What is Named Beneficiary?
Named Beneficiary is a person whose name is recorded on the legal documentation by the force of law or a decree. This person is the sole or shared collector of benefits from the trust, insurance policy, pension plan, annuity etc. If there is more than one named beneficiary, all will share the asset equally or as per their defined share in the legal document or will.
Explanation
Sometimes an estate can be a beneficiary instead of an individual. There is a difference between heir and beneficiary; heir gets the asset as a successor while the beneficiary gets his or her share if their name is on the will.
In the case of a financial instrument like an annuity, the beneficiary and the policyholder can be the same individual. Appointing a beneficiary comes with certain advantages like tax advantages and skipping probate processes, which ultimately leads to speeding up of the asset distribution process.
Types of Named Beneficiary
- Primary Beneficiary: The primary beneficiary is the individual who is foremost in the list of receiving the benefit, as mentioned in the will of the deceased person. The deceased person specifically mentions the primary beneficiary’s name in the will in his or her lifetime.
- Contingent Beneficiary: Contingent Beneficiary is the person who receives the asset in case the primary beneficiary is not found or refuses to take the asset as allotted by the deceased in his or her will. There are certain conditions outlined in the will that need to be met before the asset can be transferred to the contingent beneficiary. A contingent beneficiary is also called as a secondary beneficiary.
Sometimes the owner can mention estate like some non-profit organization or NGOs as the primary beneficiary in the will instead of an individual.
Examples
Refer below the snapshot of the beneficiary designation form for the life insurance policy. By reading the first paragraph, we can easily comprehend that a person can appoint more than one primary as well as a contingent beneficiary. Though, no primary beneficiary can be the contingent beneficiary as well. Also, in case an estate like charity organization or trust is mentioned as the beneficiary, full details regarding the address and the date of its creation should be mentioned. Lastly, in case the owner is married, and the spouse is not mentioned as the sole primary beneficiary, spousal consent is writing would be required.
Source: www.yumpu.com
Risk of Named Beneficiary
There are several risks that should be kept in mind by the owner or should be detailed to the owner by a legal advisor when she or he makes the will and designate a primary and contingent beneficiary. Some of the risks are mentioned as below:
- In case the asset owner fails to designate named beneficiary, the asset will go through the probate process and will have several tax consequences that could have been avoided otherwise.
- If the primary beneficiary is minor instead of trust for them, the judge will decide who will manage the asset until the minor person becomes an adult.
- Mentioning non-specific beneficiaries, like my immediate family or my children, will lead to disputes after the asset owner’s death.
Above are just a few examples, to sum up, asset owners should very carefully with the help of their legal adviser fill the named beneficiary form, to avoid any hassle in the distribution of assets after their death. Also, they should review and update the beneficiary’s names after every major life event like divorce, marriage, or death of a primary or contingent beneficiary before the owner.
Importance of Named Beneficiary
Naming a beneficiary in a will is very important. Naming a primary or contingent beneficiary ensures that the asset goes in the right hands after the owner’s death. Designating beneficiaries helps in getting tax advantage after the owner’s death. It helps the family and legal heir of the owner in skipping the probate process (sale and distribution of assets) altogether. It is a very lengthy and expensive process that can cost the family a lot after the owner’s death.
Advantages
- Tax Advantage: In cases where primary beneficiaries are specifically mentioned in the will, they will be able to get the tax advantages after the owner’s death. For example, let us say the owner’s assets were all becoming taxable in two-year time, but after death, the primary beneficiary can collect the asset with a deferred tax benefit for a longer period.
- Asset Goes in Right Hands: If the beneficiary’s name is not specifically mentioned in the will, the court will decide who will get the asset in given facts and scenarios. It sometimes leads to assets going to the wrong hands. Therefore, to ensure that the right individual gets the benefit after the owner’s death, beneficiary’s (both primary and contingent) should be mentioned in the will.
- Skipping Probate Process: Probate process is a time consuming and expensive process that family and heir have to go through after the asset owner’s death. The designation of the asset to primary and contingent beneficiaries can help to skip this process altogether.
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