DEFINITION of 'Discretionary Beneficiary'

Discretionary beneficiaries are individuals or entities that a grantor names in a trust, life insurance policy, or retirement plan. Discretionary beneficiaries will receive distributions at the appropriate time. While they may apply for distributions, it is up to the trustees to determine whether the payment will be made. In the United States, a discretionary beneficiary has no legal proprietary interest in a trust.

BREAKING DOWN 'Discretionary Beneficiary'

There is usually a particular reason for a person to be named a discretionary beneficiary. For example, they may be young or have poor financial habits. While the trustees still have fiduciary responsibilities to a discretionary beneficiary, it can be difficult to enforce this unless a specific letter of intent exists from the grantor of the trust.

While a discretionary beneficiary is usually an individual, a grantor may, at times, name an entity such as a charity. A grantor often elects to do this instead of gifting assets to a charity during his or her lifetime. In this scenario, the charity, instead of the grantor, is treated as receiving the distribution, and neither the grantor nor the estate will owe income taxes on the amount.

Discretionary Beneficiary and Other Types of Beneficiaries

In addition to a discretionary beneficiary, other types of beneficiaries exist and can be named to accounts. These include a named beneficiary; these are beneficial owners of the property and will share in the proceeds at the time of disposition. In some cases, such as an annuity policy, the policyholder and the named beneficiary may be the same.

Absolute beneficiaries cannot be changed without their written consent. Absolute beneficiaries are also referred as irrevocable beneficiaries and can be associated with a trust, an employee benefit plan such as a pension, and a range of additional instruments or contracts with a beneficiary clause. In contrast, a revocable beneficiary does not have guaranteed rights to receive compensation from a policy or a fund. In this scenario, a policy owner reserves the right to make changes to who receives payment, change the terms of the policy, or terminate the policy without consent from the revocable beneficiary.

Several trusts, wills, policies, and annuities have both primary beneficiaries and secondary beneficiaries. A primary beneficiary is first in line to receive benefits upon the account or trust holder's death. An owner can name multiple primary beneficiaries and stipulate how distributions will be allocated along. A secondary beneficiary inherits the assets if the primary beneficiary dies before the grantor. A secondary beneficiary would also be considered a "contingent beneficiary."

RELATED TERMS
  1. Alternate Beneficiary

    An alternate beneficiary is a term used for the individual who ...
  2. Beneficial Interest

    A beneficiary interest refers to an individual's right to benefit ...
  3. Donee Beneficiary

    A donee beneficiary receives intended benefits from a contractual ...
  4. Revocable Trust

    A revocable trust is a trust whereby provisions can be altered ...
  5. Transfer On Death - TOD

    A transfer on death designation allows beneficiaries to receive ...
  6. Stretch Annuity

    A stretch annuity is an option where tax-deferred allowances ...
Related Articles
  1. Retirement

    3 Deadlines For Retirement Plan Beneficiaries

    To take full advantage of new RMD regulations, beneficiaries need to take action before important deadlines.
  2. 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.
  3. Retirement

    Mistakes in Designating a Retirement Beneficiary

    Make sure your beneficiary designations not only reflect your intentions but also meet the requirements to be effective.
  4. 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.
  5. Retirement

    Breaking Down IRA Beneficiaries: Part 1

    It's important to give serious consideration to your IRA beneficiary designations.
  6. 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.
  7. Retirement

    3 Ways People Accidentally Disinherit Loved Ones

    Proper beneficiary planning can ensure you don't accidentally disinherit loved ones.
  8. Retirement

    Distribution Rules For Inherited Retirement Plan Assets

    If you've recently inherited a retirement plan, you must get to know the rules for distributing the funds.
RELATED FAQS
  1. What are the pros and cons of naming a trust as the beneficiary of a retirement account?

    Learn more here about the pros and cons of naming a trust as the beneficiary of a retirement account. Read Answer >>
Trading Center