Beneficiary

A beneficiary is the term used to describe someone who will inherit benefits—such as money, property, or other assets—from their original owner. For the purposes of estate planning, your beneficiaries are the people you designate to take over your estate after you pass away.

If you’re drafting a will or a trust, or even just filling out paperwork related to a life insurance policy or a retirement account, you’ll need to designate beneficiaries. Naming a beneficiary—or multiple beneficiaries—lets the executor of your will, or the financial institutions that oversee your accounts, know who should take over ownership of your assets after you pass on.

How a beneficiary designation works

A beneficiary may be named directly in a legal document or on a financial account form, depending on the type of asset.

• Last will and testament: The testator (the person who makes a will) names beneficiaries in the document, and assets transfer after the estate passes through probate court.
• Living trust: The grantor names beneficiaries in the trust document, while assets transfer directly upon death, without probate.
• Financial accounts: The account owner names beneficiaries for assets such as life insurance policies, individual retirement accounts (IRAs), and 401(k) plans. These designations generally operate separately from a will, and the valid designation on file usually determines who receives the asset.

When a beneficiary becomes entitled to an asset, they may need to provide proof of identity, a certified death certificate, or other documents required by the institution or estate representative.

Why a beneficiary designation matters

A properly named beneficiary allows assets to transfer quickly, often bypassing probate entirely. Failing to name a beneficiary or to update a designation after a major life event can have significant consequences. Assets without a named beneficiary may fall into the estate and be distributed under state intestacy laws rather than the owner’s wishes.

Outdated designations can also cause problems. For example, a former spouse named years earlier may still receive assets if the designation was never updated. Courts generally enforce the designation on file, regardless of the owner's later intentions.

Key characteristics

The following points explain how beneficiary rights commonly work:

• Rights to assets: A beneficiary’s rights depend on the document or account. Some beneficiaries receive assets only after the owner’s death, while trust beneficiaries may have rights during the grantor’s lifetime.
• Primary beneficiary: The person or entity first entitled to receive the asset or benefit.
• Contingent beneficiary: A backup recipient who may receive the asset if the primary beneficiary dies, disclaims it, or cannot receive it under the governing terms.
• Minor beneficiary: A minor may be named as a beneficiary, but state law and the value and type of asset may determine whether a custodian, guardian, or trustee must manage it.

Beneficiary vs. heir

These terms have distinct legal meanings. An heir is someone legally entitled to inherit under state intestacy laws when a person dies without a valid will. A beneficiary is someone specifically named in a legal document to receive assets. For example, a close friend named in a will is a beneficiary but generally is not an heir under state intestacy law.

Related terms

A beneficiary’s rights and the process for receiving assets connect to several estate planning and legal authority concepts. These terms provide useful context.

• Last will and testament: The legal document in which a testator names beneficiaries to receive assets after death, distributed through probate.
• Living trust: An estate planning tool that allows assets to pass directly to named beneficiaries without probate.
• Executor: The person named in a will and appointed by the court to administer the probate estate and distribute property.
• Probate: The court process that validates a will, and assets get distributed to the named beneficiaries
• Power of attorney: A document that authorizes someone to make specified decisions for another person during that person’s lifetime. It can be related to financial decisions, healthcare, real estate, etc.

FAQs about beneficiary

What happens if a named beneficiary dies before the account owner?

Assets pass to the contingent beneficiary. If none was named, the assets typically fall into the estate and are distributed through probate or under state intestacy laws.

Does a will override a beneficiary designation on a retirement account or life insurance policy?

Generally, no. A valid beneficiary designation usually controls the distribution of a retirement account or life insurance policy, even if a will contains different instructions. However, federal law, state law, spousal rights, and the terms of the plan or policy may affect the result.

Do beneficiaries pay taxes on inherited assets?

It depends on the asset type. Life insurance proceeds are generally not subject to federal income tax. Distributions from inherited retirement accounts may be taxable, and federal distribution rules vary depending on the type of account and the beneficiary’s relationship to the account owner.

How many beneficiaries can you have?

There’s technically no limit to the number of designated beneficiaries you can have, and you have the right to decide how your assets are divided up amongst them all. 

You also have the option to designate primary and contingent beneficiaries if you choose. Primary beneficiaries are your first-choice beneficiaries, or the ones you most wish to inherit your property. Contingent beneficiaries are people you can choose to inherit your property if your primary beneficiaries die, or are otherwise unable to accept the assets you’ve left them. Contingent beneficiaries are essentially backup beneficiaries.

Who can be a beneficiary?

While many people choose friends and family members as their beneficiaries, your options aren’t limited to people you know—or even people. Charities, nonprofits, and even organizations can be beneficiaries, too.

That said, laws regarding eligible designated beneficiaries can vary by state and according to your specific circumstances. For example, if you’re married, certain states dictate that you must leave a certain percentage of your estate to your spouse. Likewise, the IRS has specific rules for who can and can’t be named as a beneficiary on a retirement account. An experienced estate planner can help you figure out what rules apply to your specific situation.

Can you list a minor child as a beneficiary?

Yes, it’s possible to name minor children as beneficiaries, but it may not always be the best option. Your minor child won’t be able to assume responsibility for the assets until they reach adulthood, so the courts may need to designate a conservator for the estate until they come of age. To avoid this, you could consider putting your assets into a trust for your minor children instead.

Can I change beneficiaries?

Yes, you can change the beneficiaries designated on your will or financial accounts whenever you please or as your circumstances change. As the account owner, it’s relatively easy to update a bank account, brokerage account, or life insurance policy with the new beneficiary’s name, but for a will, it might be easier to create a new, updated will rather than amending the old one.