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What does it mean to name or designate a beneficiary?

Smiling woman in discussion with friend during holiday meal
Thomas Barwick/Getty Images

Many retirement accounts and life insurance products have a dual purpose. First, they can provide you with the money you need during retirement, and second, they let you leave a legacy for the people or organizations you care about. When you name a beneficiary—or multiple beneficiaries—you can help ensure your assets will be directed according to your wishes after your death.

Naming beneficiaries can be a fast, easy process, especially if you're clear about who will receive what benefits. Establishing this clarity ahead of time can help avoid confusion and mental anguish for your loved ones; they won't have to guess what you wanted to happen. It is an act of care to make a clear plan for how you'll eventually share your assets.

What is a beneficiary?

Beneficiaries are the people, entities or organizations you've named via a contractual designation to receive specified assets after your death. Identifying who will be a beneficiary for your accounts and policies can save your loved ones time in the estate resolution process and help ensure the right people and entities—such as a trust or nonprofit—receive what you want them to have.

It's important to get any beneficiary's legal name and contact information correct on the associated documents and to update it as needed. You should also check in periodically to make sure that the beneficiaries you've named are still in line with your wishes. Major life events can shift your thinking or priorities, and updating estate-related paperwork isn't always top of mind. As long as your account allows for changes to named beneficiaries, it may only require submitting a simple form. Some times you'll definitely want to pause and review are:

  • After a divorce is finalized
  • After the birth of children
  • After a new marriage
  • When a person named as your beneficiary dies
  • When an entity named as your beneficiary ceases to exist

After your death, the process is generally straightforward for a beneficiary to receive what you've left them. They will likely only need to submit your death certificate and any other required paperwork. For tax-advantaged accounts, there may be laws or other rules about how quickly funds can or must be disbursed, and the beneficiary may have to pay taxes on them.*

However, for the most part, the assets for which you've named a beneficiary should be easily accessible to them without them having to go through court or other estate resolution processes.

Why you should name a beneficiary

Taking the time to designate and periodically update the beneficiaries of your financial accounts and assets can help make your inheritance wishes clear. Without named beneficiaries, you may be leaving behind a confused family—especially if you also don't have a will. Additionally, your loved ones might:

  • Have to wait longer to receive assets or benefits
  • Need to pay legal fees for probate court or other resolutions
  • Not receive assets you intended them to have

Retirement accounts—including 401(k) and 403(b) accounts, individual retirement accounts (IRAs) and annuities—and life insurance policies typically require named beneficiaries to avoid those situations. Banking accounts, like checking and savings, often don't, but you may be able to convert them into payable-on-death accounts that do have a named beneficiary.

Understanding the types of beneficiaries

Understanding which type of beneficiary you are considering for your assets can help you make prudent choices for your family's generational wealth. Each kind has slightly different features. These are some of the most common ones:

Primary and secondary beneficiaries

Primary beneficiaries are the first in line to inherit the particular asset you've selected them for if they are alive (or existing, if it's an organization) and able to receive it. If the primary beneficiary isn't able to collect the asset (death, insolvency, or other circumstances), the asset will pass on to the secondary, or contingent, beneficiary. With both options in place, you can feel more confident that your assets will transfer smoothly to someone you care about.

Revocable and irrevocable beneficiaries

Most beneficiaries are revocable, which means you can list a different beneficiary for the asset at any time. With these, you aren't committing to a forever decision because it's entirely up to you to make alterations if you change your mind.

In contrast, naming an irrevocable beneficiary for an asset means you generally can't change the beneficiary unless they agree to it. Because it's likely to be permanent, you should consider working with your financial advisor or estate planning professional to discuss your specific needs and whether an irrevocable beneficiary is the right choice for you.

Designated beneficiaries

Certain types of beneficiaries are specific to IRAs and other defined contribution plans and therefore governed by rules in the Internal Revenue Code, as recently amended by the SECURE Act in 2019. A Designated Beneficiary is one of them.

One of the goals of the SECURE Act was to address retirees and beneficiaries stretching payments over many years. Income tax bills can be calculated higher or lower depending on how much you withdraw each year (or when you disburse an entire account); the SECURE Act made changes to such deadlines for distributions.

As a result of the SECURE Act, Designated Beneficiaries need to disburse all funds from an inherited IRA or defined contribution plan within 10 years of the account owner's death, provided the original owner passed away after 2019.

Eligible designated beneficiaries

The SECURE Act also defines eligible designated beneficiaries, a type of designated beneficiary that is generally allowed to stretch disbursements from inherited retirement accounts. There are five categories of eligible designated beneficiaries:

  1. The original owner's surviving spouse
  2. The original owner's minor child
  3. A disabled individual
  4. A chronically ill individual
  5. Individuals not more than 10 years younger than the account's original owner

These individuals may have more flexibility to withdraw RMDs from specific accounts. They have the option, for example, to take RMDs across their own life expectancy—except for minors, who must complete disbursal by the 10th year after reaching the age of majority.
Your designated beneficiaries, eligible or not, will need to follow the withdrawal rules set out in the SECURE Act.So, you might consider talking to a tax professional to verify how RMDs might affect your beneficiaries' finances and tax bills.

Nondesignated beneficiaries

Nondesignated beneficiaries—again, a defined term in the tax code—generally means that the beneficiary is not a person, but is a charity, trust or other entity. Per the Internal Revenue Code, when a charity or trust is receiving funds from one or more of your accounts, they typically need to disburse the money within five years.

Before you name an organization as a beneficiary, it's wise to talk with someone there in an official capacity, such as an executive, director or board member. Nonprofits and charities sometimes have development or donor teams you can connect with so you can follow any legacy-gifting procedures they may have in place.

For more financial guidance, talk with us

The best way to evaluate your choices when it comes time to designate a beneficiary—especially if you're not well-versed in all the different types and options—is to talk with experts in the field, such as financial advisors, estate planning attorneys and tax specialists.

In addition to prioritizing and streamlining your money decisions with your personal values, Thrivent's financial advisors can help you come up with beneficiary-related questions to ask your accountant or attorney. We can also help you manage and potentially grow your assets as you strive to build generational wealth. Beneficiaries are just one of the puzzle pieces in your bigger financial picture.

Savvy financial planning, for both today and tomorrow, helps you take care of the people you love most and is an act of kindness that will live on with those you care about.

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*Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.
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