What Is a Beneficiary?
A beneficiary is a person or entity you choose to receive money or property under a will, trust, life insurance policy, retirement account such as a 401(k) or IRA, annuity, or bank or investment account.
For example, the beneficiary of a life insurance policy is the person who receives the insurance payout after the insured person dies. The beneficiary of a trust is the person the trust holds and manages assets for, as directed by the trustee.
One of the most important parts of your estate plan is deciding who will receive your assets when you die. Many people assume their will handles everything, but some of your largest assets, such as life insurance, retirement accounts, and bank accounts, may pass by beneficiary designation. Those accounts go straight to the person named on the form, whatever your will says.
That makes your beneficiary choices just as important as your will, and they're often more likely to be out of date. Below are answers to the most common questions we hear about beneficiaries.
Why Do Beneficiary Designations Matter So Much?
Accounts with a named beneficiary are generally non-probate assets. They transfer directly to the named beneficiary without going through probate court. This is usually a benefit, because the money moves faster and more privately.
The catch is that a beneficiary designation usually overrides your will. If your will leaves everything to your children, but your life insurance still names a sibling from twenty years ago, the insurance company will generally pay your sibling. Your estate plan is only as good as the beneficiary forms that go with it.
What Is a Primary Beneficiary?
A primary beneficiary is the person or entity first in line to receive an asset. You can name one primary beneficiary or several, and you decide what percentage each one receives.
What Is a Contingent (Secondary) Beneficiary?
A contingent beneficiary, sometimes called a secondary beneficiary, is next in line. They inherit only if the primary beneficiary has died before you, can't be located, or declines the inheritance.
Naming a contingent beneficiary is one of the simplest ways to protect your plan. If your only primary beneficiary dies before you and no contingent is named, the asset often defaults to your estate. The asset then goes through probate, and that is exactly what the beneficiary designation was supposed to avoid.
Who or What Can Be a Beneficiary?
You can name any of the following as a beneficiary:
- One person
- Two or more people, in equal or unequal shares
- A trust, which is managed by the trustee you appoint
- A charity or other nonprofit organization
- Your estate
Each choice has trade-offs:
- Naming your estate sends the asset back through probate and may expose it to creditors. It is rarely the best choice unless there is a specific reason for it.
- Naming a trust gives you control over how and when the money is distributed. This is especially useful for young beneficiaries, beneficiaries who struggle with money, or blended families.
- Naming a charity can support causes you care about and, depending on the asset, may offer tax advantages. Retirement accounts are often an efficient asset to leave to charity.
Can I Name a Minor Child as a Beneficiary?
You can, but it often causes problems. A minor child cannot legally take control of an inheritance. If a child under 18 is named directly, a court may need to appoint a guardian of the estate to manage the money. That process takes time, costs money, and involves court oversight. Once the child reaches adulthood, they may receive the full amount outright, whether or not they are ready for it.
A better approach is usually to leave the asset to a trust for the child's benefit, or to use a custodial arrangement. Either way, someone you trust manages the money, and you decide at what age your child receives it.
What About a Beneficiary With Special Needs?
If a loved one receives, or may someday need, needs-based government benefits such as SSI or Medicaid, leaving them money outright could disqualify them. A properly drafted supplemental needs trust can hold the inheritance for their benefit without jeopardizing those benefits.
What Does "Per Stirpes" Mean?
Many beneficiary forms offer a "per stirpes" option. It means that if one of your beneficiaries dies before you, that person's share passes to their descendants, typically their children, instead of being split among your surviving beneficiaries.
For example, if you leave your account equally to your three children and one child dies before you, "per stirpes" sends that child's one-third share to your grandchildren through that child. Without it, the two surviving children would typically split the entire account. Neither choice is wrong, but it should be a deliberate decision.
Can I Change My Beneficiaries?
Yes. In most cases you can change your beneficiaries at any time by filing an updated form with the insurance company, plan administrator, or financial institution. Changing your will does not change your beneficiary designations. Each account has to be updated separately.
It's wise to review your beneficiaries every few years and whenever your life changes. That includes:
- Marriage or remarriage
- Divorce
- The birth or adoption of a child or grandchild
- The death of a beneficiary
- A beneficiary developing a disability or financial difficulty
- Starting a new job or rolling over a retirement account
- Buying a new life insurance policy
- Creating or updating a trust
What Happens to My Beneficiaries if I Get Divorced?
This is where family law and estate planning meet, and it's one of the most common and costly oversights we see.
Texas law generally revokes a former spouse's designation as beneficiary on certain non-probate assets, such as life insurance, after a divorce. There are exceptions: the divorce decree can keep the designation in place, or the former spouse can be re-designated after the divorce.
Many employer-sponsored retirement plans, like 401(k)s, are governed by federal law, which may override that Texas rule. In those cases, the plan administrator will often pay whoever is named on the form, even if that person is an ex-spouse.
For example, imagine a man who divorces, remarries, and dies ten years later, but never updated his 401(k) beneficiary form. His retirement savings could go to his former wife instead of his current wife and children, and the family may have little recourse.
If you are going through a divorce or have recently finalized one, updating your beneficiary designations should be at the top of your to-do list once the decree is signed. It also helps to know that federal rules often require your spouse's written consent if you want to name someone other than your spouse as the beneficiary of certain retirement plans while you are married.
Do I Still Need a Will if I Have Beneficiaries Named?
Yes. Beneficiary designations only cover the specific accounts they are attached to. A will still covers everything else: your home, if it is not otherwise titled; personal belongings; accounts without a beneficiary; and, importantly, who will care for your minor children. A trust-based plan can tie all of these pieces together so your wishes are carried out consistently.
As our estate planning team likes to say, you can choose your estate plan, or you can take the "no-plan estate plan" and let the State of Texas and a judge decide for you.
A Simple Beneficiary Checklist
- Make a list of every account and policy that has a beneficiary designation.
- Request a copy of the current designation for each one. Don't rely on memory.
- Confirm that every account has both a primary and a contingent beneficiary.
- Make sure no minor children are named directly.
- Check that your designations match your will and trust.
- Review everything after any major life change.
Talk to The Ashmore Law Firm
Beneficiary designations look like simple forms, but they can control a large share of your wealth. They work best when they are coordinated with a complete estate plan. The estate planning attorneys at The Ashmore Law Firm can review your designations, spot conflicts with your will or trust, and help make sure your assets go where you intend.
If you have recently gone through a divorce, our family law and estate planning teams work under one roof to help you protect your family's future. Speak to our team to make sure you have the right estate planning protection.
Do You Need To Speak With An Experienced Estate Planning Lawyer In The Dallas Area?
If you need to speak to an experienced estate planning attorney please contact us online or call our Dallas office directly at 214.559.7202. We help clients throughout the Dallas area with all of their estate planning needs and look forward to helping you.
