A beneficiary is an individual, trust, organization, or other entity with the legal right to receive assets from a will or trust, or from other legal arrangements or agreements, such as an insurance policy or retirement plan. By understanding beneficiary designations and beneficiary rights, individuals can better protect their financial future and the financial future of their families.
What Is a Beneficiary?
A beneficiary is a person or entity that has rights to receive assets from a will, trust, insurance policy, or other account. The assets are bestowed upon the beneficiary upon the death of the account holder, such as in the case of a will or trust, or upon the occurrence of an event, such as when the insured dies or meets certain requirements associated with a retirement plan. Benefits and assets can be passed on to the beneficiary as outright property or deposited into an estate or trust.
The Importance of Proper Beneficiary Designations
It is important to designate a beneficiary properly to ensure the assets go to their intended recipient, according to a person’s wishes. This requires understanding the different types of beneficiary designations and when they are legally binding.
Types of Beneficiaries
The most common types of beneficiaries include the following:
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Primary Beneficiaries: This type of beneficiary is the first in line to receive any asset upon the death of the account holder.
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Contingent Beneficiaries: If the primary beneficiary is deceased when the assets pass to the beneficiary, a contingent beneficiary has the right to receive the assets as the legal beneficiary.
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Restricted Beneficiary: Restricted beneficiaries are only able to receive assets if certain conditions are met. This can include age, marriage, or other contingencies stated in the original trust or will.
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Testamentary Beneficiary: A testamentary beneficiary is someone who is named in a will and gives his or her rights to the assets through the will.
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Irrevocable Beneficiary: An irrevocable beneficiary is a beneficiary with rights that cannot be changed or revoked by the account holder. Once the beneficiary is designated as such, the account holder cannot change or revoke the designation without the permission of the beneficiary.
Beneficiary Rights
Beneficiaries have certain rights that cannot be violated. These rights often depend on the laws of the state in which the beneficiary resides, as well as the provisions of the original document granting the beneficiary these rights. Generally, these rights include the following:
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Right to Receive Information: Beneficiaries have the right to receive information about the estate and any accounts they are entitled to, including account statements, tax information, and other documents related to the estate.
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Right to Receive Benefits: Beneficiaries have the right to receive the full benefits that were intended for them in the original trust or will. In the event that the estate does not have enough funds to honor the terms of the trust or will, the beneficiary may petition the court for some or all of their rightful benefits to be paid out of the estate.
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Right to Challenge the Will: Beneficiaries have the right to challenge a will or trust if they feel the terms of the will or trust were not properly followed or if they feel there was an act of fraud or undue influence in regard to their rights as a beneficiary.
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Right to Receive Account Statements: Beneficiaries have the right to receive account statements, which they can use to review activity and track the growth of their assets.
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Right to Dispose of Assets: Beneficiaries have the right to transfer assets according to their wishes, such as through gifting or sale.
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Right to Access the Estate’s Property: Beneficiaries have the right to access the property owned by the estate. This includes the right to use the property and sell it, if desired.
By understanding the different types of beneficiaries, the different rights each type of beneficiary has, and how these designations affect the distribution of assets, individuals can better protect their financial future and the financial future of their families. Proper designation of beneficiaries is essential to ensure the terms of a trust or will are followed and the desired beneficiary receives the intended asset. It is also important for estate planners to keep beneficiary designations up to date in order to avoid any unintended beneficiaries from receiving the assets.
