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Beneficiary

Updated on January 5, 2024
Article byPrakhar Gajendrakar
Edited byCollins Enosh
Reviewed byDheeraj Vaidya, CFA, FRM

Beneficiary Meaning

A beneficiary is a person, company, or entity that receives benefits and is legally entitled to possess someone else’s property, assets, or claims. Typically, recipients receive an inheritance from their family or insurance claims.

Beneficiary

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There can be multiple recipients. While drafting a will, individuals mention recipients to ensure that assets, wealth, and property are distributed by their wishes. A legal claim benefits a person by offering a right to claim a certain asset or benefit. The passed-on assets usually include either retirement accounts, brokerage accounts, bank account funds, art collectibles, estates, or property.

Key Takeaways

  • Beneficiaries are legal entities, individuals, trusts, or organizations that receive assets after the death of a person.
  • There are three subtypes—primary, contingent, and residual. The term is usually used in insurance policies, brokerage accounts, beneficiary wills, and wealth distribution.
  • If an individual passes away, banks must be notified. Recipients must submit legal documents and the death certificate. After clearance, the bank beneficiary can transfer the amount to another account.

Beneficiary Explained

A beneficiary is a person that receives someone else’s property, assets, or money after their demise. It is very important to mention who receives what in legal documents. As such, there is no set requirement or qualification for an individual to become a beneficiary. Even children below 18 years old can become a recipient.

The beneficiary definition states that assets named in a will go through a probate process. The probate process is the most secure way of knowing where money is supposed to go post-death.

Last will and Testament

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The term is primarily used in insurance policies where people name family members or close relatives recipients. Not having a will or not mentioning a recipient can lead to disputes and even lawsuits. In the absence of a specified recipient, wealth can become stagnant.

Therefore, it is advised that the beneficiary will and testament should mention details of distribution if there is more than one recipient. But, again, in the absence of clear instructions, recipients could have disputes about who gets what and how much.

Also, a legal advisor performs their fiduciary duty by ensuring all the mentioned recipients are informed about the will details and clauses.

Types

1. Primary

Primary beneficiaries are the first to receive a person’s property or wealth after demise. Legal documents must contain the recipient’s current address, contact details, and social security number to facilitate that. While drafting a beneficiary will, individuals can decide the number of recipients.

2. Contingent

A contingent beneficiary is a person who receives property and entitlements without a primary beneficiary (or when the primary recipient is not found). Thus, they are second in line.

Contingent Beneficiary

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The claim of the contingent over the benefits of the financial account is conditional. There may be multiple recipients in a contract, which will mention their proportionate share in the agreement. Individuals, organizations, charities, or beneficiary trusts can be chosen as contingent. However, the selected person (or entity) must be of legal age and capacity. Thus, if a minor is selected, one must ensure that a legal guardian is appointed to manage the assets until the minor attains maturity age.

3. Residuary

A residual beneficiary is a person who receives what’s left and is not particularly mentioned in the document. They could receive in two ways; they can receive what’s left behind or when no one claims mentioned assets. To avoid such issues, a person must clearly state every minute detail—transparency is highly recommended.

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Example

Stuart lives in New York, and he has a small family. He is married to Susan, and they have two children—Jason and Megan. Jason is older than Megan. Stuart owns two apartments, a brokerage account, and a yacht. In addition, Stuart has a friend and his business partner—Patrick.

Unfortunately, Stuart meets with a fatal car crash. In his will, Stuart mentions all his family members. He left the brokerage account to his wife and the two apartments to his children—Jason and Megan. In this case, all his family members are beneficiaries. This is an example of the primary beneficiary system.

But for some reason, Megan was not located and did not claim the apartment. Therefore, it was passed on to Patrick. In this instance, a contingent beneficiary system is followed. Patrick is a contingent recipient who was second in line for the property.

No one claims the yacht, so it goes to Patrick. In this instance, Patrick is the residual beneficiary.

Alternatively, had Stuart chosen to donate to a charity, corporation, or trust, the recipient, would have been referred to as a beneficiary trust.

Risks

Several risks should be kept in mind by the owner. Legal advisors should mention these when they draft wills and testaments. The risks are as follows.

  • If the asset owner fails to mention a recipient, the asset will go through the probate process and have several tax consequences that could have been avoided.
  • If the primary recipient is a minor, the judge will decide who will manage the asset until the minor becomes an adult.
  • While mentioning recipients, non-specific terms like “immediate family” or “my children” can lead to disputes.
  • For example, the term “immediate family” could include any individual related by blood or sharing a bond through marriage, adoption, cohabitation, or civil partnership.
  • Further, the term “family refers to first-degree relatives: parents, siblings, spouse, and children; relatives by lineage: in-laws: grandparents, cousins, stepchildren, or cohabitating partners.

Beneficiary vs Dependent vs Trustee

  • Beneficiaries receive benefits, and a person’s plans cover dependents, whereas a trustee’s role is to look after someone else’s wealth and property.
  • A beneficiary could be anyone, while dependents are typically spouses or children, and trustees are generally legal professionals or law advisors.
  • Both beneficiaries and dependents receive benefits, but a trustee only performs their fiduciary duty.
  • A beneficiary or a dependent does not have a legal obligation, but a trustee does. Therefore, trustees must do their part in the recipient’s best interests.

Frequently Asked Questions (FAQs)

1. Does a beneficiary pay taxes on life insurance?

No, they do not. For example, when a recipient receives money from a life insurance claim, the amount is not considered a part of gross income and, therefore, not subject to any income tax deductions. But in the case of an estate, the recipient is required to pay estate taxes and property taxes.

2. Who is considered a bank beneficiary?

If an individual dies, banks must be notified, and the beneficiary is required to submit legal documents and a death certificate. After clearance, the bank beneficiary can transfer the amount to another account and close the account belonging to the deceased person.

3. What does it take to be a beneficiary?

There are no specific prerequisites to be considered a recipient. While drafting wills and testaments, individuals have complete discretion in naming recipients. A trust can also be the recipient, referred to as a beneficiary trust. This occurs when the deceased person leaves their assets to charity.

This article has been a guide to What is Beneficiary. We explain its types, example, risks, and comparisons with dependent and trustee. You can learn more about it from the following articles –

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