parts of the estate planning process that cover this, but one of the most important is naming your beneficiaries. The term might seem a bit technical, but it all comes down to one simple question: who do you want to receive your various assets after your passing?
What Does “Beneficiary” Mean?
A beneficiary is a person or organization that you name in certain legal documents to receive some or all your assets when you pass away.1 You can name a beneficiary for almost anything involving your money and assets, including a will, a life insurance policy, a retirement plan, or a bank account. You can choose to have a single beneficiary or list several, and you don’t need to choose a relative when selecting one either: you can name a charity or non-profit organization, the trustee of a trust you’ve set up, or your own estate in the case of a life insurance policy.2
In general, there are two main types of beneficiaries: a primary beneficiary and a contingent beneficiary. A primary beneficiary is “first in line” to receive any assets that you assign to them. You can generally divide up your assets among as many primary beneficiaries as you choose, assigning a certain percentage of your account to each one. All primary beneficiaries are first in line, though you may have given them different percentages of your account.3
A contingent beneficiary is “second in line” to receive benefits. If a primary beneficiary should predecease the benefactor or are otherwise unable to collect any assets assigned to them, the proceeds would automatically go to the contingent beneficiary.4 For instance, you can opt to have the benefits go to the children of a beneficiary or have the assets allocated among the other remaining primary beneficiaries. Not all financial accounts allow you to select a contingent beneficiary, but some even allow for a third option: a tertiary beneficiary that receives a benefit in the case that both the primary or contingent beneficiaries are unable to collect.5
Why You Need a Beneficiary
Some people don’t like the idea of naming beneficiaries, whether it’s because they dislike the thought of “picking favorites” or because it means confronting their own mortality. There are also people who might think that it’s obvious who they would want to receive their various assets after their passing, not seeing the point of formally declaring a beneficiary. But the truth is, no matter how clear it might seem to you, there is always room for ambiguity and conflict if your wishes aren’t clearly laid out in writing.
Naming your beneficiaries ensures that your assets go to the people that you want to have them. Without this clarification, your local court might need to get involved to direct your assets where it sees fit. Not only can this lead to your various assets going to other parties you hadn’t intended, but it can also create further expenses for your loved ones in the form of lawyer fees. Naming a beneficiary can also help you avoid the delays often associated with probate court, which can tie up assets for years in some cases.6
Choosing Your Beneficiaries
Who you select as your beneficiaries will come down to personal preferences, but when making this decision, it is important to ask yourself: who relies on me financially? Obviously, your spouse or your children are likely to be primary beneficiaries, but there might be people outside of your immediate family who depend on you as well. You might have extended family members or close friends in need of financial support. Since you can usually name as many beneficiaries as you like, you should carefully consider who needs your support and how much they should receive after your passing.
Additionally, when choosing your beneficiaries, be aware that there might be special requirements to consider. For instance, if you have any children who are still minors, you will need to assign a trustee to hold onto any money or assets you have left them until they turn 18. You can also set certain conditions that must be fulfilled to receive your assets, whether it be them reaching a certain age, or by completing a task such as graduating college or paying off any debts that they have.7
Choosing your beneficiaries can sometimes be a complicated process, but by taking this step, you eliminate some of the confusion that often follows after someone’s passing. You ensure that even after you’re gone, the people who matter to you most are covered, and in the end, that’s what estate planning is all about.
1. Ramsey Solutions. (2021, July 8). What Is a Beneficiary and How Do I Choose One? Ramsey Solutions. https://www.ramseysolutions.com/retirement/what-is-a-beneficiary.
2. Ramsey Solutions.
3. Royal, J. (2020, July 1). What Is A Beneficiary? Bankrate. https://www.bankrate.com/retirement/what-is-a-beneficiary/.
4. Hicks, P. (n.d.). Beneficiary – What is a Beneficiary & How to Choose One. Trust & Will. https://trustandwill.com/learn/beneficiary.
5. Royal, J.
6. Royal, J.
7. Ramsey Solutions.