What is a 'Primary Beneficiary'

A primary beneficiary is an individual or organization who is first in line to receive benefits in a will, trust, retirement account, life insurance policy or annuity upon the account or trust holder's death. An individual can name multiple primary beneficiaries and stipulate how distributions would be allocated. 

For example, a parent with a $100,000 life insurance policy can name his son and daughter as the primary beneficiaries. However, he is free to decide how to distribute the assets which means the daughter can receive $60,000 and the son can get $40,000 upon the policy holder's death. Each can also receive equal 50% portions of $50,000 should the parent make that clear in the insurance policy.

BREAKING DOWN 'Primary Beneficiary'

A primary beneficiary is different from a contingent beneficiary, who is second in line to receive benefits. The contingent beneficiary receives an inheritance if he or she outlives the primary beneficiary. The contingent beneficiary can also receive benefits if the primary beneficiary refuses the inheritance or can't be located.  

Regardless, both primary and contingent beneficiaries must be legally competent to accept the gift. If a person dies while his or her named beneficiaries are still children, a court may appoint a legal guardian to manage the inheritance until the child reaches an age of maturity as defined by state law. In the case of a will or trust, an individual can set specific rules as to how distributions are made toward beneficiaries. For example, the trust creator or grantor can stipulate that their children as named beneficiaries can acquire control of the trust's assets and income only after they graduate college or marry. 

The Importance of Updating Primary Beneficiaries 

Named beneficiaries of insurance policies and accounts like 401(k)s and Individual Retirement Accounts (IRA)s take stance over those designated in a will. This means assets in these accounts will flow to the named beneficiary in the account policy even if a will suggests otherwise. 

An IRA can name a spouse as the primary beneficiary, while the same person's will may name the children as primary beneficiaries. The spouse will receive the proceeds of the IRA and the children will receive the assets for which they are named primary beneficiaries in the will—but nothing from the IRA. 

Except for an irrevocable trust, most entities that transfer wealth can be updated by changing primary and contingent beneficiaries. 

And even though naming primary and contingent beneficiaries is often optional for accounts like IRAs, naming them can help assets bypass the often costly process of probate that an individual's heirs may go through to secure their benefits. Failure to name beneficiaries may also mean assets fail to keep generating returns or income. For example, several retirement accounts allow spousal beneficiaries to roll over their partner's retirement assets into their own IRAs and delay making required minimum distributions (RMD) until after they turn 70. Non-spousal beneficiaries are typically required to start taking RMDs as soon as the original account holder dies, which means these assets won't benefit from compound interest and tax deferred growth.

 

RELATED TERMS
  1. Designated Beneficiary

    A designated beneficiary is usually a person (although it can ...
  2. Secondary Beneficiary

    A secondary beneficiary is a person or entity that inherits assets ...
  3. IRA Asset Will

    An IRA asset will is a document specifiying how the assets in ...
  4. Bare Trust

    A bare trust is a type of trust that provides beneficiaries with ...
  5. Five-Year Rule

    The Five-Year Rule allows inherited IRA beneficiaries to withdrawal ...
  6. Payable On Death - POD

    Payable on death (POD) is an arrangement between a bank or credit ...
Related Articles
  1. Retirement

    Breaking Down IRA Beneficiaries: Part 1

    It's important to give serious consideration to your IRA beneficiary designations.
  2. 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.
  3. Retirement

    What You Should Know About IRA Beneficiaries: Part 2

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

    3 Deadlines For Retirement Plan Beneficiaries

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

    Include Your Retirement Accounts in Your Estate

    Although they are often overlooked during estate planning, your retirement accounts are most likely one of the biggest assets you will leave your heirs.
  6. 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.
  7. Retirement

    Designating a trust as retirement beneficiary

    Designating a trust as your IRA beneficiary can be beneficial, but it requires proper planning to avoid problems.
RELATED FAQS
  1. Can the non-spouse beneficiary of an IRA name a successor beneficiary?

    Whether an Individual Retirement Account beneficiary can name a successor beneficiary is determined by the provisions of ... Read Answer >>
Trading Center