Simply put: If you have a Last Will and Testament as part of a comprehensive Estate Plan, then the people you have chosen and named to inherit your assets are your beneficiaries. If you don't have a Will, the people who have a legal right to inherit your property are your heirs. In most cases, your heirs are your next of kin. In other words, your beneficiaries are named and chosen by you, while your heirs are determined by the court according to Texas or Arkansas intestate laws.
Why You Always Want Beneficiaries Instead of Heirs
It's never a good idea to leave the distribution of your Estate up to the discretion of the state. You can avoid this by making sure you have a valid Will. Without a Will, the state will determine who your heirs are according to the law, likely with no regard for your relationship with those heirs or any preferences you might have indicated while you were alive.
In general, court-determined heirs inherit in the following order:
- If no spouse, children and their descendants
- If no children, mother and father
- If only one parent is surviving, then the estate is split between the parent and any siblings.
- If no parents, siblings and their descendants
- If no spouse, children, parents, or siblings are surviving, the estate is divided between the closest living maternal relatives and paternal relatives (i.e., grandparents, aunts, uncles, cousins)
You can avoid this line of succession by naming beneficiaries you choose in your Will and other documents.
Documents That Allow You to Name Beneficiaries
It's important to understand that you can name anyone as a beneficiary of your Estate. Beneficiaries do not have to be family members. They can be friends, charities, or even pets! It might be necessary to change your beneficiaries over the years as people pass away or become estranged or as new people enter your life.
Many financial accounts allow or even require you to name beneficiaries so that the assets in the accounts will pass directly to them upon your death. These accounts include:
- Wills. A Last Will and Testament is a legal document that allows individuals to designate beneficiaries who will inherit their assets, including real estate, personal property, or financial accounts, upon their death.
- Trusts. Revocable living trusts are legal entities that hold assets for the benefit of beneficiaries designated by the creator of the trust, who can specify how the assets are to be distributed.
- Life insurance policies. The point of a life insurance policy is to support the person or people you name as beneficiaries in the event of your death, so you would obviously name them in the document. It's important to update and change the beneficiaries if circumstances require it.
- Retirement accounts. Accounts such as Individual Retirement Accounts (IRAs), 401(k) plans, or pension plans often require the account holder to designate a beneficiary who will inherit the funds upon the account holder's death.
- Bank accounts. Some bank accounts, such as payable-on-death (POD) accounts or transfer-on-death (TOD) accounts, allow the account holder to name a beneficiary who will receive the account funds upon the account holder's death.
- Investment accounts. Certain investment accounts, such as brokerage accounts or mutual funds, may require the account holder to designate a beneficiary who will inherit the investments upon the account holder's death.
- Annuities. Annuity contracts often require the contract holder to name a beneficiary who will receive the remaining funds or payments from the annuity upon the holder's death.
Who Should You Name as Your Beneficiaries?
Who you choose to inherit your assets and property is entirely up to you. In many cases, the beneficiaries you name are the same as your legal heirs—your spouse, children, parents, siblings, nieces, and nephews. In other cases, your beneficiaries might not include any family members. Your beneficiaries might include your chosen family—close friends, business partners, long-time neighbors, or even a special charity or scholarship fund. The beauty of having an Estate Plan is that it allows you to exercise your right to choose who will inherit your precious possessions and valuable assets.