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What Does It Mean to be a Beneficiary?

A beneficiary is the person who is chosen to receive the proceeds of a trust, will or insurance policy. These legal documents or contracts will name one or more beneficiaries who will be awarded the deceased’s assets by a trustee or executor on behalf of the estate or be paid out the appropriate value of an annuity or life insurance policy.

Some examples of accounts, contracts or financial products for which you’ll need to name a beneficiary include:

  • 401(k)s, IRAs and other retirement savings accounts

  • Brokerage accounts

  • All types of bank accounts (checking, savings, CDs, etc.) 

  • Life insurance policies

  • Annuities

Types of Beneficiaries

The basic idea of a beneficiary is not all that complicated. It’s the person who gets an asset after you pass away. However, nothing is ever that simple when it comes to estate planning or financial bequeathments. There are about a half dozen unique types of beneficiaries, some of which may or may not be relevant to you depending on the types of financial products or assets you own or control.

Primary beneficiary: This is the basic beneficiary. It’s a single person you name to receive the asset or benefits in the event of your death.

Secondary beneficiary: Sometimes referred to as a “contingent” beneficiary, the secondary beneficiary will receive the benefits if the person you listed as the primary beneficiary is also deceased or does not want or cannot accept the asset/s bequeathed to them.

Eligible Designated Beneficiary (EDB) As Defined by the 2019 SECURE Act

Under the 2019 SECURE Act, an “eligible” designated beneficiary for an IRA can be:

  • Your surviving spouse

  • An individual who is chronically ill or disabled

  • One of your minor children

  • A person who is less than 10 years your junior

  • A trust, charity or estate (considered a not designated beneficiary (NDB))

Not Designed Beneficiaries are non-living entities that are named as the beneficiary of an IRA as defined by the SECURE Act.

You may have noticed that some people you may want to leave your retirement savings to, like an adult child, might not fit into any of those categories. The SECURE Act changed the law to prevent non-spousal beneficiaries, like adult children, from enjoying an extended Required Minimum Distribution (RMD) period, or essentially long-term tax-deferred growth, on inherited retirement accounts. The new rules now require non-eligible beneficiaries to empty the retirement account within 10 years of inheriting the asset instead of having the option to stretch the disbursements indefinitely (until their passing).

What Rights Does a Designated Beneficiary Enjoy?

Being named a beneficiary essentially gives you precedence over specific instructions left in a will. For example, if you’re the designated beneficiary on a brokerage account, the institution will transfer the account to you as soon as they’re notified of the owner’s passing, regardless of what’s stipulated in the owner’s will.

This can, unsurprisingly, lead to estate and probate conflicts. Scenarios where a former spouse was still left as the beneficiary on accounts at the time of the account holder’s passing can leave the current spouse or children scrambling for legal avenues to reclaim assets. 

Every person should be cognizant of who they have named as beneficiaries on accounts and update them after important life changes, like divorce or the birth of children. This can be difficult if you have many different bank accounts, financial assets, real properties, retirement savings accounts, brokerage accounts, etc.

Get Estate Planning Help From Fullerton Financial Planning

One of the invaluable services our retirement planning team can offer is assistance with your estate plan, especially in regards to beneficiaries. We can assist with IRA legacy planning, annuities and life insurance and other asset protection strategies.

This is especially important after the passage of the SECURE Act. If you haven’t updated your beneficiaries or estate plan since the new rules regarding EDBs went into effect, it may be time to do so. Plans that were leveraging the RMD stretch may now need to reorient to accomplish their estate planning goals.

Call us at (623) 974-0300 to learn more about beneficiaries and how your choices may affect your retirement planning efforts.

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