When you open most financial accounts; like a bank account, life insurance, a brokerage account, or a retirement account (e.g., a 401(k) or IRA); the institution will ask you to name a beneficiary. You also establish beneficiaries, when you draft a will or other legal contracts that require you to specify someone to benefit in your place. With some trusts, the beneficiary may even be you and your spouse.

Bankrate’s article explains that the beneficiary could be any number of individuals as well as other entities like a trustee of your trust, your estate, or an organization.

When opening an account, many people forget to name a beneficiary, because it’s not needed as part of the process to create many financial accounts. However, naming one allows you to direct your assets as you want, avoid conflict, and reduce legal issues. Failing to name one may create big headaches in the future, especially for those who have to deal with sorting out your affairs after you pass away.

There are two types of beneficiaries. A primary beneficiary is first in line to receive any distributions from your assets.  You can appoint as many as you want to receive the distributions. You can also portion your assets as you like, with a certain percentage of your account to designated each primary beneficiary. The other type is a contingent beneficiary which receives the distributions if one or more of the primaries is unable to collect.

After you’ve named your beneficiaries, it’s important to review the designations regularly. Major life events (death, divorce, birth) may modify who you designate. You should also make certain that any language in your will doesn’t conflict with beneficiary designations. Beneficiary designations generally take precedence over your will. Check with an elder law or experienced estate planning attorney.

Finally, it is important to understand that a minor (e.g., typically under age 18 in most states) usually can’t hold property, so you’ll need to set up a structure that ensures the child receives the assets. One way to do this, is to have a guardian that holds assets in custody for the minor. You may also be able to use a trust with the same result but with an added benefit: in a trust you can instruct that the assets be given to specific individuals only when they reach a certain age or other event or purpose.

Reference: Bankrate (July 1, 2020) “What is a beneficiary?”