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Named Beneficiary

An individual – named in a legal document – who is permitted to collect assets from IRAs, insurance policies, pension plans, and trusts

What is a Named Beneficiary?

A named beneficiary is an individual – named in a legal document – who is permitted to collect assets from:

  • IRAs
  • Insurance policies
  • Pension plans
  • Trusts

When it comes to instruments such as annuity policies, the holder and the beneficiary may be the same individual. In the event that several beneficiaries are named (which is more likely to happen with property or larger assets), each beneficiary will receive an equal part of the proceeds once the asset is sold.

 

Named Beneficiary

 

 

Summary

  • A named beneficiary is an individual who is entitled to receive assets from a deceased’s IRA, insurance policies, pension plans, and trusts.
  • Named beneficiaries can be either primary and contingent (or secondary) beneficiaries; estates can also be named beneficiaries.
  • They are important because they ensure assets go to the right individual(s), they come with tax advantages for heirs, and they help heirs avoid probate.

 

Types of Named Beneficiaries

A primary beneficiary is number one on the list to receive benefits outlined in a will. The deceased specifically chooses the primary beneficiary.

In the event that the primary beneficiary can’t or won’t accept the assets, the contingent beneficiary is next in line. Because the contingent beneficiary – or secondary beneficiary – wasn’t the deceased’s first choice, there may be conditions that the secondary beneficiary must meet before receiving any proceeds.

It is also important to point out that beneficiaries don’t need to be an individual or a group of individuals. For example, an individual’s insurance policy can name an estate or non-profit organization as a beneficiary.

 

The Importance of a Named Beneficiary

It is important to appoint a named beneficiary for several reasons. The first is, of course, that designating a beneficiary ensures assets go the right individual(s).

More than that, though, appointing a named beneficiary comes with tax advantages for those left behind. Let’s say, for example, that Mr. Jones passes away without naming an individual(s) or his estate as a beneficiary. In five years, all of his assets may become completely taxable. If Mr. Jones had appointed a named beneficiary before his passing, then the funds he left behind could be taken out over a much longer period of time.

A named beneficiary also enables family and friends to skip the probate process, where assets are sold and distributed. The process usually doesn’t benefit the beneficiaries. On the contrary, it is one more step that an heir needs to go through, and probate can take months or even years.

Appointing a named beneficiary is crucial. It ensures that the deceased’s assets go to those he/she intended. Specifying who is supposed to get what makes the process of distributing inheritances quick and easy.

 

Related Readings

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional CFI resources will be very helpful:

  • Escheatment
  • Executor
  • Indirect Taxes
  • SEP IRA

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!