Financial Word of the Week: Beneficiary

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Financial Word of the Week - beneficiary

The technical definition of a beneficiary is one who benefits from the act of another.  In the financial world, the term beneficiary is used in many contexts, generally to describe an individual or entity that is to receive an interest in property.

Some of the most common uses of the term beneficiary include:

  • naming a beneficiary of a life insurance policy, retirement plan or IRA,
  • designating the individuals who are to receive an interest in property upon the death of the original owner (generally through the use of a Will or trust), and
  • using a transfer on death or pay on death designation on a financial account (such a s a checking account, savings account or investment account).

When you’re designating beneficiaries, you can generally name individuals, charities, organizations or trusts. You might even list a group of individuals, such as surviving family members.

Many financial advisors urge clients to review their list of beneficiaries as often as possible, but most importantly after a life-changing event in which their financial priorities may have changed. This may include a death of a loved one, birth, marriage, divorce, a significant change in the individual’s financial situation or a significant change to the tax law.

It’s important to be as specific as possible when naming beneficiaries to avoid any confusion once the benefactor passes away. You should state how the benefits are doled out if one or more beneficiaries are not able to receive their distribution. This could occur if a person lists four children as beneficiaries, with each listed to receive one-fourth of the estate. If one of those children passes away before the benefactor, it could affect the distribution process if clear conditional instructions have not been included. You should also consider whether you would like the named beneficiary to have complete access to the assets or if you would like to restrict access in some manner.  For example, for many assets it may be possible to name a trust as the beneficiary and have the trust provide for limited distributions to the individuals for their health, education, maintenance and support (or however the benefactor desires to limit the distributions).

Because the naming of beneficiaries can have a substantial impact on your financial and estate plan, it is important to visit with your attorney or financial planner to see what options are available and to determine how such designations impact your individual plan.

For more information on estate planning, check out our post on the benefits of a will.

UMB Financial Corporation (Nasdaq: UMBF) is a diversified financial holding company headquartered in Kansas City, Mo., offering complete banking services, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas, as well as two national specialty-lending businesses. Subsidiaries of the holding company include companies that offer services to mutual funds and alternative-investment entities and registered investment advisors that offer equity and fixed income strategies to institutions and individual investors.

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