When it comes to estate planning, the terms beneficiary and benefactor are often used interchangeably. Since this can lead to confusion, it’s important to tell the difference between benefactor vs beneficiary.
In simple terms, a benefactor is the person who creates the estate plan, or the plan to distribute their assets, while a beneficiary is someone who is the recipient, or who benefits from, the estate plan.
This article will further explain these terms, and how you might see them in an estate planning context.
What is the definition of benefactor?
According to Merriam Webster, the word benefactor is defined as:
Someone or something that provides help or an advantage : one that confers a benefit
In estate planning, people primarily use the term benefactor when it comes to charitable giving.
For example, it would be appropriate to say that Bill and Melinda Gates are benefactors of the Bill and Melinda Gates Foundation. Or that Warren Buffett, who has pledged to give over 90% of his wealth to the foundation, is a very generous benefactor.
What is the definition of beneficiary?
Conversely, Merriam Webster states that a beneficiary is:
A person or thing that receives help or an advantage from something : one that benefits from something
In other words, a beneficiary benefits from the actions of the benefactor.
When is the word beneficiary used?
In estate planning, people use the word ‘beneficiary’ far more often than ‘benefactor.’
Let’s look at how you might see the word beneficiary used in an estate planning context.
Life insurance policies
When it comes to life insurance policies, a life insurance company uses beneficiary designation to determine where the life insurance proceeds go.
You have the owner of the policy. This is the natural person or entity that controls the contract and pays the premiums.
You have the insured person. This is the person whose life is insured.
Upon the insured’s death, the life insurance company pays the policy’s proceeds to the designated beneficiary. This is also known as the death benefit.
Usually, life insurance contracts will ask the policy owner to designate a primary beneficiary and one or more contingent beneficiaries. That way, if the primary beneficiary of a life insurance policy predeceases the insured, there is at least one contingent beneficiary that will receive the proceeds.
You will also see beneficiary designations used in financial accounts.
For investment accounts and retirement accounts, like IRAs or a workplace retirement plan, you will hear references to primary and contingent beneficiary designations. You may also hear contingent beneficiary designations referred to as secondary beneficiary designations.
In banking, you’ll hear the phrase, payable on death, or POD, used in place of a beneficiary designation. With investment accounts, custodians will use the term, transfer on death, or TOD instead.
In order to establish beneficiary designations for financial accounts, most financial institutions will require some basic information about the beneficiary, such as:
- Social Security Number
- Date of Birth
This helps to ensure the correct recipient of funds upon the death of the accountholder.
The most common way you’ll encounter the term beneficiary in estate planning is when it comes to a last will and testament, or a revocable trust. These are two of the most common estate planning tools accessible to most people.
Wills and trusts
In most estate plans, someone creates a will to ensure continued financial support to family members after they pass away. Or they can specify who might receive a valuable possession by using a will.
In cases where there is someone with special needs or minor children, people might create a revocable trust. A revocable trust helps to ensure the proper distribution of assets.
They are especially helpful as the grantor can put specifications in place on how the money or assets or used. For example, an attorney can structure a trust to pay only college expenses until the beneficiary reaches a certain age.
NOTE: Wills and trusts are legal documents. Only a licensed attorney should draft legal documents. Please do not interpret this article as as legal advice. We’ve written a more in-depth article if you’d like to read more about common errors with beneficiary designations in estate planning and how to avoid them.
Federal estate tax returns
Many estates are quickly distributed by the executor. Most of these estates fall well below the estate tax threshold.
But those that do not might have to file a federal estate tax return. The IRS uses the term beneficiary to describe those who receive either income or assets distributed from the estate on the tax return.
When is the term benefactor used?
As you can see, we went through a significant amount of estate planning material, and did not use the term benefactor one time.
Generally speaking, you probably won’t see the word benefactor used, outside of a charity-related context, in the world of estate planning. You’ll see terms such as:
None of these words means the exact same thing as benefactor. But the general tone is very similar–these are all words which imply the function of someone, or a legal entity, that is doing something for the benefit of someone else. Which is kind of what a benefactor does as well.
If you liked this article, and want to learn more about other financial planning topics, please check out our estate planning archives!
After retiring from a 24-year career as a Naval officer in 2017, Forrest became a financial planner to help people achieve success in managing their personal finances. In 2022, he sold his partnership stake in his financial planning firm to focus on helping people full-time through his writing.
Featured in: Forrest’s writing has been featured in the following publications: Forbes, Military.com, NerdWallet, Yahoo Finance, The Military Guide, The Military Wallet, Christian Science Monitor, and many other publications.
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