Beneficiaries are people or organizations named in a will or a trust that are named to be the recipients of the estate. This could mean insurance policies, bank accounts, title transfers, or direct payments.
Are you a beneficiary? And if so, how will you receive your money? It’s not always that easy to answer. It’s arguably the most misunderstood part of the distribution of assets. But we want to clear that up today for you.
This article provides clearer insight into how you can expect to get paid as a beneficiary of an estate. Let’s define your obligations, your rights, and when you can expect to see a payout if you’re eligible.
What are Beneficiaries?
Just because you feel you’re owed something, or because you’re a close friend or family member does not automatically make you a beneficiary. And if you are, what kind of beneficiary are you? Here’s what you should know.
Defining a Beneficiary
In contracts like wills and trusts, a beneficiary is a person or organization who receives the benefit or assets. This can mean everything from inheriting land and wealth to collecting life insurance policies.
Who can be a beneficiary? In short, anybody! Families, friends, charities - even legal entities - could all be beneficiaries. We’ve even seen family pets named as beneficiaries.
When a grantor chooses who will inherit what, this is the most essential part of estate planning. So, how do you know if you’re a beneficiary and you’re eligible to receive money? You’ll be told. Specifically, if you’re named as a beneficiary, you’ll receive reports and updates on the assets. And this will include the intended payout schedule of those assets.
The Role And Responsibility Of A Beneficiary
Beneficiaries are mostly the people who acquire assets. But you have certain responsibilities to play in your role. Key roles include:
- You need to have a clear comprehension of the terms stated in the will or trust.
- You need to keep the executor or trustee informed about your movements.
- You must complete your financial duties like entering identification or tax details.
Why all the extra work? Because beneficiaries could be subject to estate taxes and other debts accompanying the estate. If you know this, then you won’t be surprised if you suddenly get a letter from the IRS asking for a substantial chunk of your inheritance. But you should also know that you’re not liable to pay the debts of the estate, no matter what creditors might say. That duty falls in the trustee (if it’s a trust) or the executor (if it’s a will).
However, you should consult financial advisors or legal professionals before you can accept your inheritance, especially if it relates to things such as investments and real estate. You might have capital gains tax, income tax, or other liabilities that you need to pay after you accept the payout.
The Beneficiary Naming Process
If you are named in an estate, it’s for a good reason. Either the grantor feels you have the capacity to handle the payout, you’re deemed trustworthy, or you’re part of the greater plan for the estate’s legacy.
The reason for naming a beneficiary is threefold;
- It simplifies the process of administrating the policy
- It speeds up payment
- It minimizes estate taxes
One of the most important steps in estate planning is naming a beneficiary. This ensures that all the assets are smoothly transferred to the people named in the trust or will. This will prevent potential confusion or disputes among future heirs.
If there are assets not named in a will or trust, those assets need to pass through probate, a timely and costly court process. As you can imagine, this makes it especially difficult during times of grief and stress.
How to Choose a Beneficiary
Selecting a beneficiary may seem simple, but it is not. The grantor of the estate went through a careful selection process before naming their beneficiaries. They may have:
- Considered all close contacts. This includes personal and family connections, depending on how trustworthy they can be.
- Chosen only people who can handle the financial responsibility of handling large estates and assets.
- Considered the future of their legacy. The beneficiaries named in a trust or will have been chosen because they will be able to sustain the legacy long after the grantor has passed away.
Types of Beneficiaries
What type of beneficiary are you? Did you know that there is even a type of beneficiary? You should know where you stand because it will affect when you can be paid from the estate.
Primary Beneficiaries
A primary beneficiary is the person who stands first in line to be granted an asset from the estate of someone who has died. Usually, these are spouses or partners. It could be children or other close family members.
Primary beneficiaries are clearly named in legal documents to eliminate any confusion at the distribution time. The goal of having a primary beneficiary is so that everything is clearly labelled to clear up the process. It also removes any disputes among family members.
However, people have the ability to designate both relatives and non-relatives–sometimes close friends or charitable organizations- as primary beneficiaries in line with personal values and relationships.
Contingent Beneficiaries
In cases where the primary beneficiary may have passed away or been incapacitated, you might have contingent beneficiaries. These are backup beneficiaries, a just-in-case kind of recipient of the estate.
For example, let’s say a married parent names their spouse as the first beneficiary. But they pass away at the same time as their spouse. This would make the children the contingent beneficiaries. And everything that would have gone to the spouse now goes to them.
These kinds of beneficiaries get paid only if the primary is unavailable to receive the inheritance. It’s also an extra layer of safety in estate planning. Most grantors tend to review their beneficiary designations at least every 3 years (or after a life change like divorce, marriage, or new child).
Minor Beneficiaries
Not every beneficiary is equal. This is true when a minor is named as the beneficiary. In most states, a minor can’t be named a proper beneficiary until they reach a certain age. In this case, a guardian or conservator will have to be assigned to oversee the use of the money until the child can do so on their own.
For minor beneficiaries, this is when a trust can be a helpful approach to asset management. Trusts will give the assets how and when the trust document dictates. This is especially useful when a minor beneficiary wants to have money for their education or other necessities.
Receiving Money By Beneficiaries
So, when does a beneficiary get paid? In most cases, there is a process that must be followed before any distributions can be made. Although there are a lot of exceptions, here is the general rule for when beneficiaries can receive their payouts.
The Executor and Trustee’s Roles In Disbursing Funds
The executor has the job of taking care of an estate and is generally required to pay off all debts and tax obligations before any assets are distributed among beneficiaries. The executor is only named in a will. In a trust, you would have a trustee play this role.
The executor processes all paperwork and oversees the communication between all parties. This includes collecting all associated financial documents like bank statements, property deeds and investment records to form a big picture of everything the estate owns and owes.
An executor only takes on their role after someone has died, leaving a will behind to manage their estate. But in a trust, the trustee is constantly at work. They continuously manage the assets, govern distributions, make investment decisions, and communicate with the beneficiaries.
Executors have to follow the directions set forth in the will and abide by state laws. This is a slow procedure, however. It could be months or years before the estate is settled. The trustee can distribute funds immediately when it’s time. There is no probate system to slow down truss distributions
And in many cases, the executor or trustee might need to hire an accountant for tax filing purposes or use a lawyer to work through convoluted legal situations. This collaboration will make sure the estate is managed properly as possible, and the beneficiaries get their due share without any unwanted delay.
How To Claim Your Distribution
Receiving a distribution will usually involve several steps for the beneficiaries, including:
- Supplying proofs—You’ll have to prove your identification and provide documents that the will requires.
- Speaking with the executor or trustee. Constant communication will give you a better idea of the distribution timeline and procedure.
- Having patience. Dealing with an estate can be a long process. Be patient as the executor works through the legal and bureaucratic responsibilities.
- Meeting conditions in the trust - Beneficiaries might need to reach a certain age, graduate, or get married before being eligible for distributions. This all depends on the terms of the trust.
After all of this is complete, the assets can be distributed to the beneficiaries. This might be a bank account surrendered to you. You might receive an insurance payout. You might have businesses or property retitled into your name. Or you might just receive a direct cash payout, made at one time, or spread out over a defined period.
Turnaround Time for Payouts to Beneficiaries
Several factors can impact how long it will take for beneficiaries to get their money, such as:
- The complexity of the estate.
- Whether beneficiaries are in dispute.
- Probate laws in the jurisdiction.
The typical timeframe for an inheritance process is between a few months and 2 years before beneficiaries get paid. But this is just a general rule. Larger estates require more time. And if there are legal disputes between beneficiaries, this will delay how they receive their payouts.
In a trust, payouts can be immediate, given that all conditions of the trust are met. There is no probate process to slow down distributions.
Executors are required by law to dispose of assets in a timely manner, but unforeseen events such as will disputes can pause the will from being executed. If the estate contains real estate or investments that must be sold off, this can also add to the time frame.
A trustee is required by law to meet the conditions of the trust, including all payout timings and asset distributions.
Legal and Tax Concerns for Beneficiaries
Getting a payout might require that you have some obligations to pay taxes or file certain legal forms. Don’t be shocked by what’s expected of you. Get ahead of the game by preparing yourself for what’s to come.
Understanding Estate Tax
A key factor for beneficiaries to consider is the possible inheritance tax implications of your state. Beneficiaries in some areas are required to pay taxes on received assets, so be prepared for the handover of this financial responsibility.
Some states have no tax at all, whilst others escalate their rates based on the value of the estate. Furthermore, your tax burden may be even more complicated if there are debts to be paid from the estate.
It’s in your best interest to ask a tax professional or an estate planner to help you understand your specific situation. The last thing you want is a surprise additional tax bill a few years down the road.
Legal Rights of Beneficiaries
You do have some legal rights as a beneficiary. So if you feel you’re not getting paid what you deserve, you can take legal action if you need to. Your rights include:
- The right to access information on the status of the estate.
- The right to object to the will, if there are sufficient reasons.
- The right to minimal delay in receiving their share of the estate.
- In the case of a trust, the right to challenge the trustee’s management of the estate.
By understanding your rights, you can be involved in the process, not just subject to it. In some cases, beneficiaries have the right to an accounting of the assets and liabilities of the estate. This gives you transparency about the process and the peace of mind that the executor is managing the estate correctly.
How Do Beneficiaries Get Paid? The Last Word
As long as you’re named as a beneficiary in the will, you have the right to know what to expect. You should know your role as a recipient. You should know how much to expect to relieve from the estate. You should understand your responsibilities to pay taxes if owed. And you should know how long the payout process will take.
But remember that this is just a guide. State to state, wills and trusts have different rules and guidelines about how beneficiaries are paid out. If you have any concerns about your role or rights as a beneficiary, speak with an experienced attorney.
Better yet, speak with us. We can discuss your options to create a trust that keeps your beneficiaries secure for years. Fill in the form below and we’ll be happy to reach out and get back to you with your perfect trust plan. Why wait? Fill in the form below and let’s get started.
