What is Beneficiary?
A beneficiary can be a person or entity who will receive benefits, or the assets of someone passed away. These benefits or assets are generally transferred to the beneficiary as part of an inheritance. A beneficiary is usually specified in the legal documents related to different types of benefits or financial products, such as retirement accounts, life insurance policies, brokerage accounts, bank accounts, etc.
Beneficiary Explained
A beneficiary is a person or entity who is eligible to receive your assets after your demise. The owner of the assets or the benefactor can impose various conditions on the distribution of the assets. For instance, a beneficiary may have to reach a certain age or be married before accessing the inherited assets.
Moreover, there can be tax implications for the beneficiary when receiving certain financial assets. For example, the principal of most life insurance policies is not taxed, but the interest earned may be.
Naming beneficiaries on your financial accounts and in your will is critical to ensure that your assets are distributed according to your wishes. Otherwise, the financial institution that holds the assets may have to decide how to allocate them. Or the state in which you live may have to determine how to disburse them.
In either case, the people whom you intended to provide financial support after your death may not get it. Or they may have to wait a long time for it.
Beneficiaries specified on the documents for financial accounts replace any beneficiary mentioned in a will.
Types of Beneficiaries
There are three types of beneficiaries:
Primary: Primary beneficiaries are the first ones to inherit a person’s assets. These beneficiaries must be clearly specified in the legal documents with their personal details. A person can name more than one primary beneficiary and specify their share of the assets.
Contingent: Contingent beneficiaries are the ones who inherit the assets if the primary beneficiaries are not available or cannot be located. They are the second in line. The contingent beneficiaries’ claim to the assets is conditional on the absence of the primary beneficiaries. A person can also name multiple contingent beneficiaries and assign their share of the assets. The contingent beneficiaries can be individuals, organizations, charities, or trusts. However, they must be legally capable of receiving the assets. If a juvenile is named as a contingent beneficiary, a legal guardian must be designated to manage the assets until the minor attains the legal age.
Residuary: Residuary beneficiaries are the ones who inherit the remaining assets that are not specifically mentioned in the legal documents. They can inherit the assets in two ways: either by receiving the leftover assets after the primary and contingent beneficiaries have received their share or by receiving the assets that no one else claims. To avoid disarray and disputes, a person should state every detail of their assets and beneficiaries clearly and transparently