Beneficiaries 101: What to know about those who are designated to receive assets

Many estates include assets with beneficiaries already designated to them.  These include life insurance policies, investments accounts like IRAs and 401Ks and bank accounts.  Language naming beneficiaries in the contracts which govern these assets may supersede the language in a will.    

In estate planning, it is important to understand the types of beneficiaries and how they may assume the assets in an estate.

Estates as Beneficiaries

When a person dies, their assets automatically form a legal entity called an estate. In a court process called probate, an estate is often liquidated to pay out to beneficiaries according to a will or the decision of a judge. Without a will to guide the process, a judge will decide who and what receives the assets.  Some assets such as insurance policies pass on to beneficiaries directly at the death of the asset holder, without going through probate.  If a beneficiary has not been named for such an asset, or if all named beneficiaries have passed away themselves, the asset goes to the estate of the deceased asset holder.

It is often an undesirable situation to name an estate as a beneficiary.  Probate fees are often determined by the monetary value of the assets being determined in the process.  Allowing assets to go to the estate simply raises the probate fees and reduces the wealth that can be passed on to the next generation. Naming an estate as a beneficiary can also cause complications during probate. In the absence of a will, or in the case of a disputed will, probate can often end with a judge making a decision that would have not been the ultimate intention of the deceased asset holder. 

Beneficiary Class Designations

For all intents and purposes, beneficiaries can be divided into three classes: primary beneficiaries, secondary contingent beneficiaries and tertiary contingent beneficiaries. Explained in the simplest terms, upon the death of an asset owner (such as a bank account holder or insurance policyholder) the asset passes to the primary beneficiary, the person who had been named as the first beneficiary by the deceased prior to their passing.  If both the asset owner and the primary beneficiary dies, then the asset passes to the secondary beneficiary.  The asset passes to the tertiary beneficiary if the asset owner and both the primary and secondary beneficiaries pass away. 

If all three beneficiaries have died before the asset owner, and the asset owner dies, then the asset goes to the estate of the asset owner.

With some assets, such as insurance policies, asset owners may name more than one beneficiary in each class.  This creates a more complex succession wherein beneficiaries receive percentages of the asset according to the language set out in a statement written by the policyholder.  

The language of this statement makes a difference in the way the statement is interpreted.  For example, if a woman were to designate that the proceeds of her life insurance policy go to her husband and son in equal measures, then they will each receive 50% of the remaining proceeds after any loans made against the policy.  However, if she were to have stated that a specific dollar amount goes to her husband and the remaining amount to her son, then her husband would receive the specific dollar amount and her son will have the loan deducted from his amount and receive the difference.  

“It is often an undesirable situation to name an estate as a beneficiary.”

Per Stirpes vs Per Capita Distributions

Some assets may be passed on to beneficiaries who are direct descendants of the deceased asset holder.  In such a case, the assets can either be passed on in a per stirpes or per capita method.  

Per stirpes is a Latin phrase meaning “by the root” and implies that the asset will be passed equally on to all living children of the asset holder or the grandchildren of the asset holder if one or more of the asset holder’s children were deceased at the time of the asset holder’s death. The asset would be divided equally in such a case would be among the siblings with the grandchildren sharing equally in the portion that would have been received by their deceased parent.

Alternatively, distributions can be designated as per capita, which is Latin for “by the head”.  In such a case, the proceeds are always divided equally among the living children of the deceased asset holder. In a per capita distribution, no proceeds go to the grandchildren of a previously deceased child.

Reviewing and Changing Beneficiaries

To prevent potential conflicts, it is important to do a review of the beneficiaries assigned to the assets in an estate and determine if these are up-to-date.  For example, if you have divorced you may not want your ex-spouse to continue to be listed as a beneficiary on any of your assets.  

Changing beneficiaries for many assets is a simple task that requires the asset holder to file paperwork advising a financial institution (such as a bank or insurance company) in writing of the change. Such is the case with financial assets with so-called revocable beneficiaries. However, changing beneficiaries on some assets may be more difficult.  These assets include joint bank accounts and insurance policies with irrevocable beneficiaries.

Insurance policies with irrevocable beneficiary clauses can be divided into two categories, those with “absolute” clauses and those with clauses that are “reversionary”.  Absolute clauses dictate that the beneficiaries cannot be changed by the policyholder. Even in cases when the beneficiary passes away before the policyholder, an asset with an irrevocable clause that is absolute will then get inherited by the deceased’s next-of-kin.  However, if the policy is reversionary, then the policyholder may reassign beneficiaries in the event of the primary beneficiary’s death.  

Proceeds Held in Trust

Asset owners may make arrangements with their financial institution to hold the proceeds to any beneficiary in a trust, then make periodic payments from the trust to the beneficiary.  This can be done for a single beneficiary or more than one beneficiary.  

Organizations as a Beneficiaries

Trusts, companies and charities can be named as primary, secondary or tertiary beneficiaries on bank accounts, insurance policies and investment accounts.  In many cases, insurance policyholders may be required to list their financial institution as the beneficiary on a life insurance policy if the institution requires the proceeds to pay for a mortgage or other loan after the policy holder’s death.  Small businesses and partnerships may take out “key person” insurance to hedge against the risk of an important person in the business dying.  Designating a charity as the beneficiary of a life insurance policy may be preferable to bequeathing the money as a gift from the asset holder’s estate.  This is because insurance proceeds do not go through potentially lengthy and costly probate court where the “gift” may be contested by potential heirs.  As mentioned above, trusts can also be designated as beneficiaries.  In that case, trustees with a fiduciary responsibility will be the custodians of the proceeds which could be paid out to the beneficiaries of the trust.   

The Importance of Legal Counsel

Choosing a beneficiary and ensuring that the chosen beneficiary receives the asset after the death of the asset holder can be a complex process.  The language used to designate the beneficiary and the terms and conditions of the contract governing the assets as well as the probate process can affect who or what receives the asset in the end.  With careful legal planning, asset holders can better ensure that the beneficiaries they designate will indeed receive the assets as intended.  

For best results, asset holders could instruct a Florida attorney with experience in the estate planning practice area.

South Florida Law

Estate planning is best done with the help of experienced professionals.  While tax and financial professionals can play an essential role in the process, there are many non-financial aspects that can best be handled by an attorney with experience handling such issues in your state.  South Florida Law is a boutique law firm with big law firm resources, allowing you to get the attention to detail and the experience necessary to draft and review documents to handle both the financial and non-financial aspects of your estate planning needs.

You never know when you will need to have had a plan in place.  Be sure to have one done before it’s too late.  Contact South Florida Law today via our contact form or (954) 900-8885.

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