Many types of assets allow the owner to name a “beneficiary.” If the original owner later dies, ownership of the asset passes automatically to the named beneficiary. Because beneficiary designations are easy to use, they can be a key estate planning tool. However, significant negative tax, financial and even personal problems can arise if the “wrong” individual or entity is named as the beneficiary.
Common Named Beneficiaries
A number of individuals, entities or organizations are commonly named as a designated beneficiary:
- Spouse: A married individual’s spouse is perhaps the most common beneficiary designation. Assets passing to a surviving spouse generally escape federal estate tax because of the unlimited marital deduction as it relates to federal tax. State and/or local tax laws may vary.
- Children: Children are often named as beneficiaries. Step children or other children adopted informally generally need to be specifically identified.
- Other family members: Brothers and sisters, aunts and uncles, nieces and nephews are frequently encountered beneficiaries.
- Estate: In some situations, the asset owner will name his or her estate as the beneficiary.
- Trust: As a part of a more complex estate plan, a trust may be named as a beneficiary. The trust must exist at the time of death for he beneficiary designation to be valid.
- Charity: A charity may be a designated beneficiary, which can reduce the owner’s taxable estate.
- Corporate or partnership: Buy-sell agreements, key individual insurance, stock redemption, split-dollar arrangements and salary continuation plans are all valid business reasons why a corporation or partnership may be named as a beneficiary.
How to avoid beneficiary blunders | Las Vegas Review-Journal