When Beneficiaries are Not Heirs

Holland & Hart - Fiduciary Law Blog

The terms Beneficiary and Heir both refer to someone who receives an inheritance after someone passes away.  However, while the terms are often used interchangeably, they do not always refer to the same individual or set of individuals.  Heirs can be beneficiaries but beneficiaries are not always heirs.

In our practice, we often see issues arising when these 2 sets are not identical or are different than the expectations of the parties.

Beneficiaries are those named in a testamentary instrument, including a Last Will and Testament, trust or beneficiary designation.  Beneficiaries can include direct family members, but can also be non-family members, trusts or charities.

Heirs, also called heirs-at-law, are those persons that would receive the decedent’s assets if there were no testamentary instruments and in accordance with state intestacy laws.  Everyone has heirs, even if they do not have a spouse or children.  Many jurisdictions, including Colorado, require notification of all heirs in a probate proceeding, even if they are not beneficiaries.  For many decedents, the heirs may not be apparent or known and a consanguinity table or heir locator service will need to be consulted.

If no beneficiary is designated, certain types of assets like life insurance or retirement plans may pass directly to heirs-at-law or to the decedent’s estate based on the language of the contract or the plan document.

A client having predeceased children needs to understand that his or her heirs include the children of that predeceased child.  A client wanting to treat her spouse’s children as her own children for estate purposes must understand that her spouse’s children need to be named as beneficiaries in addition to her biological children.  And a client wishing to name charities as the recipients of their retirement accounts or life insurance policies must designate those charities as beneficiaries on the account plan documents.  These are just a few situations where the identification of beneficiaries and heirs may not intersect.

It is important for clients and practitioners to make sure they have a clear understanding of who are their beneficiaries, and who are their heirs, particularly when those groups are not identical.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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