In its most basic terms, a “beneficiary” is a person or entity that receives financial or other benefits from a patron or benefactor. While the concept of a beneficiary is commonly thought of in relation to wills and trusts, it is also used in connection with insurance policies and contracts. The beneficiary of an insurance policy is the individual that receives benefits when the policy pays out. A third-party beneficiary to a contract is an individual that is not a party to the contract, but who will benefit from the other parties’ fulfillment of the terms of the contract. To explore this concept, consider the following beneficiary definition.
Definition of Beneficiary
- An individual or entity designated as the recipient of money or property under a will or trust.
- An individual or entity designated to receive benefits, or a cash payout, from an insurance policy.
1605-1615 Latin beneficiārius
What is a Beneficiary
In estate planning, or trust law, a beneficiary is the person or entity entitled to the benefit or assets of a trust. A trust beneficiary may be any individual, including an adult, a minor, or an individual with a mental disability. An unborn child may even be the beneficiary of a trust. In trust law, there is no requirement that the beneficiary of a trust be a person, so it is perfectly legal to name a corporate or non-profit organization as a beneficiary.
What is a Primary Beneficiary
To put it simply, a primary beneficiary is the first in line to receive benefits from an insurance policy or trust. The primary beneficiary is named by the insured individual, or the person making the trust (“Trustor”), and there may be more than one primary beneficiary. By contrast, contingent beneficiaries receive benefits only if the primary beneficiary has died. In the event only one beneficiary is named, that individual is automatically the primary beneficiary.
What is a Beneficiary IRA
Inheriting an Individual Retirement Account (“IRA”) from someone other than a spouse, which has its own rules, means being left the assets of an IRA when someone has passed away. This is referred to as an “inherited IRA,” or a “beneficiary IRA.” There are very specific laws for handling a beneficiary IRA, including how and when distributions must be taken, and how taxes apply.
Generally speaking, an individual who has inherited an IRA must take distributions during his or her lifetime, or within five years of the date the original account holder died. This means that an inherited IRA cannot be left to yet another beneficiary. The holder of an inherited traditional IRA is taxed on each distribution taken. The holder of an inherited Roth IRA pays no taxes on distributions. A host of other rules and regulations apply to beneficiary IRAs, so it is important for such a beneficiary to consult a tax professional.
Trust Beneficiary Rights and Interest
A trust beneficiary’s rights under a trust vary according to the type and provisions of the trust. Trusts may be separated into two classifications, (1) fixed trusts, and (2) discretionary trusts. Under a fixed trust, each named beneficiary holds a proprietary interest of his share of the assets held in the trust. In other words, each beneficiary owns a specified portion of the assets. In a discretionary trust, each named beneficiary is entitled only to what the trustee sees fit to distribute.
Life Insurance Beneficiary
One of the most important tasks when purchasing life insurance is to name a beneficiary. The beneficiary is the person who will receive the insurance benefit in the event the insured passes away. Choosing one or more beneficiaries is as easy as writing a name on the life insurance application. There are, however, a number of potential tax, financial, and legal ramifications if beneficiaries are not named properly.
A beneficiary may be specified, either by name, or by class, such as “children of the insured.” When naming a class of people as life insurance beneficiary, additional clarification may be needed. For example, Thomas intends to leave his $500,000 life insurance policy to his children. He has been married twice, however, and has two stepchildren in addition to his three biological children. Thomas would need to clarify whether he wants the insurance proceeds to be divided among all of his children, both biological and step, or whether the proceeds are only to be paid to his biological children.
This still leaves the issue of naming primary and secondary, or “contingent,” beneficiaries. For example, Thomas specifies that his life insurance proceeds should be divided equally between his biological children, Amanda, Charles, and Scott. Unfortunately, Charles died in a car accident five years before Thomas’ death. Does this mean that the proceeds will be divided equally between only Amanda and Scott? Or would Charles’ portion be distributed to Charles’ wife or children? This situation can be planned for by naming each beneficiary and their “heirs and assigns,” which allows the beneficiary’s portion to be given to their heirs, or to someone they have designated for such matters.
An individual naming a minor child as a life insurance beneficiary must also specify whether the money is to be paid to the child while he is still a minor, or whether the money is to be put into a trust account to be disbursed at a specified age. Life insurance companies are usually reluctant to pay money directly to a minor child, preferring to pay the proceeds to a legal guardian. A custodian for this purpose may be designated under the Uniform Transfers to Minors Act, eliminating the need for a guardian to be appointed. Asking a representative of the life insurance company about how to handle these various situations will help ensure the insurance benefits are disbursed as the insured individual intends.
Probate and Life Insurance Policies
Life insurance proceeds do not go through the probate process, as the insured has already named a beneficiary. This means that the beneficiary is left to claim the policy benefits on his own. Information that should be made available to the beneficiary includes:
- Type of life insurance policy – whole life, variable life, or term
- Was the policy still in effect at the time of death
- Who are the beneficiaries
- How much will the insurance company pay
When the time comes to claim life insurance benefits, the beneficiary should call the insurance company. The beneficiary will be asked to complete a claim form, and provide a copy of the death certificate as verification of the insured’s death.
Probate and the Beneficiary Deed
Real property can be kept out of the probate process by filing a Beneficiary Deed with the recorder in the county in which the property is located. A Beneficiary Deed specifies to whom ownership of the property will pass in the event the current owner dies. Once a Beneficiary Deed has been recorded, the beneficiary has no legal rights to the property until the current owner dies, at which time actual ownership of the property immediately passes to the named beneficiary.
For example, Ruth owns her home in Colorado. She wants her son, Adam, to inherit the home upon her death, and doesn’t want him to have to go through the legal probate process to get it. Ruth signs and records a Beneficiary Deed, naming Adam as the beneficiary. Upon Ruth’s death, Adam only needs to record her death certificate with the county recorder, and title to the property transfers to him.
An individual recording a Beneficiary Deed retains full rights to the property, and may sell it if they want. This would void the Beneficiary Deed. Such a deed may also be revoked, if desired, by filing a Revocation of Beneficiary Deed with the county recorder of the same county in which the Beneficiary Deed was recorded.
In the event a property is owned as “community property with right of survivorship,” or “joint tenants with right of survivorship,” a Beneficiary Deed can still be filed, but it would not take effect until the last of the joint tenants have passed away. For example, Randall and Marge own their home on five acres outside Phoenix, Arizona. They wish to leave the property to their daughter, April, upon their death. The couple records a Beneficiary Deed naming April as the beneficiary. When Randall dies, Marge becomes the sole owner of the property, and April does not receive ownership until Marge’s death.
Advance Beneficiary Notice
An Advance Beneficiary Notice (“ABN”) is a notice provided to individuals covered by Medicare to warn them that a service or medical supply ordered by their doctor will likely not be covered by Medicare. Advance Beneficiary Notices apply only to individuals covered under original Medicare, not those with a Medicare Advantage private health insurance plan.
Providers of medical care, and suppliers of medical supplies, are required to give patients an ABN when a service or medical item might be covered by Medicare, but they expect that Medicare will not agree that it is medically necessary. An Advance Beneficiary Notice must provide the reasons the provider or supplier expects a denial of coverage from Medicare. For example, an ABN might say, “Medicare only pays for this test after age 50,” or “Medicare only pays for this procedure once every two years.” Providers are not required to provide an ABN for medical services or supplies that Medicare never covers.
ABN notices may appear slightly different from different providers, though the information contained will be substantially the same. Receipt of an ABN is not an official Medicare determination. This means that the patient could attempt to have the prescribing doctor document the medical necessity in the format required by Medicare, or the patient may appeal a denial to Medicare directly.
Related Legal Terms and Issues
- Community Property – All property purchased or acquired by a couple during the course of their marriage or domestic partnership that is not a gift or inheritance.
- Deed – A legal document transferring title for real or personal property from one person or entity to another.
- Insured – A person or entity covered by an insurance policy.
- Legal Guardian – An individual who has legal authority and duty to care for the personal, financial, and property interests of another person.
- Probate – The court process by which a Will is validated, and by which the estate of a deceased person is administered.
- Real Property – Land and property attached or fixed directly to the land, including buildings and structures.