What is 'Beneficial Interest'

A beneficial interest is the right to receive benefits on assets held by another party. The beneficial interest is often related to matters concerning trusts accounts. For example, most beneficial interest arrangements are in the form of trust accounts, where an individual, the beneficiary, has a vested interest in the trust's assets. The beneficiary receives income from the trust's holdings but does not own the account.

BREAKING DOWN 'Beneficial Interest'

A beneficiary interest will change depending on the type of trust account and the rules of the trust agreement. 

A beneficiary typically has a future interest in the trust's assets meaning they might access funds at a determined time, such as when the recipient reaches a certain age. For example, a parent may set up a testamentary trust to benefit their three children upon the parent's death. The trust creator can stipulate distribution of the account's assets to the children during the parent's lifetime,

Parents may set up Crummey trusts, funded through annual gifts, to take advantage of gift tax exclusions. With Crummey trusts, the beneficiary has an immediate interest and access to the trust's assets for a specified timeframe. For example, the beneficiary may be able to access the trust's funds within the first 30 days after the transfer of a gift. Those assets fall under the distribution rules governing the trust.

Other Examples of Beneficial Interest

Another example of beneficial interest is in real estate. A tenant renting a property is enjoying the benefits of having a roof over their head. However, the renter does not own the asset. Beneficiary interests can also be applied to employer-sponsored retirement plans such as 401(k)s and Roth 401(k)s, as well as in individual retirement accounts (IRA) and Roth IRAs. 

With these employer-sponsored accounts, the account holder may designate a named beneficiary who can benefit from the account funds in the event of the account holder's death. The rules governing beneficiary interest in these cases vary widely depending on the type of retirement account and the identity of the beneficiary.

A spouse beneficiary to an IRA has more freedom over the assets. The surviving spouse can treat the account as their own, roll over assets into another plan, if the IRS allows, or designate themselves as the beneficiary. 

A non-spouse beneficiary to an IRA, for example, can't treat the account as their own. Thus, the beneficiary can't make contributions into the account or rollover any assets in or out of the IRA.

RELATED TERMS
  1. Primary Beneficiary

    A primary beneficiary is the first person in line to receive ...
  2. Extended IRA

    An Extended IRA allows a second-generation beneficiary to continue ...
  3. Secondary Beneficiary

    A secondary beneficiary is a person or entity that inherits assets ...
  4. Charitable Lead Trust

    A trust designed to reduce beneficiaries' taxable income by first ...
  5. 5 by 5 Power in Trust

    A “5 by 5 Power in Trust” is a common clause in many trusts that ...
  6. Beneficiary Clause

    Beneficiary clause permits an investment vehicle policy owner ...
Related Articles
  1. Retirement

    A Look at Protecting Children With an IRA Trust

    Too many people make huge and irreversible mistakes when naming the beneficiaries for their retirement accounts.
  2. Retirement

    What You Should Know About IRA Beneficiaries: Part 2

    Here's how IRAs, and the beneficiaries you name, work with wills and trusts.
  3. Retirement

    The Importance of Updating Retirement Account Beneficiaries

    Retirement account beneficiaries should be reviewed and updated on a regular basis to avoid any outdated information. This prevent any confusion in a time of loss.
  4. Financial Advisor

    Avoid These 4 Roth IRA Mistakes in Estate Planning

    Beneficiaries will not be able to maximize their tax savings with a Roth IRA unless it is passed down in a certain manner.
  5. Managing Wealth

    Which Retirement Plans Need a Family Trust?

    Many people think family trusts are only for the very wealthy, but if your retirement assets exceed $500,000, you may want to consider the option.
  6. Retirement

    Why You Need to Update Retirement Account Beneficiaries

    The designation of beneficiaries in retirement accounts takes precedence over a will. Don't forget to keep them updated.
  7. Retirement

    How To Set Up A Trust Fund In The U.K.

    A guide to the whys and wherefores of setting up this most versatile of estate-planning instruments in the United Kingdom.
  8. Managing Wealth

    Why Your Will Should Name Designated Beneficiaries

    Find out how to make the tough decisions when it comes to choosing beneficiaries for your will.
  9. Retirement

    Why Your Estate Shouldn't Be Your IRA Beneficiary

    Here are five reasons why you should not name your estate as your IRA beneficiary.
RELATED FAQS
  1. What are the pros and cons of naming a trust as the beneficiary of a retirement account?

    Basically, naming a trust as the beneficiary of a retirement account depends on how many people you want the account's proceeds ... Read Answer >>
  2. How can I put my IRA in a trust?

    Understand the proper way to transfer ownership of your IRA to a trust. Consider the advantages and disadvantages of naming ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center