When you set up a will or life insurance, you will need to appoint beneficiaries. If you are wondering what a beneficiary is, then we’ve got you covered.
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What is a beneficiary?
A beneficiary is someone that will gain from a trust, will or life insurance policy. When setting up any of these financial products, you will have to appoint beneficiaries.
When will you need beneficiaries?
If you are making a will or thinking about life insurance, your beneficiaries will be the people you nominate to gain financially in the event of your death. You will need to appoint them as part of the process.
If you have life insurance through your employer (commonly known as Death in Service), you will need to nominate people that will be paid if you die while in their employment.
If you have a pension, it is worth appointing one or more beneficiaries. Then, if you die before pensionable age, they will be paid by the company responsible for your pension scheme.
How should I choose one?
When choosing a beneficiary, think about why you are making your plans in the first place. You can choose more than one person depending on the contents of your estate.
So, if you want to make sure your family are provided for, then you could choose your spouse as a beneficiary of the family home and some additional funds.
Alternatively, if you are the co-owner of a business, then you should probably choose your business partner as a beneficiary of your share of the company.
If you are making a will, an executor can also be a beneficiary. You can also nominate any charitable organisations.
Who are unsuitable beneficiaries?
Unsuitable direct beneficiaries include anyone not of sound mind. Someone sectioned under the Mental Health Act (1983) or someone with dementia would probably not be a good beneficiary.
Appointing someone under the age of 18 could also be problematic. If the estate is sizable, this type of beneficiary could inherit a large sum of money on their 18th birthday, which is a big responsibility.
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In these situations, it is probably more appropriate to set up a trust. This would ensure they are provided for while not taking on the financial responsibility.
When thinking about how suitable a beneficiary is, it’s also best to avoid people that can’t be easily located. If you want to nominate that long-lost relative, then its best to try and locate them first. That way you don’t leave your executors with the headache of doing this on your behalf.
What are their rights?
The beneficiary in a will has the right to be kept informed and the right to see the will. These rights are activated once a grant of probate has been issued to an executor.
An individual benefitting from a life insurance payout does not have to pay income or capital gains tax. However, if the payout is equal to or more than £325,000, then the beneficiary may have to pay inheritance tax.
Further information about this is available from the gov.uk website.
What happens if I don’t appoint one?
This applies to individuals that do not have a will or life insurance by definition. In this situation, you will be intestate, and the rules of intestacy will apply.
If you pass away without appropriate estate planning there is a risk that your estate will not be distributed in line with your wishes.
For example, if you have children and you are unmarried, then they may not benefit from your estate. The same goes for elderly relatives or anyone that is financially dependent on you but is not directly related to you.
One of the biggest problems associated with intestacy is the fact that probate can take longer. This can cause problems for beneficiaries in the short term because they won’t have access to your estate while probate is taking place.
When making these kinds of arrangements is always a good idea to seek expert advice. Appointing beneficiaries should be part of an estate planning process and there are qualified professionals that can help you.
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