Beneficiary vs. Heir: What’s the Difference?
If you are listed in someone’s will or expecting to inherit from an estate after a family member has died, you may hear the terms “beneficiary” and “heir” used interchangeably. You may wonder if there is a difference between the two words and how that can impact your inheritance. The following is information to help you understand the difference between an heir vs. beneficiary.
Testate and Intestate Estates
When someone has created a last will and testament for the assets of their estate, it is said that their estate is testate. It is referred to as dying intestate when there isn’t a will or none have been found. When there is a will, the probate court will oversee the asset distribution of the estate in accordance to the terms outlined in a valid will.
What Happens with an Intestate Estate
Without a will or when dying intestate, the court must follow the state probate law as to who will inherit and in what order, known as intestate succession. For instance, a spouse and children are the first to inherit in most states as the closest heirs. In some cases, the spouse may inherit all the estate under spousal rights for the state. Other times, they may receive a portion with the rest of the inheritance being divided between the children or grandchildren.
If there isn’t a spouse and children and no will, other family members will inherit in a particular succession order. This order is usually parents first, then siblings, grandparents, aunts and uncles, nieces and nephews, then cousins. Anyone outside of immediate family is known as a collateral heir.
Who is an Heir?
Heirs are people designated as close relatives who can legally inherit an estate even without a will. They are recognized by the court according to the state intestacy law. The surviving spouse, children, grandchildren, parents, and siblings are all considered to be heirs. This includes both biological children and adopted children for their rightful inheritance. You may have heard of the term adoptive heir, but it isn’t a separate designation from the biological child when it comes to inheriting the estate.
Unrelated People and the Decedent’s Estate
Friends, co-workers, foster children, and even an unmarried partner aren’t considered heirs unless the person is legally a domestic partner. Most states allow for a domestic partner to receive spousal rights in an estate.
Legally divorced spouses no longer qualify as an heir and aren’t automatically entitled to inherit assets from the estate. They won’t be entitled to any of the estate even if no other living heirs are found.
If the owner of the estate wishes for someone outside of those legally recognized as heirs in succession order to receive an inheritance, they will need to have a last will and testament drawn up. This should be a focus of their estate planning.
Who is a Beneficiary?
You’ve probably heard the term beneficiary as it relates to a life insurance policy and retirement accounts. They are the person legally named on the documents of the assets who will receive those funds when the owner of the account dies.
Many financial accounts offer you the opportunity to designate someone as your beneficiary. You should always take advantage of this feature to ensure the person you want receives the assets to which they are entitled.
A beneficiary may be named on bank accounts, other financial accounts, life insurance policies, and even on the title of a vehicle. They are also listed on trusts as part of an estate plan and in the last will and testament for the distribution of the decedent’s property.
A Beneficiary But Not in the Will
Not all beneficiaries named on these accounts will be included in the will. Even if the decedent dies intestate, the beneficiaries named on the accounts will receive those assets.
Anyone can be a beneficiary and be legally entitled to receive assets from an estate. They don’t need to be a family member or blood relative. You can name close friends, the child of a friend, even a charity or your pet. They have the same rights as blood relatives if they are named in the will.
When You Have an Heir and a Beneficiary
An heir can be a beneficiary, but they aren’t always the same. For example, adult children would be a legal heir, but they may be written out of the will or not named, which means they wouldn’t inherit anything even though the state recognizes them as an heir.
Sometimes, the owner of the estate dies without leaving a will, but they have named people as beneficiaries on certain accounts. For example, they may have listed a sibling on their life insurance account. That person would receive those funds even though a living child or spouse would be entitled to inherit according to state law.
Important Differences Between the Heir vs Beneficiary
Beneficiaries beat out heirs and those designations are recognized over a will. If someone listed a friend as the sole heir in the will but they had named a child on the bank accounts as a beneficiary, the child would receive those assets. The friend named in the will would only receive assets that didn’t have a beneficiary listed.
Heirs who inherit based on state probate law will only inherit the percentage as designated by the law. Beneficiaries can receive any amount determined by the person making the will. They may give one child 80 percent of their assets and a second child only 20 percent. Without a will, both children would receive 50 percent as stated by law.
Primary and Secondary Beneficiary Designations
The primary beneficiary is the first person or persons named in a will or on a document naming the beneficiary or the heir apparent. A secondary beneficiary can be listed to inherit if the primary beneficiary dies before the owner of the asset. The secondary beneficiary may also be called the contingent beneficiary.
You can set up your estate to be distributed any way you want. You can have multiple primary or secondary beneficiaries. You can have one primary and two or three secondary beneficiaries. They can inherit equally or with different percentages.
Having beneficiaries allows you to determine exactly what you want to happen to your estate after you die. It’s important to choose your beneficiaries and update your estate as life circumstances change. There may be new births, deaths, marriages, divorces, and adoptions that can impact who you want to inherit.
Finding and Notifying the Heirs and Beneficiaries of an Estate
When a person dies, one of the first steps is to locate the heirs or beneficiaries of the estate. The executor or personal representative of the estate or one of the heirs or beneficiaries will file a petition with the probate court to open probate. Once an executor is appointed or approved by the court, they are responsible for notifying all beneficiaries.
While this might seem like an easy task, it can be quite challenging. If the will hasn’t been changed in a long time, the beneficiaries listed may have moved and even be deceased. The executor must make every attempt to find them before notifying the court that they can’t be located.
Can Heirs Dispute the Beneficiaries’ Inheritance?
Anyone named in the will or any heirs or anyone with a valid interest may dispute the validity of the will. They cannot legally question what the will says, even if it gives to another person what they believe should rightfully be their inheritance.
The only legal dispute they can take to court is regarding the validity of the will. This may include the belief that the estate owner wasn’t of sound mind when they wrote the will or that they were under undue influence or coerced into signing the will.
The court will review the evidence to determine if the will is valid. If it deems the will to be valid, the instructions will be carried out by the executor. If the will is determined to be invalid, the court will proceed the same as if the decedent dies intestate.
The Probate Process for an Heir and a Beneficiary
The probate process is the same for the heir vs beneficiary. The executor who will be handling the deceased person’s estate will notify the creditors and pay all outstanding debts before they can distribute any assets to the heirs or beneficiaries.
Any remaining estate property will be divided as stated in the will. If there isn’t a will, it will be distributed as state law dictates, regardless of what the deceased person wanted.
The executor must also take inventory of the assets of the estate, which can include real and personal property. They will liquidate most of the estate unless the will stipulates giving specific property to the heir apparent. They are obligated to follow the instructions of the will even if it specifies someone other than the presumptive heir or close relatives. If no will exists, they will be required to follow the laws of the state regarding who will receive property from the estate and how much.
Create Your Estate Plan
If you are concerned about ensuring the correct heir and beneficiary receive the portion of your estate you want, you need to create a formal estate plan. An estate plan includes legal documents to ensure that you have the final say about who inherits rather than it falling to your blood relative by default.
Seek Legal Advice
You should seek legal counsel to understand the state laws governing estate planning and any person entitled to your estate as well as any community property laws. An estate law firm can help you formulate your estate plans according to your wishes. Legal counsel can ensure that your assets pass to whomever you wish, whether that is a direct descendant or people other than blood relatives.