What is Named Beneficiary?

Explanation

Sometimes an estate can be a beneficiary instead of an individual. There is a difference between heir and beneficiary; the heir gets the asset as a successor while the beneficiary gets his or her share if their name is on the will.

In the case of a financial instrumentFinancial InstrumentFinancial instruments are certain contracts or documents that act as financial assets such as debentures and bonds, receivables, cash deposits, bank balances, swaps, cap, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, etc. to one organization and as a liability to another organization and are solely taken into use for trading purposes.read more like an annuity, the beneficiary and the policyholder can be the same individual. Appointing a beneficiary comes with certain advantages like tax advantages and skipping probate processes, which ultimately leads to speeding up of the asset distribution process.

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Types of Named Beneficiary

#1 – Primary Beneficiary

The primary beneficiary is the individual who is foremost in the list of receiving the benefit, as mentioned in the will of the deceased person. The deceased person specifically mentions the primary beneficiary’s name in the will in his or her lifetime.

#2 – Contingent Beneficiary

The contingent Beneficiary is the person who receives the asset in case the primary beneficiary is not found or refuses to take the asset as allotted by the deceased in his or her will. There are certain conditions outlined in the will that need to be met before the asset can be transferred to the contingent beneficiary. A contingent beneficiary is also called a secondary beneficiary.

Sometimes the owner can mention estate like some non-profit organization or NGOs as the primary beneficiary in the will instead of an individual.

Example

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Risk of Named Beneficiary

There are several risks that should be kept in mind by the owner or should be detailed to the owner by a legal advisor when she or he makes the will and designate a primary and contingent beneficiary. Some of the risks are mentioned as below:

  • In case the asset owner fails to designate a named beneficiary, the asset will go through the probate process and will have several tax consequences that could have been avoided otherwise.If the primary beneficiary is minor instead of trust for them, the judge will decide who will manage the asset until the minor person becomes an adult.Mentioning non-specific beneficiaries, like my immediate familyImmediate FamilyAn immediate family is the one members of which are related by blood or share a bond through marriage, adoption, cohabitation, or civil partnership. They can be first-degree relatives, such as parents, siblings, spouse, children, or relatives by lineage like in-laws, grandparents, cousins, adopted and step-children, or civil and cohabiting partners.
  • read more or my children, will lead to disputes after the asset owner’s death.

The above are just a few examples. To sum up, asset owners should very carefully, with the help of their legal adviser, fill the named beneficiary form, to avoid any hassle in the distribution of assets after their death. Also, they should review and update the beneficiary’s names after every major life event like divorce, marriage, or death of a primary or contingent beneficiaryContingent BeneficiaryA contingent beneficiary for any financial account is the person who has been designated as a secondary beneficiary.read more before the owner.

Importance of Named Beneficiary

Naming a beneficiary in a will is very important. Naming a primary or contingent beneficiary ensures that the asset goes in the right hands after the owner’s death. Designating beneficiaries helps in getting tax advantage after the owner’s death. It helps the family and legal heir of the owner in skipping the probate process (sale and distribution of assets) altogether. It is a very lengthy and expensive process that can cost the family a lot after the owner’s death.

Advantages

#1 – Tax Advantage

In cases where primary beneficiaries are specifically mentioned in the will, they will be able to get the tax advantages after the owner’s death. For example, let us say the owner’s assets were all becoming taxable in two-year time, but after death, the primary beneficiary can collect the asset with a deferred taxDeferred TaxDeferred Tax is the effect that occurs in a firm as a result of timing differences between the date when taxes are actually paid to tax authorities by the company and the date when such tax is accrued. Simply put, it is the difference in taxes that arises when taxes due in one of the accounting period are either not paid or overpaid.read more benefit for a longer period.

#2 – Asset Goes in Right Hands

If the beneficiary’s name is not specifically mentioned in the will, the court will decide who will get the asset in given facts and scenarios. It sometimes leads to assets going to the wrong hands. Therefore, to ensure that the right individual gets the benefit after the owner’s death, beneficiaries (both primary and contingent) should be mentioned in the will.

#3 – Skipping Probate Process

The probate process is a time-consuming and expensive process that family and heir have to go through after the asset owner’s death. The designation of the asset to primary and contingent beneficiaries can help to skip this process altogether.

This has been a guide to Named Beneficiary & its Definition. Here we discuss the types of named beneficiary, risks, and importance along with examples and advantages. You can learn more about it from the following articles –

  • 529 PlanGroup InsuranceVariable AnnuityTax-Sheltered Annuity