Named Beneficiary

Named Beneficiary is a person whose name is recorded on the legal documentation by the force of law or a decree. This person is the sole or shared collector of benefits from the trust, insurance policy, pension plan, annuity etc. If there is more than one named beneficiary, all will share the asset equally or as per their defined share in the legal document or will.

A named beneficiary is different from the beneficiaries mentioned in the will as the former is only concerned with inheritance of benefits coming from assets, like life insurance coverage, retirement savings plan, etc. On the contrary, the latter includes assets such as real estate property, checking accounts, etc.

• A named beneficiary is an individual or entity designated to receive the proceeds of a financial account or insurance policy upon the account holder's or policyholder's death.
• Designating a beneficiary ensures that the assets or insurance benefits pass directly to the designated person or organization, bypassing the probate process and potentially expediting the distribution of assets.
• Common examples of accounts or policies that allow for named beneficiaries include life insurance policies, retirement accounts (such as IRAs and 401(k)s), payable-on-death (POD) bank accounts, and transfer-on-death (TOD) investment accounts.

A named beneficiary is the one who is supposed to inherit the benefits of the financial products owned by the original owner. It is done and is made active through a legal document, mentioning the name and details of the person in concern. Sometimes an estate as a whole can also be named a beneficiary instead of an individual.

Unlike a will, a named beneficiary is eligible to enjoy benefits coming from limited sources, which are the financial products, including insurance coverage, retirement plans, and others. There is a difference between heir named in a will and a beneficiary named for financial instrument related benefits. The heir gets the asset as a successor while the beneficiary gets the share if their name is on the legal document concerning the procedure.

In the case of a financial instrument like an annuity, the beneficiary and the policyholder can be the same individual. Appointing a beneficiary comes with certain advantages like tax advantages and skipping probate processes, which ultimately leads to speeding up of the asset distribution process.

Named beneficiaries can be of various kinds. However, they can be broadly classified into two categories – primary and contingent/secondary beneficiary.

#1 - Primary Beneficiary

The primary beneficiary is the individual who is foremost in the list of receiving the benefit, as mentioned in the will of the deceased person. The deceased person specifically mentions the primary beneficiary’s name in the will in his or her lifetime.

#2 - Contingent Beneficiary

The contingent Beneficiary is the person who receives the asset in case the primary beneficiary is not found or refuses to take the asset as allotted by the deceased in his or her will. There are certain conditions outlined in the will that need to be met before the asset can be transferred to the contingent beneficiary. A contingent beneficiary is also called a secondary beneficiary.

Sometimes the owner can mention estate like some non-profit organization or NGOs as the primary beneficiary in the will instead of an individual.

Let us consider the following instances to understand the concept properly and also check how it works and is prepared:

Example 1

In September 2023, an article on estate planning and trust law stated that the trusts may be named a death beneficiary for an IRA account, but they cannot own them after the original owner dies.

Until 2020, the death beneficiaries were allowed to receive annual benefits whatever generated from the retirement account, which has witnessed being bound by the recent limitations. However, there are a few Eligible Designated Death Beneficiaries or EDBs who are allowed to take up the benefits without interruption and they include spouse, disables people or chronically ill individual. This shows how changing regulations may affect the initial meaning, origination, and concept of enjoying benefits for named beneficiaries from time to time. Hence, remaining updated is required.

Example 2

Refer below the snapshot of the beneficiary designation form for the life insurance policy. By reading the first paragraph, we can easily comprehend that a person can appoint more than one primary as well as a contingent beneficiary. Though, no primary beneficiary can be the contingent beneficiary as well. Also, in case an estate like a charity organization or trust is mentioned as the beneficiary, full details regarding the address and the date of its creation should be mentioned. Lastly, in case the owner is married and the spouse is not mentioned as the sole primary beneficiary, spousal consent is required.

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Naming a beneficiary is very important. Naming a primary or contingent beneficiary ensures that the asset goes in the right hands after the owner’s death. Designating beneficiaries helps in getting tax advantage after the owner’s death. It helps the family and legal heir of the owner in skipping the probate process (sale and distribution of assets) altogether. It is a very lengthy and expensive process that can cost the family a lot after the owner’s death.

Given the unpredictable life span, it is always important to have someone entitled or mentioned beforehand as the inheritor of the benefits that the original owner would get once any such beneficial program matures. In case of real estate assets or properties having sentimental value, the will has an heir named, but for financial products such as insurance or retirement benefits, individuals tend to ignore the importance of naming a beneficiary.

Listed below are the benefits of naming a beneficiary, which must be known to anyone who is unaware of how important it is. Let us have a look at them:

#1 - Tax Advantage

In cases where primary beneficiaries are specifically mentioned in the will, they will be able to get the tax advantages after the owner’s death. For example, let us say the owner’s assets were all becoming taxable in two-year time, but after death, the primary beneficiary can collect the asset with a deferred tax benefit for a longer period.

#2 - Asset Goes in Right Hands

If the beneficiary’s name is not specifically mentioned in the will, the court will decide who will get the asset in given facts and scenarios. It sometimes leads to assets going to the wrong hands. Therefore, to ensure that the right individual gets the benefit after the owner’s death, beneficiaries (both primary and contingent) should be mentioned in the will.

#3 - Skipping Probate Process

The probate process is a time-consuming and expensive process that family and heir have to go through after the asset owner’s death. The designation of the asset to primary and contingent beneficiaries can help to skip this process altogether.

There are several risks that should be kept in mind by the owner or should be detailed to the owner by a legal advisor when she or he makes the will and designate a primary and contingent beneficiary. Some of the risks are mentioned as below:

• In case the asset owner fails to designate a named beneficiary, the asset will go through the probate process and will have several tax consequences that could have been avoided otherwise.
• If the primary beneficiary is minor instead of trust for them, the judge will decide who will manage the asset until the minor person becomes an adult.
• Mentioning non-specific beneficiaries, like my immediate family or my children, will lead to disputes after the asset owner’s death.

The above are just a few examples. To sum up, asset owners should very carefully, with the help of their legal adviser, fill the named beneficiary form, to avoid any hassle in the distribution of assets after their death. Also, they should review and update the beneficiary’s names after every major life event like divorce, marriage, or death of a primary or contingent beneficiary before the owner.

This has been a guide to what is Named Beneficiary. Here, we explain the concept along with its the types, examples, importance, advantages, and risks. You can learn more about it from the following articles –

• 529 Plan
• Group Insurance
• Variable Annuity
• Tax-Sheltered Annuity