How to Choose Beneficiaries for Your Estate

The primary role of your estate plan is to protect your loved ones and pass on your assets. To do this, you need to name your beneficiaries. 

For people without spouses, children, or significant assets, this may be as easy as naming a favorite charity. However, if you have more than one person you want to leave things to, or if you need to shelter assets from taxes, the process is more complicated. Let’s break down how beneficiaries work and how to choose yours effectively. 

What Are Beneficiaries?

A beneficiary is a party named in your estate planning documents to receive some benefit. Beneficiaries can be individuals, classes, organizations, or trusts.

An individual beneficiary is a specific person. For example, most couples will name each other as individual beneficiaries. You can name anyone you want to individually benefit in your estate plan.

Beneficiary classes name a group of people with a similar characteristic who will all receive the same benefits. For example, you could identify your legal grandchildren as a beneficiary class to ensure no living grandchild gets left out because you forgot to update your will. You can state everyone in the class will split an asset equally, or will all receive the same flat amount of money. 

An organizational beneficiary is often a charity or non-profit, but it can be any legal entity. Many people will name religious institutions, charities, or schools in their estate plans to support these beloved groups.

Trusts are a specific subset of organizational beneficiary. They can be named in your will to receive assets upon your death, protect them from taxes, and ensure they are managed according to your wishes. 

Beneficiaries can also be broken down into primary and contingent categories. Primary refers to the first party in line to receive an asset. If they survive you, they will receive the asset as planned. Contingent beneficiaries are second or subsequent in line. If a primary beneficiary is not available to receive an asset, the contingent one will get it instead.

Choosing Your Beneficiaries

Choosing your beneficiaries is more than just deciding which people you want to support after you’re gone. There’s an element of strategy necessary to ensure you’re giving them the maximum amount of support while minimizing potential tax penalties. Here’s a quick guide on how to name your heirs:

  • Write a list of everyone you’d want to benefit from your assets. Feel free to name as many people as you want. Name charities and other organizations, too. This is supposed to be as comprehensive of a list as possible.
  • Sort your list in order of priority. People like your children and dependents, spouse will likely be at the top of the list, followed by your adult children, grandchildren, and beloved friends. Other potential beneficiaries may fall anywhere on the list that makes sense to you. People at the top will usually be primary beneficiaries, while those toward the bottom may be contingent.
  • Consider whether there are any natural groups that may make sense as a class. If you’re younger, you may want to name your children as a class in case you have more. Older adults often name grandchildren as a class for the same reason. You could also group a collection of friends, your siblings, or any other class that makes sense.
  • Identify anyone who may need assistance managing their inheritance. Young children cannot manage their own assets. You can name a trust as a beneficiary for the things you want them to receive, then name the children to be beneficiaries of the trust. The trustee will manage the assets on their behalf.
  • Consult an estate planning attorney about the best ways to guard your heirs from tax penalties. Trusts may also be the best way to pass on property to others if you have a significant estate. Your attorney will help you determine whether it makes more sense to name individuals or trusts in your will to minimize the federal inheritance tax. 

Get More Bang for Your Beneficiaries With Expert Legal Counsel

A well-designed estate plan helps you make the most of your assets. Consulting with a skilled attorney is key to making sure your beneficiaries get the biggest benefits. At The Dayton Law Firm P.C., we are dedicated to helping California families build estate plans that accomplish their goals, provide for their loved ones, and avoid unnecessary taxes. Talk to our San Jose estate planning law firm today to learn how we can help.