What is a Beneficiary?What is a Beneficiary

Choosing a beneficiary is the most orderly way to leave money to your loved ones.  Do not take this decision lightly. Do you want to leave money for your children, grandchildren, or perhaps a favorite charity?

Why Do I Need Beneficiaries?

When you name beneficiaries to your life insurance policy, 401(k), or other retirement plans, the money will go directly to these individuals after your death.  If you do not name beneficiaries, the money will most likely go to your estate and a probate distributes your assets according to a will.  Probate can be costly and lengthy, and your heirs may have to pay estate taxes, which may total up to 50% of the assets.

Typically, a beneficiary is a family member including a spouse, child, other relative or maybe a friend. If you have more than one person named, you can choose percentages of the money distribution as long as it totals 100%. You may also choose to divide evenly among beneficiaries such as all your children. It’s best to use percentages versus dollar amounts. You can name secondary and tertiary beneficiaries, in case one passes before you.


If your beneficiary is a spouse, most assets are tax-free.  For example, your spouse can roll your IRA over to his or her own.  Be sure to ask your tax adviser for other situations as laws vary by state.


Make sure your designated beneficiaries on your life insurance and on your will do not oppose each other.  Your beneficiaries will most likely override all conditions in your will if they conflict.  Spousal inheritance typically takes precedence in most states.  Beneficiary Designation forms are actually more ironclad than a will.


The trust is the beneficiary and the trust property will then be distributed as stated in the trust agreement you created.  If your beneficiary has debts, a trust can help protect your assets from creditors.  Trusts can also have tax advantages.  Revocable trusts can be changed during your lifetime, but assets are subject to estate tax.  Irrevocable trusts generally cannot be changed with the consent of the beneficiary.  Assets in irrevocable trusts are not subject to taxes.

What NOT To Do

Try not to make these common mistakes when choosing your beneficiaries.

Do not just name one beneficiary. Also, it is not wise to leave money to just one of your children thinking that they will distribute to others.  It is legal for that child to keep all the money, and the last thing you want is a family dispute.  Be sure to communicate with your beneficiaries now to prevent chaos later.  If they do not know a policy exists, the money may go unclaimed.

Be as detailed as possible.  Do you want the money distributed by family or by each person? Minor details like that can cause a lot of problems, so map out as many situations as you can with your lawyer.

Remember this is not a decision to take in stride.  Be sure to visit your policies and beneficiaries often to be sure that your situation has not changed.

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