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Personal finance

Adding a beneficiary: What you need to know

Designating your beneficiaries is an important financial matter, so be sure to make your decisions carefully.

11 minute read

•

December 13, 2024

Adding a beneficiary to your accounts is one of the most important financial decisions you'll make. It ensures your assets are distributed according to your wishes and can help your loved ones avoid complicated and time-consuming legal proceedings after your passing. Whether you're just starting your financial journey or reviewing your existing arrangements, understanding beneficiary designation is vital for protecting your legacy.

It's a good idea to regularly review and update your beneficiary designations, especially after major life events such as marriage, divorce, births, or deaths in the family.

What is a beneficiary?

A beneficiary is the person or entity that you legally designate to receive your financial assets when you die. As an account owner, you have the authority to designate a beneficiary for your financial accounts.

The accounts might include life insurance, retirement or brokerage accounts, or checking and savings accounts. Understanding the different types of beneficiaries helps ensure your assets go to the people or organizations of your choosing. Beneficiaries you designate on your accounts overrule any beneficiaries designated in your will.

Understanding beneficiary designations

When deciding whether to name beneficiaries on your accounts, start by considering how beneficiary designations work for different account types.

Retirement accounts

The beneficiary designations that you make on a retirement account, like an IRA supersede any other instructions you leave, including your will. So, if your will states that your spouse is your IRA beneficiary, but the IRA itself designates your children as your beneficiaries, your children will inherit your IRA.

If you don't designate beneficiaries for your IRA, your assets will pass to your spouse (if you're married at the time of your death) or your estate (if you're not married at the time of your death).

Learn more about your IRA beneficiary options

Nonretirement accounts

When you decide whether to name beneficiaries on your nonretirement accounts, consider the context of your broader estate plan. Depending on the choices you've already made, your nonretirement accounts may not need beneficiaries. We recommend consulting an estate-planning attorney to determine the approach that best aligns with your goals.

Learn more about your nonretirement account beneficiary options

Want to review or update your beneficiary designations? Log in to manage your account beneficiaries.

What types of accounts do you have?

Your options for whether and by what method to add beneficiaries to your accounts depend on the accounts that you hold.

IRAs

The beneficiary designations that you make on a retirement account like an IRA generally supersede any other instructions you leave, including your will. So if your will states that your spouse is your IRA beneficiary, but the IRA itself designates your children as your beneficiaries, your children will inherit your IRA.

If you don't designate beneficiaries for your IRA, your assets will pass to your spouse (if you're married at the time of your death) or your estate (if you're not married at the time of your death).

Learn more about adding beneficiaries to your IRAs

Beneficiaries & backup beneficiaries

A beneficiary receives your assets after your death. Your beneficiary must survive you (or be a charity or an existing trust). A backup or contingent beneficiary will inherit your assets only if you have no surviving beneficiaries.

Nonretirement accounts

The decision whether to name beneficiaries on your nonretirement accounts should be made in the context of your estate plan. Depending on the choices you've already made, your nonretirement accounts may not need beneficiaries. Consult an estate-planning attorney to determine what's best for you.

Learn more about adding beneficiaries to your nonretirement accounts

Joint accounts

Your Vanguard joint accounts don't need beneficiaries. Joint accounts simply pass to the surviving owner.

GOOD TO KNOW

The beneficiaries you select for your IRA won't carry over to your nonretirement account, or vice versa. But if you have multiple Vanguard IRAs of the same type—for example, 2 traditional IRAs—the beneficiaries you designate on one of them will carry over to all of them.

Types of beneficiaries

When planning your estate, understanding the different types of beneficiaries is essential to ensuring your assets are distributed according to your wishes. There are 2 types of beneficiaries you can choose from.

Primary beneficiary

A primary beneficiary is the first person, entity, or institution in line to receive your assets after your passing. As your primary beneficiaries, these people or entities will have the first claim to your assets and will receive their designated share as specified in your beneficiary designation.

When naming a primary beneficiary, you have several options:

Individuals (such as family members, friends, or other loved ones).
Charitable organizations.
Trusts established for estate-planning purposes.
Your estate.

It's important to note that the laws in your state of residence may restrict which individuals or entities you can name as a beneficiary. For example, some states require spousal consent if you wish to name someone other than your spouse as the primary beneficiary of certain retirement accounts.

When designating primary beneficiaries, you can name more than one and specify the percentage each should receive. You can also designate different primary beneficiaries for different accounts.

There are 2 methods for designating primary beneficiaries: per stirpes and per capita. Per stirpes, meaning "by roots" or "by branch" in Latin, extends inheritance to an individual's descendants. If the primary beneficiary dies before the asset owner, their share passes to their children, grandchildren, and great-grandchildren. Per capita, meaning "by head," distributes the inheritance equally among the remaining primary beneficiaries.

Contingent beneficiaries

It’s important to name both primary beneficiaries and contingent beneficiaries. Contingent beneficiaries, also known as secondary beneficiaries, are your backup plan for asset distribution. They inherit your assets only if all primary beneficiaries are deceased, can't be located, or refuse their inheritance. This additional layer of planning helps ensure your assets don't end up in probate or distributed according to state laws.

Let's say you've listed Jane and John as primary beneficiaries and Steve and Quinn as contingent beneficiaries. This makes Jane and John the first in line to receive your assets, while Steve and Quinn would only inherit if Jane and John are unable.

If Steve and Quinn are listed as contingent beneficiaries, they would only inherit if both Jane and John (the primary beneficiaries) are unable to receive the assets and there isn't a per stirpes designation. With a per stirpes designation, if John and Jane predecease the account owner, John's and Jane's heirs would inherit their portions. Conversely, if there's a per capita designation and John and Jane pass away, Steve and Quinn are next in line to inherit the assets. But if John dies before the asset owner, Jane would inherit the entire estate in a per capita designation.

Contingent beneficiary arrangements provide important protections for your estate-planning goals. Keep these things in mind about contingent beneficiaries:

You can name multiple contingent beneficiaries and specify different percentages for each.
Like primary beneficiaries, they can be individuals, charities, trusts, or your estate.
They have no rights to the assets while primary beneficiaries are still living and eligible to inherit.
You can designate different contingent beneficiaries for different accounts or assets.

Want to review or update your beneficiary designations? Log in to manage your account beneficiaries.

How to choose a beneficiary

Choosing a beneficiary is a personal decision that depends on several factors, such as your relationship with the potential beneficiary, tax implications, and your broader financial goals. Different types of accounts and assets, such as life insurance policies, retirement accounts, and other investments, may have separate beneficiary rules, so take time to review each one individually.

Consider the following points when selecting your beneficiary:

Relationship and family dynamics. Think about the individuals you want to benefit and how that might impact your family members' relationships with each other. For instance, if you want to name one child as a beneficiary on a retirement account, but not others, it could cause resentment within your family. Be prepared to have open, honest conversations with your family to explain your thinking.
Tax implications. Understand the potential tax impacts on different beneficiaries, as they may vary based on account types and the beneficiary's relationship to you. For example, a spouse who inherits a traditional IRA has more flexible distribution options than a non-spouse beneficiary, who may need to withdraw the funds within 10 years and pay tax. Likewise, leaving tax-deferred retirement accounts to a charity rather than an individual can have different tax consequences, as qualified charities don't pay income tax on the distributions.
Contingent beneficiaries. Naming secondary beneficiaries can ensure that your assets are passed on according to your wishes if the primary beneficiary is unable to inherit.
Changes in life circumstances. Life events like marriage, divorce, or the birth of a child, may affect your choice. Regularly reviewing and updating your beneficiary designations is crucial to ensure they reflect your current wishes.

Accounts ineligible for beneficiaries

You cannot add beneficiaries to all Vanguard account types. For example, we don’t allow you to add beneficiaries to joint accounts because joint accounts simply pass to the surviving owner. Below are all the account types that are not eligible for beneficiaries.

Joint accounts
UGMA/UTMAs
Trusts
Estate accounts
Bankruptcy accounts
Organization accounts
Custodial/guardian/conservator accounts (with some exceptions)

How does the inheritance process work?

When the time comes, your beneficiaries will need to contact Vanguard and alert us of your passing. They'll need to provide a death certificate and some other information and paperwork to start the transfer process.

Once we have everything on file, we'll transfer the assets to any beneficiaries listed on the account.

Learn more about the inheritance process

Designating beneficiaries is a crucial step in estate planning to ensure your assets are distributed according to your wishes. It's important to regularly review and update your beneficiary designations, especially after major life events. Understanding the different types of beneficiaries and how beneficiary designations work can help you create a comprehensive plan that provides protections for your loved ones. By considering factors like family dynamics, tax implications, and changing life circumstances, you can make informed decisions about who should inherit your assets.

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