We’ve all chosen beneficiaries at some point, for insurance provided through work, deeds of trust, or similar documents. While it may be tempting to quickly jot down a parent or spouse without much thought, it’s smart to know the details of beneficiary planning and how to make sure your loved ones are protected. 

Beneficiary planning is simply naming the individual(s) or entity(s) you wish to receive the proceeds of an insurance policy (life or annuity) upon your passing. With insurance contracts, the beneficiary designation outweighs any other inheritance rules or process. As the beneficiary, the funds pass directly to the beneficiary per the terms of the contract, bypassing probate.  By bypassing probate, the transfer of funds is a private transaction and not subject to the public notice required when probating an estate.  Best of all, if there is no estate to probate there are no legal and court fees.

It’s important to recognize that, not all beneficiaries are equal. Primary beneficiaries may be a sole beneficiary or share the designation with other beneficiaries.  For example, your annuity contract may name your spouse as a Primary beneficiary entitled to 100% of the account value if they are the sole primary. If there are other primary beneficiaries the inheritance will be shared with the other primary beneficiaries according to prechosen percentages by the owner. A single parent may choose to name each child as a primary beneficiary entitled to 25% of the annuity value. 

Contingent beneficiaries come into play if a primary beneficiary has predeceased the annuity owner and no new primary beneficiary has not been chosen.  Consider a spouse who is listed as the sole primary beneficiary. As a precaution, the owner may name their children as contingent beneficiaries who would be entitled to the primary beneficiary’s (the spouse’s) share if the spouse predecease the owner. 

But what happens if the contingents pass away before the original owner and primary beneficiary? That’s where per capita or per stirpes designations come in.

Per capita simply means if a beneficiary is deceased, their share is equally split among the surviving beneficiaries.  If an owner names four beneficiaries as per capita (primary or contingent) and two pass away before the owner, the payout is split 50/50 between the remaining two beneficiaries. With per stirpes, the amount a deceased beneficiary would have received is not split among surviving beneficiaries; it’s instead split among that deceased beneficiary’s family. If a beneficiary has five children, their share would be split into five equal parts, giving each child 20% of the amount designated to their parent.  

Occasionally someone dies and there are no beneficiaries to be found; either they were never named or they are deceased. In that scenario, the estate becomes the final beneficiary subjecting the funds to probate. This is not a desirable outcome, due to court costs and lack of privacy.

You probably never knew beneficiary planning was so complex or important. It’s definitely something to be taken seriously.  You don’t want your weird third cousin with the tinfoil hat to end up with all your money.