Beneficiaries

Beneficiaries are the primary focus of your last will and testament and/or trusts set up on their behalf.

These are the people you choose to inherit part or all of your estate after your death.

  • Make sure you have enough assets to cover each beneficiary’s gift set forth in your will or trust. You need to account for estate taxes, creditors, fees, and other expenses of settling your estate. This is a place where a professional can help.
  • Adult beneficiaries can be named as executors and/or trustees, but shouldn’t sign as witnesses of the documents.
  • You may see the term beneficiary and heir used interchangeably, but this is not accurate.
    • Only family members who inherit from you if you die without a will (intestate) are heirs; they are beneficiaries if named in your will.
    • Non-family members and groups (such as a charitable organization) can be named beneficiaries in your will or a trust .

You can list the name of a beneficiary, but you can assign a designation that may account for some changes over time, such as “to the person I’m married to at the time of my death” and “to my descendants who survive me.” 

When you are creating your estate plan it is crucial to carefully consider your beneficiary choices, the assets they inherit, how they may handle them, and the overall effect on their lives and on other beneficiaries. Not naming beneficiaries is similar to dying without a will; the probate court in your state has the final say on how the assets are distributed. The same is true if the beneficiary choices are invalid because the forms are improperly filled out.

  • Create a comprehensive list of all assets you leave to each beneficiary in your will, along with a detailed distribution plan, including percentages for any assets with multiple beneficiaries.
  • Use the same list if you are planning individual trusts for each beneficiary.
  • Consider any contingencies or restrictions you wish to place on assets going to each individual.
  • Make sure you account for all or your assets to prevent bickering for any assets not listed.

In some states you can also use a Beneficiary Designation Form to provide more detail. You should make sure all beneficiary forms and others are filled out correctly.

Although they are not included in a will, beneficiaries can be named for many other assets such as a life insurance policy, a bank or brokerage account, securities or annuities, retirement accounts (IRA and 401k), or other transfer on death accounts. In some states, a beneficiary may be designated for motor vehicles and real estate.

  • Be aware of restrictions that may exist on your beneficiary choice for each asset, for example:
    • Retirement plans, accounts, insurance policies, or trusts may be restricted to family;
    • You may need written consent from your spouse to designate a different beneficiary for some types of accounts, such as IRAs and 401(k)s;
    • Beneficiaries cannot be changed on an irrevocable trust; and
    • Spouses can add your retirement plan into theirs without tax consequences, but not your children or other beneficiaries.
  • If you have or create a living trust, you could name the trust as the beneficiary, although this may have tax consequences if you do it with a qualified account such as IRA or 401k. 

You can choose alternate/backup/contingent beneficiaries in the event something happens to one of your primary choices, designate multiple primary or contingent beneficiaries for the same asset, or provide details on how your assets would be distributed to the remaining beneficiaries.

You may choose a “residuary beneficiary” to inherit anything not accounted for in your will or estate plan. This can simplify your will if you only have a few specific gifts in mind. Examples of assets this would be helpful for include:

  • everything left in the estate after any specific gifts included in your will have been distributed, all non-probate property has been distributed, and paying debts, taxes, and final expenses; and/or
  • any benefits that would previously have gone to your divorced spouse or deceased beneficiary.

Make sure you notify your beneficiaries, both primary or contingent, so they are aware they may to receive inheritance upon your death.

It is crucial to keep your will, documents, and trusts updated with any changes in beneficiaries, such as a birth, adoption, death, or divorce.

Although your ex-spouse may be legally removed from your will after the divorce is official, you will need to alter the distribution of your assets to account for this to avoid involvement of the probate court in this decision.

They will need to be removed as beneficiaries from trusts and other assets.

Even if a death may be covered by a contingent beneficiary, you should name a new alternate.

Although you could designate beneficiaries as “my descendants who survive me” to account for the birth or death of a child, it would not account for adoptions.

It is better to add all new children and remove deceased children, even if you designate that all assets will be divided equally among your surviving children.

Beneficiaries can be changed at any time, except for those named in an irrevocable trust which requires legal proceedings. You should make sure these updates are done correctly and do not contradict each other. For example, most transferable on-death assets automatically go to the named beneficiary and are no longer part of your estate after you die.

  • Since the asset is not included in your will, it won’t be distributed to the beneficiaries named there.
  • This is not a problem if they are the same person, but you may have assets that have been yours for decades for which you never updated the beneficiary.
  • If the life insurance policy you took out years ago before you met your spouse still names your brother as the beneficiary, he will get the money after your death despite the fact that you designated that your spouse would get everything in your will.

Primary Beneficiaries

A primary beneficiary is any person or entity designated by your will and/or trust to receive its assets. In general, a primary beneficiary receives assets in your will after your death or from the trust during the trust’s existence, whether it is a living trust before and/or after your death or a testamentary trust after your death.

Spouses

Most couples in their first marriage will name the surviving spouse as the primary, and frequently, the sole beneficiary. 

Even if you elect to exclude them, your spouse will inherit part of your estate. This is called the Spousal Share.

All 50 states have laws that ensure this, although the spousal share varies considerably by state.

This applies only as long as they are legally your spouse, since they are automatically removed when your divorce is finalized.

The longer your divorce process goes on, the longer your soon-to-be ex will retain the right to inheritance.

When your spouse is the beneficiary, how much control they have of your assets is based on the details of the trust or your will. If you leave everything to your spouse, they will have complete control of the estate. This is the simplest thing to do, but there are issues to consider.

 

  • It is best to only consider doing this when your spouse is your children’s parent, since they will have the same interests for your children. You may not want to do this if this is a subsequent marriage, especially if they have children as well.
  • If you did most of the financial management, make sure there is a plan in place to ensure they have the knowledge and/or help needed to manage their new financial responsibilities.
  • Any future decisions about beneficiaries will be solely up to your surviving spouse. While this may allow them flexibility in distributing the estate based on the needs of your children and value of the assets as they change over time, it may be a difficult decision to make alone.
  • This option doesn’t account for important possibilities such as both of you dying at the same time or your spouse remarrying.

There are many options for distributing your assets between your children and any subsequent spouses. Ideally, you want to provide income and financial security for your surviving spouse while doing the same for your children in a way that protects each parties’ assets from the other.

Children

For those with children, it is likely their welfare you’re most concerned about when planning for your death. Decisions about their inheritance are among the most important estate planning tasks.

There are a lot of factors to consider when naming your children as beneficiaries. Here is a brief list of some of those important factors to think about and why.

Name your children individually, especially if they are getting different inheritances – If you just use “All My Children,” the inheritance will be split evenly among them

Whether or not they are minors – Frequently adult and minor children have different rights.

Do any children have special needs – Disabled children may not be able to inherit and would need special provisions in your will or a Special Needs Trust. 

If your spouse is their parent – It is common to leave everything to your spouse if they are your children’s parent, something you might not consider if they were a step-parent. 

 Is your spouse still alive?

  • If your children are minors, they cannot inherit until they reach the age of maturity.
  • If your spouse has also died, they will need an executor and/or trustee to manage the estate until then.
  • They will need a guardian named in your will.

Are there step-children? – It may be necessary to protect your children’s inheritance from their step-parent giving some or all of your estate to their own children.

What provisions in your will or type of trust would be best for them?

  • Children will vary in their ability to manage their inheritance; some may need others to do it.
  • Consider if it is best to limit their access to the inheritance with specific provisions for the executor or trustee or allow them to inherit without restrictions.

A child can be either a primary or contingent beneficiary in a will or trust or have their own trust. However,  if they are minors, you may elect not to create a trust for them or not name them in your will or other type of trust.

  • Not naming your minor children in your will is only feasible if your surviving spouse is their parent and can take care of them in your surviving spouse’s will or trust.
  • The same would be true if you want to list your spouse as the primary beneficiary and your children as contingent beneficiaries. This will not affect when your children get their inheritance, which would be the same as if they were not listed at all, at your spouse’s death. However, this option is recommended to protect your children’s interests:
    • in case your deaths are simultaneous; or 
    • if your surviving spouse remarries.
  • If your spouse is not also their parent, only naming your children as contingent beneficiaries can become a problem if your spouse outlives you.,.
    • If your spouse is alive after your death a contingent beneficiary is no longer needed and your children would not be part of your will. Your children will have no protection if your surviving spouse does not have the same commitment to them.
    • If your spouse is a step-parent it is best to make your children primary beneficiaries as well.

Children can be named as beneficiaries for other assets such as a life insurance policy, a bank or brokerage account, securities or annuities accounts, retirement accounts (IRA and 401k), or other transfer on death accounts.

Unlike your spouse, adult children do not have any rights to inheritance and you can deliberately leave them out of your will.

If your children are minors (less than 18 years old in most states)

You could make minor children primary beneficiaries for a will, trust, or transferable upon death account. However, they cannot take ownership of or manage inherited assets. An adult will need to manage their inherited assets as a trust until your children reach the age of majority.

  • This person could be your surviving spouse, another adult of your choosing more capable of managing the estate, or the person assigned by the probate court if you don’t designate one.
    • They would be called a trustee for any assets in a trust or a conservator for assets inherited in a will.
    • The conservator may or may not be the designated guardian named in your will.
  • Although the age of majority is 18 years old in most states, you may choose any age between ages 19-35 years that seems most appropriate. You may also opt for a specific event, such as graduation from college.

You can make your children contingent beneficiaries, to become primary beneficiaries upon reaching the age of majority. 

  • Children designated as contingent beneficiaries of a trust can receive assets from that trust, even as a minor. This is usually in the form of income for the primary beneficiary, usually your surviving spouse, but it could be the guardian or conservator if your spouse is not alive.
  • When they come of age they will receive their individual trust or share of the combined trust.
  • They, or their children, are then entitled to any remainder of the trust on the death of the primary beneficiary.

You can make children or grandchildren beneficiaries of 529 (College Trust) Plan, Uniform Gifts to Minors Act (UGMA) account, or Uniform Transfers to Minors Act (UTMA) account to plan for a college education.

You can create a special needs trust for any child with any physical, cognitive, or psychological needs.

If your children are adults

If this is your first/only marriage, you could name adult children as contingent beneficiaries, where they inherit only if your surviving spouse dies.

It may not be worth the effort because the outcome would likely be the same as if you did not list them at all.

If you want them to inherit, you should opt to make them primary beneficiaries by leaving assets to them in your will or trust or creating trusts in their names.

  • You can stipulate that this will not happen until your spouse’s death, which would transfer the assets at the same time as if they were contingent beneficiaries.
  • This would give you the opportunity to provide more details and other stipulations concerning the assets for each child.
  • You would prevent any step-parent from distributing the assets contrary to your wishes.

Other family

Only your spouse and minor children have a right to inherit from your estate, so any other relative you want to have inheritance must be named as a beneficiary. The exception is when you do not have a legal spouse and you die without a will, don’t name beneficiaries in it, or your beneficiaries die before you. 

In that case, there are state-specific guidelines about who inherits your estate. The beneficiaries usually include only immediate family, including children, grandchildren, siblings, parents, and grandparents.

Non-family

As with more distant family, the only way to leave assets to friends or charities is to specifically name them as beneficiaries.

  • It is not unusual to have relatives question your choice of a non-family member or donations to certain charities.
  • This is usually based on a concern/perception that the decision was based on coercion, vulnerability, or fraud.
  • This can be avoided by a few additions to your will.

Contingent Beneficiaries

Contingent beneficiaries are an important but often overlooked part of protecting your estate. These beneficiaries do not automatically inherit upon your death, but will do so under specific circumstances. 

There are two different ways a person can be considered a contingent beneficiary. They can be an alternate/back-up beneficiary that you name in case one of your primary choices are unable or a person in a will or trust who will inherit only if specific conditions outlined in the document are met.

Although contingent beneficiaries are commonly named in wills and trusts, other assets with named beneficiaries such as life insurance settlements or retirement accounts, bank accounts, securities brokerage accounts, college savings plans, and health savings accounts are less likely to.

Alternate Beneficiaries

An alternate beneficiary is someone who would only inherit will and/or trust assets if something happens with the primary beneficiary. Usually it will be if that beneficiary dies while you are alive, becomes unable to inherit, or chooses not to inherit when the estate is settled.

Alternate beneficiaries are recommended to prevent assets from going into your general estate and leaving it to the probate court to redistribute them or choose new beneficiaries. Designating one or more contingent beneficiaries will give you assurance that your assets will still be distributed according to your wishes, even if there are any of these unforeseen events.

  • Although most state’s beneficiary priority lists will correspond with what you might have done otherwise, it is best to make sure.
  • You can designate that the inheritance will go to your grandchild if their parent dies, even though this may happen anyway if probate court is involved.

You can also name a primary beneficiary for one asset as a contingent beneficiary for a different asset. For example, you could leave the vacation home to your son, but designate your daughter as the contingent beneficiary in the event of your son’s death.

Although they may or may not inherit anything right after your death, they are still beneficiaries of your will and/or trust, and may have some rights regarding your estate. You could give other rights to alternate beneficiaries, but  state laws and regulations dictate which rights are allowed. 

All contingent beneficiaries must sign off on any changes to an irrevocable trust along with the primary beneficiaries and the trustee and have the right to petition the probate court to order a trust to be altered.

Unless otherwise designated, a contingent beneficiary also has the right to petition the probate court to remove a trustee that has not been properly managing the assets of the trust, but

does not have the rights to manage or request details of any of the trust’s assets.

Contingent Inheritance

Since one purpose of a will is to provide specific instructions for your assets, you can put contingencies or stipulations on the inheritance of any of those assets. For example, your son’s inheritance can be contingent upon finishing college, running the family business, or successfully completing rehab.

Trust as a Beneficiary in Your Will or Retirement Plan

Sometimes it may be better for tax purposes to have a living trust, which is a trust that already exists, as the beneficiary in your will or retirement plan.

  • Other benefits of naming the trust as beneficiary for your retirement account is that you have some control over how your retirement account is distributed after your death.
    • Creating an Accumulation Trust allows the payouts to be accumulated tax-free and spread out distributions over time to prevent any beneficiary from spending it too soon.
    • You can create trusts for minor children and other types of trusts that can be used for specific purposes, such as a Special Needs Trust.
    • You can provide for multiple beneficiaries, such as children from a previous marriage.
    • Also see Inheriting Retirement Accounts.
  • Other benefits of naming the trust as beneficiary for your will are either:
    • Avoiding the probate process because the living trust assets are not in your will after your death; or
    • Using your will to add additional assets to trust, at which point the trust becomes a pour-over will which does go through probate.
  • You can further protect your assets by making the trust discretionary. This allows your trustee more control over the trust so they can alter distributions as needed for changing circumstances.

These trusts need to be written very carefully to pass a strict “look through” rule for the trust beneficiaries to be considered “designated beneficiaries.” To be considered “look through” a trust must:

  • Be a valid trust under state law;
  • Have identifiable individual beneficiaries of the trust in the trust document who will be the recipient of the stretch provisions (see below);
  • Be irrevocable upon your death or contain language that it will be irrevocable upon the death of the subsequent owner; and/or
  • Have the required trust documentation provided to the trust custodian no later than October 31 of the year following the owner’s death. 
    • The trustee is responsible for providing trust documentation to the custodian.
    • The custodian is the financial institution holding your account’s investments for safekeeping and that also assures that IRS and government regulations are adhered to at all times.

Designate the trust as the beneficiary in your will or using a form specific for your retirement account. In the space for designation of a beneficiary, add [The Trustee’s Name] as trustee for [The Name of the Living or Special Needs Trust], date (month date, year).

  • Although a subtle difference, do not have the assets moved directly to the trust without declaring the trust as beneficiary since it will result in more estate taxes. 
  • Not all assets can name a trust as beneficiary. Life insurance settlements are the most common.

When this is done properly assets will be transferred from your will or retirement account to the trust upon your death.

It is best done only if you want all of your assets to pass or “pour” into an existing living trust after your death.

If you have young children or you are going to put assets into a “special needs trust” for a disabled relative or dependent, this is a good option.

Doing this with other trusts is best done with professional help.

There are additional considerations when making a trust the beneficiary for retirement accounts. While there are some advantages in the short term and, depending on your circumstances, there can be long-term consequences vs naming your spouse or children.

  • The biggest advantage is that trusts are protected from creditors. Although the same is true for any asset that designates a person other than yourself as a beneficiary.
  • Since you can use a trust to put restrictions on use of assets, you have more control over them. You can create incentives for a trust beneficiary, protect your assets from subsequent or previous spouses, and put restrictions on inheritors not capable of managing inherited assets.
  • Retirement benefits left to your trust will be taxed sooner and usually at a higher rate than if the benefits had been paid directly to a spouse or child. This may result in fewer assets for your surviving spouse to live on and the children to inherit.
  • If a trust is the beneficiary, the individual beneficiaries of the trust will begin to get payments from the trust no later than 1 year after your death.
    • There are “required minimum” payouts that must be distributed to beneficiaries. The amounts are calculated based on the life expectancy of the oldest beneficiary; the value of the assets in the trust is divided by the number of years the oldest beneficiary is expected to live and no less than that amount must be distributed each year to the beneficiaries as a whole, not to each one.
    • This will reduce the estate over time and the ability to increase capital gains.
    • It could reduce or increase the amount of capital gains taxes paid, depending on  if the tax is higher than what a beneficiary owes.
  • If your spouse is a beneficiary, any inherited retirement funds can be combined with their own retirement plan. The combined assets are only subject to the general rules of retirement accounts.
    • Your spouse can allow the account to gain value since they are not required to withdraw from it until the required beginning date, which is currently 70 ½ years of age.
    • The account could then pass on to their children, grandchildren,  etc.
    • Beneficiaries will only have to pay capital gains tax.
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