What Is a Named Beneficiary?

What Is a Named Beneficiary?

Let me explain to you what a named beneficiary is: it's an individual specified in a written legal document who has the right to collect assets from a trust, insurance policy, pension plan account, IRA, or any other financial instrument. If there are multiple named beneficiaries for a property, they share the proceeds when the assets are distributed. In certain cases, like with an annuity policy, the policyholder and the named beneficiary could even be the same person.

Beneficiary designations can get complex. For instance, if you name a specific beneficiary in your life insurance policy, those proceeds won't be governed by your will and won't go through probate proceedings.

Key Takeaways

To sum it up directly, a named beneficiary is someone entitled by a legal document to assets from trusts, insurance, pensions, or IRAs. You'll encounter different types, like primary beneficiaries who are first in line for benefits. Then there are contingent beneficiaries, who get the assets if the primary one refuses them, has passed away, or can't be found. Remember, a beneficiary could also be an estate rather than just one person.

Types of Named Beneficiary

There are several types you should know about. A primary beneficiary is the one first in line to receive the benefits. A contingent beneficiary steps in to receive the account's benefits if the primary is deceased, unlocatable, or refuses the assets after the owner's death. Your will typically sets out conditions that must be met before a contingent beneficiary gets insurance proceeds or retirement assets. Note that 'secondary beneficiary' is just another term for 'contingent beneficiary.'

Fast Fact

Here's a quick note: In late December 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which encourages employers to include annuities as investment options in 401(k) plans.

Important Distinction

Keep in mind that a named beneficiary doesn't have to be an individual. For example, an insurance policy's named beneficiary could be the deceased's estate, meaning the actual recipients would be named in the will. Also, understand that a beneficiary differs from an heir: a beneficiary gets property as decreed in a will, while an heir inherits via intestate succession laws.

Risks Related to Named Beneficiaries

It's critical for you as a grantor to formally name your beneficiaries during a full estate planning process. I recommend reviewing and updating all beneficiary designations every few years, especially after major life events like a divorce or the death of a loved one—many financial advisors suggest this to avoid issues.

What Is the Difference Between a Primary and Secondary Beneficiary?

The primary beneficiary is the first one named to receive benefits according to the will. If that primary can't or won't accept the assets, the secondary beneficiary—also known as the contingent beneficiary—takes over next.

Who Can Be a Named Beneficiary?

A named beneficiary is usually an individual or group, like a family member or acquaintance, but it can also be an estate or a non-profit organization, as chosen in the account holder's insurance policy.

What Are the Advantages of Having a Named Beneficiary?

Designating a named beneficiary ensures that the deceased's assets go to the chosen person or entity. It provides tax advantages for the beneficiary and allows them to bypass the probate process.

The Bottom Line

In essence, a named beneficiary is the person who receives benefits from a will, trust, or financial arrangement. When you set up a life insurance policy or retirement account, you'll need to list these beneficiaries—they're the ones who can access the account after your death.