Technically, the terms “heir” and “beneficiary” have different meanings.
Like the technical terms used in any discipline, estate planning has its own jargon.
These technical terms can be confusing for those who are not estate planning attorneys.
Although terms like heir and beneficiary are often used interchangeably in conversation, their distinct meanings have estate planning implications.
According to a Nerd Wallet article titled “What Is an Heir? Meaning and Types,” estate planning documents must use the terms accurately to reflect your wishes for your assets and your family.
A beneficiary is similar to an heir but not the same.
An heir is technically a person who has the legal right to inherit when a person dies without a last will and testament.
When this happens, the decedent is said to have died intestate.
Because no last will existed, the local probate court must follow state laws to locate heirs and distribute property.
Typically, relatives most closely related by kinship are prioritized in distribution.
For example, a spouse or children will inherit before a brother or sister.
Parents would typically be next in line if the deceased individual was unmarried and had no offspring.
If necessary, parents would be followed by siblings, nieces, nephews, and possibly even more distant relatives.
Although these are general guidelines, states can vary in prioritizing relatives.
Those with estate planning documents like wills or trusts designate beneficiaries to inherit property.
A beneficiary is a person or entity named to inherit assets through a last will, trust, or directly as a beneficiary (think life insurance or retirement funds).
Unlike heirs, beneficiaries can extend beyond blood relatives.
Family members, friends, charitable organizations, or pets can be beneficiaries.
Whether using last wills, trusts, life insurance policies, or other beneficiary forms, you can provide contingency instructions for how assets are to be distributed if one of your beneficiaries cannot inherit.
Doing so allows flexibility to address possible issues and protect your wishes.
Should you pass away without an estate plan, you will be considered intestate.
The probate courts would then determine your heirs according to state law.
You can select your beneficiaries if you have a last will and testament or trust.
With an estate plan, you can retain authority over your property rather than giving control to the courts.
If you want to provide for both your loved ones and a beloved charity, you will need estate planning documents.
By neglecting to name beneficiaries on assets like retirement accounts or life insurance policies, these assets will likely be subject to probate.
The intestacy laws will once again be the default rules governing distribution to heirs.
Your estate will enter an "escheat" process if your heirs cannot be found.
In short, your assets will become the property of the state.
Yikes!
You must create a legally valid estate plan to properly designate your beneficiaries to avoid these undesirable scenarios.
Organization and thoughtfulness are important to designating beneficiaries.
The process itself is multifaceted but fairly straightforward.
Take inventory of your assets.
You must first know what you have to determine who you want to inherit from your estate.
Make a list of all your sentimental items, investments, and property.
Decide who will benefit from your estate.
Some loved ones will benefit more from your estate than others.
You can choose family members, friends, or even non-profit organizations.
Designate beneficiaries in a last will or trust.
Once you know who you would like to inherit your assets, you can specify your beneficiaries through a last will and testament or a trust.
Update your beneficiary designations with any applicable institutions.
Some assets have forms for designating beneficiaries for the assets.
These include retirement accounts and life insurance policies.
By updating these beneficiary designations, you can keep these assets out of probate while allowing them to pass directly to your chosen recipients.
The ultimate distinction between heirs and beneficiaries is control.
With beneficiaries, you maintain control and authority over the fate of your assets.
The government will determine heirs based on state law.
To create a plan to meet your needs and fulfill your wishes, you should work with an experienced estate planning attorney.
With an understanding of the roles beneficiaries and heirs hold in estate planning, you can make an educated choice on your own estate planning goals.
To avoid having courts determine your heirs by default, you should designate beneficiaries in your personal comprehensive estate plan.
In the end, only by designating beneficiaries in your estate planning documents and on your accounts can you prevent your estate from costly probate proceedings associated with intestacy.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.
Reference: NerdWallet (Nov. 13, 2023) “What Is an Heir? Meaning and Types”
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