Most people think of someone in line for an estate as an “heir.” But in estate law, it is often better to be a beneficiary of a contract or trust than an heir.

According to common law, a beneficiary is someone who is entitled to receive benefits from a legal arrangement, such as a trust or a contract. A beneficiary is usually, although not necessarily, a third party, and the contract or trust is often created specifically to benefit them. Under New York law, the term is also used for anyone entitled to property under a will, which can be confusing. A “beneficiary” of a will could also be a devisee of assets under the will—not a beneficiary as to those assets!

Luckily, a little guidance can clear up the confusion. Here’s what the term means in specific legal contexts around estate planning.

Beneficiaries under Contract

Life insurance policies create a common beneficiary relationship of this type. When someone buys life insurance, they name a spouse or close relative as the primary beneficiary. On the policy owner’s death, the insurance company pays the beneficiary whatever is owed. Until then, the beneficiary has no ownership rights in the policy, and the policy owner is typically free to cancel the policy or change the beneficiary without their approval.

Many financial instruments can be transferred this way, such as 401(k) accounts, pensions, and annuities. Bank accounts may also be made payable on death (POD) to a beneficiary. In some states, real estate deeds and vehicle titles can be transferred on death to a beneficiary, although New York does not currently permit this.

The major advantage of this arrangement is that the asset does not pass through probate. It was never part of the estate of the deceased person, or decedent, since it became the property of the beneficiary when the owner died. This means that the beneficiary does not have to wait for the estate to go through probate—a slow and expensive process—before receiving the property.

However, without further protection, the beneficiary can be at a disadvantage because they have no rights in the arrangement until the primary owner has died. The owner could change or cancel the instrument at any time. And if, for example, the holder of a POD bank account becomes incapacitated, the beneficiary might urgently need the money for their care and be unable to access it. An estate planning attorney can help you balance these interests and make sure that someone has the power to access resources if you are unable to do so yourself.

Beneficiaries of Trusts

A party who creates a trust (known as a settlor or a grantor) gives property to a trustee on behalf of a beneficiary. The trust instrument, or declaration of trust, sets out the terms of the distribution of assets. Trustees have a fiduciary duty to the beneficiary to maintain the trust property.

Trusts are very flexible, and grantors can use them to retain or distribute property more or less as they see fit. In estate planning, they are often used to:

Under New York state law, beneficiaries of trusts have more rights than beneficiaries of accounts. They can request:

  • Accounting of the trust property
  • Replacement of a trustee for cause
  • Termination of the trust for good cause

They also have rights to an inventory of the trust and timely distribution of the property, and they may sue to enforce these if necessary.

Beneficiaries in Probate

In New York probate law, “beneficiary” is also the term for “any person entitled to any part or all of an estate.” SCPA § 103(8). In this context, beneficiaries may be:

  • Devisees or legatees—parties to whom the decedent left property in their will.
  • Distributees, also known as heirs—those who are entitled to a share of the decedent’s estate when there is no will. These are the decedent’s next of kin, as defined by estate administration law, unless no next of kin can be found. In that case, the state of New York would inherit.

A beneficiary to an estate must wait for the estate’s adjudication in court before they can take possession of their assets. Beneficiaries of an estate have similar rights to trust beneficiaries. They are entitled to a full accounting and a prompt distribution of property, and they may sue to replace an executor if they wish.

Although websites offer forms for DIY trust and will drafting, they may not match the complex requirements of New York probate law. An ineffective will or trust can lead to expensive difficulties and may even defeat your intent. Consulting an estate attorney in your jurisdiction is a small investment for the peace of mind of your loved ones. For New York trusts and estate advice, you can call us today at 516-447-2144 to schedule a free consultation.