Discretionary Beneficiary

Discretionary beneficiaries are individuals or entities that a grantor names in a trust, life insurance policy, or retirement plan. Discretionary beneficiaries will receive distributions at the appropriate time. While they may apply for distributions, it is up to the trustees to determine whether the payment will be made. In the United States, a discretionary beneficiary has no legal proprietary interest in a trust.

There is usually a particular reason for a person to be named a discretionary beneficiary. For example, they may be young or have poor financial habits. While the trustees still have fiduciary responsibilities to a discretionary beneficiary, it can be difficult to enforce this unless a specific letter of intent exists from the grantor of the trust.

While a discretionary beneficiary is usually an individual, a grantor may, at times, name an entity such as a charity. A grantor often elects to do this instead of gifting assets to a charity during his or her lifetime. In this scenario, the charity, instead of the grantor, is treated as receiving the distribution, and neither the grantor nor the estate will owe income taxes on the amount.

In addition to a discretionary beneficiary, other types of beneficiaries exist and can be named to accounts. These include a named beneficiary; these are beneficial owners of the property and will share in the proceeds at the time of disposition. In some cases, such as an annuity policy, the policyholder and the named beneficiary may be the same.

Absolute beneficiaries cannot be changed without their written consent. Absolute beneficiaries are also referred as irrevocable beneficiaries and can be associated with a trust, an employee benefit plan such as a pension, and a range of additional instruments or contracts with a beneficiary clause. In contrast, a revocable beneficiary does not have guaranteed rights to receive compensation from a policy or a fund. In this scenario, a policy owner reserves the right to make changes to who receives payment, change the terms of the policy, or terminate the policy without consent from the revocable beneficiary.

Several trusts, wills, policies, and annuities have both primary beneficiaries and secondary beneficiaries. A primary beneficiary is first in line to receive benefits upon the account or trust holder's death. An owner can name multiple primary beneficiaries and stipulate how distributions will be allocated along. A secondary beneficiary inherits the assets if the primary beneficiary dies before the grantor. A secondary beneficiary would also be considered a "contingent beneficiary."