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Actions What's a Beneficiary (and Do I Really Need One)?
Key takeaways
- Naming a beneficiary is an important part of estate planning.
- It helps ensure your wishes are carried out (outside the court system).
- Review the beneficiaries on your accounts and assets once a year.
A beneficiary is a person or entity (like a trust) who will inherit proceeds upon your death. These proceeds can include things like a life insurance payout or retirement account.
You get to choose beneficiaries for many plans or accounts when you sign up or afterward, so make sure you do. If you don't name whom you want to get those assets if you die—or you don't update names from years ago—you could create problems for yourself or your heirs down the road.
Why it matters
For many assets, such as life insurance and retirement accounts, naming beneficiaries usually supersedes your will—the ones you designate receive the proceeds, no matter what the will says.*
Naming a beneficiary for certain accounts helps them bypass "probate," the process where a court reviews, approves or disapproves the will, then allows your heirs to distribute your estate assets and debts.
Probate can be a time-consuming, stressful process for loved ones that leads to disputes. It's costly, too, since they'll probably need to get a lawyer involved. Depending on state community property laws, which may split an inheritance between spouses and heirs, it can also be complex.
By naming a beneficiary, you may also be able to help prevent your retirement savings from being taxed when they're transferred. (This can vary, so check with a legal or tax expert to see what's best for you.)
*But not always; in some cases, state laws rule.
Types of accounts with beneficiaries
You typically can name beneficiaries for retirement accounts, life insurance policies and checking and savings accounts. Other assets, like your car title or house deed, may also allow it. (This varies by state and can happen through a "transfer-on-death" or "beneficiary deed.")
You may need to submit a beneficiary form to local or state agencies, but rules can vary widely based on where you live. Check your state's department of motor vehicle services and property agency to learn more.
How to name beneficiaries
Naming beneficiaries is easier than you might think.
First, decide whom you want to inherit your assets. Note that you can name more than one beneficiary, so think about the portion of the account that should go to each.
Gather basic information about each beneficiary, including name, address and Social Security number. (For trusts or organizations, a tax ID should suffice.)
Then, ask the account provider for a beneficiary designation form. (Some companies require paper, but online forms are common.) Make sure the details are correct; even small mistakes can lead to costly legal issues. Finally, return the form to the provider, and keep copies for yourself in a safe place.
Depending on your needs and situation, consider these other tips:
- Avoid naming estates. This often kicks the asset into probate and negates the benefit of naming a beneficiary.
- Learn your state's rules on naming minors. Many states restrict how and when minor children can inherit assets. If that affects you, think about working with an estate lawyer to form a trust the child can access when they come of age.
- Name backups, just in case. "Contingent" or secondary beneficiaries will receive the assets if the primary beneficiary dies before they're transferred.
A crucial part of estate planning
Beneficiaries are a simple but critical piece of estate planning, so don't skip this step. And make sure to review (and possibly update) your choices any time your life and needs change. This is especially important after major events like marriage, divorce or adding to the family. It's a good idea to do so once a year.
What you can do next
Make a note of all your financial accounts to ensure you've named beneficiaries for each. If you have, review your designations to make sure they still meet your wishes. If you haven't, complete and submit beneficiary forms from your financial providers. Also, consider working with an estate lawyer to ensure you follow the federal and state rules that apply to you. A licensed professional can help you make the right choices for you and your loved ones.
Footnotes
Bana Jobe is an Austin-based health writer and editor with more than a decade of content experience for brands, agencies and digital media.
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