Designated Beneficiary

A designated beneficiary is usually a person (although can also be an estate or trust), whose life expectancy is used to calculate particular features of a retirement plan, such as the required minimum distribution or RMD. Plans can include qualified plans, 403(b) accounts (for public school employees), 457(b) plans (for state and local government employees), or a traditional IRA. A designated beneficiary will inherit the balance of the account, annuity, or life insurance policy after the grantor passes away.

Account owners may designate multiple beneficiaries on accounts; however, the primary beneficiary will be the one to inherit assets first. If an account has more than one primary beneficiary the account owner may stipulate how distributions would be allocated. For example, if the account owner is an aunt and designates her two nieces as primary beneficiaries, she may specify that the oldest niece receives 75% of the assets, while the younger receives 25%. It is also possible to specify how the funds will be distributed (e.g. over time in installments, a lump sum, or otherwise). An estate lawyer can often be helpful in these circumstances.

A contingent beneficiary will receive the assets (some or a portion) of an insurance or retirement account if the primary beneficiary is deceased, unable to be located, or refuses the inheritance at the time the proceeds are to be paid. Many people name immediate family as primary beneficiaries and close friends and relatives as contingent beneficiaries.

It’s important for account owners to review and update contingent beneficiaries on a regular basis, particularly following major life changes such as a marriage or death. For example, if Jane remarries and wishes to name her new stepchildren as contingent beneficiaries, she must do so prior to her passing or else they will not receive any benefits. As with primary beneficiaries, an account owner may name multiple contingent beneficiaries on an account.

Designated beneficiaries may be revocable or irrevocable. If revocable, it’s possible for the policy owner to make changes to who receives payment, while an irrevocable beneficiary has certain guaranteed rights to assets that cannot be denied or amended.

In May 2018, the Houston Chronicle published information on how a charity can be named as a beneficiary of a retirement account. Similar to naming an individual, this methods allows an asset to pass to charity after the owner passes away. For a charity to receive the assets, it must contact the late owner’s bank and fill out the required forms. The charity will also generally require a death certificate at this point.