What is a beneficiary & how do you choose one?

If you don't name a beneficiary to your will, the state might decide who inherits your assets

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Elissa SuhSenior Editor & Disability Insurance ExpertElissa Suh is a disability insurance expert and a former senior editor at Policygenius, where she also covered wills, trusts, and advance planning. Her work has appeared in MarketWatch, CNBC, PBS, Inverse, The Philadelphia Inquirer, and more.

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A will is a legal document that describes who gets your assets and belongings when you die. The future heirs, called beneficiaries, must be designated in the will. For example, you might give a precious antique to your grandson or state that your second-wife inherits everything found in the house. If beneficiaries are not named in the will, they might not be able to claim the inheritance you left for them.

Life insurance policies and payable-on-death accounts also have their beneficiary designations and sometimes restrictions as to who you can name. These are separate from beneficiaries to wills, which we’ll discuss in depth.

Key takeaways

  • The beneficiary of a will receives some or all of your property when you die

  • If you don’t name a valid beneficiary to inherit your assets, the state might decide who gets them

  • You can choose multiple beneficiaries

  • A beneficiary designation for a life insurance policy or payable-on-death account is separate

Who can be a beneficiary?

The beneficiary of your will can be whoever you want, for the most part. After all, these are your assets and belongings that are going to be distributed when you die. The beneficiary must be someone who is alive and generally cannot be the person who serves as a witness when you sign the will document. (The easy solution to this is to have someone else other than the beneficiary act as witness).

A strong estate plan starts with life insurance

Note, however, that the law gives special rights to spouses and children. Most states give spouses a right to a certain percentage of your property regardless of what your will says, and most states also presume that your children will all be treated equally. You don’t necessarily have to give anything to your children, but if you do, then it can cause problems if they don’t all share equally.

Additionally, if you live in a community property state, where your spouse automatically owns half of any property you acquired during the marriage, you may need to get an agreement with your spouse in writing if you want to designate someone else as a beneficiary.

Minor children can be named as beneficiaries, but they might not be able to have control of the assets until they are 18 years old. For this reason, many people with young children choose to create a trust to pay out distributions to them. (You can also do the same thing for a pet.)

You can name more than one beneficiary for your will and beneficiaries are not restricted to family, friends, or people at all. You can name an entity like a charity or business as the beneficiary to your will, too.

If you set up a trust, you can even name it as a beneficiary in your will. The assets you bequeath will pour over into the trust upon your death.

Trust beneficiaries

As part of your estate plan, you may have transferred your assets into a trust to pass along an inheritance this way. A trust is a separate entity that operates and pays taxes on its own. It also has its own beneficiaries that you have to choose. There might be some restrictions as to who you can name as the beneficiary of a trust, especially if it’s an irrevocable trust that you created to minimize taxes. An estate planning attorney can help you understand the laws in your state when opening a trust.

Contingent beneficiaries

The primary beneficiary is the main person who will receive some or all of your property when you die. But you can also designate a contingent beneficiary, also called a secondary beneficiary to receive the assets if the first person you named isn’t able to.

Beneficiary rights

While the beneficiary is entitled to receive an inheritance, it does not happen until after the executor of the estate has taken care of a few things. Any estate tax and debts must be paid for the decedent’s estate before any assets can be distributed. If the estate owes money to creditors, the executor may need to sell some assets to pay off these debts. It’s possible if the decedent was heavily in debt that the estate would deplete its resources and the beneficiary would end up without an inheritance.

Beneficiary designation

When you are writing your will and choosing beneficiaries for your assets, you might think twice about including the money in your bank account or retirement account, like an IRA. That’s because some financial accounts might come with their own beneficiary designation You can fill out a beneficiary designation form to make a bank account, pension benefits, or Social Security benefits, and more payable or transferable on death to a beneficiary of your choosing.

The person you designated to receive this account on a beneficiary form generally has priority if you also bequeathed the same asset to someone else in your will.

How to choose a beneficiary

Who should inherit your belongings when you die? It’s a question only you can answer. Similar to the beneficiary of a life insurance policy, many people choose a spouse or family member as their will beneficiary, leaving them an inheritance to live a comfortable life.

However, others choose to create a legacy and name a charitable organization as their beneficiary. You can have it both ways and name multiple beneficiaries to your will. When you choose multiple beneficiaries, you will have to describe how the assets should be should be divided.

You can bequeath specific assets to certain beneficiaries, and leave the remainder or residue of the estate for another — I give my car and my boat to my brother, and the residual estate to such-and-such charity. Or you might distribute the estate through percentages — I give my wife 50%, my daughter 25%, and my son 25%.

You might also want to name a contingent or secondary beneficiary for your assets as we discussed before. Using the first example, in case your brother isn’t alive to receive the car and boat, maybe you want to specify that your grandson should have them.

Bequeathing assets to your beneficiaries can get complicated. The last thing you want is for your intended beneficiaries to squabble over who gets what and contest the will in court, so you may also want to speak to an estate planning attorney if you can afford one.

Take a look at our guide to estate planning to learn more about how to distribute your property after you die.

What if your beneficiary dies?

If you don’t name a beneficiary to your will, the estate will be declared in intestacy and the state law will determine your heirs. Not naming a beneficiary to the will has the same consequences as not having a will in the first place.

When a beneficiary predeceases or dies before the testator, things become a little complicated. Depending on how the will is written, the deceased beneficiary’s inheritance might become part of the residue of the estate or distributed based on state intestacy laws, mentioned above.

The easiest way to avoid the situation is simply to update your will or modify it with a codicil. It’s important to review beneficiary designations over time to time, especially after you’ve gotten married or divorced.

You can also designate contingent beneficiaries as mentioned before, or include a clause like per stripes, which will distribute your assets to the beneficiary's descendants should they die before you.

Life insurance beneficiary

Life insurance can also be an important part of estate planning. If you have a life insurance policy, you will pay a monthly premium and upon your death your loved ones will receive a lump sum called the death benefit.

A life insurance policy comes with its own beneficiaries. You will name primary beneficiary and contingent beneficiaries on the beneficiary designation form. When you die, the insurance company will pay out the life insurance proceeds to them.

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