What is a beneficiary?

A beneficiary is a party to an exchange that receives a payment. The beneficiary is paid in cash, by check or by another means of transfer by a payer. The payer receives goods or services in return. The beneficiary’s name is included in the bill of exchange and it generally refers to an individual or an entity such as a business, a trust or a depositary.

Understanding the beneficiary

In a banking situation, the beneficiary must have an active account in good standing through which the funds can be sent by the payer.

In the case of a promissory note, whereby a party promises to pay a predetermined amount to another party, the party receiving the payment is known as the beneficiary. The party making the payment is known as the payer. For bond coupon payments, the party receiving the coupon is the beneficiary and the bond issuer is called the payer.

Beneficiaries have the option of accepting or rejecting the amounts paid to them, on the basis of an agreement or contract.

Investment management transactions often have beneficiary accounts that receive payments for the benefit of a client’s separate account. For example, by contributing to an individual IRA retirement account, a client can issue a check from their checking account to their investment management company, the beneficiary being the name of the company receiving the funds “For the benefit of” (FBO ) client. The would appear as “XYZ Management FBO John Smith.” The funds will ultimately be deposited into John Smith’s account as the beneficiary, XYZ Management being the depositary.

Beneficiaries can also be more than one party. This usually occurs in wire transfers when a person withdraws money from the payer’s account and divides it into various recipient allowances. Depending on the banking institution, these types of transactions may have approval requirements for numbers, percentages, and account types.

Sometimes the beneficiary and the payer can be the same party. This can happen when someone checks, withdraws and deposits, or transfers funds electronically from one of their accounts to another.

It is good practice to ensure that the payer and the recipient agree on the amount transferred between the parties.

Special considerations

Payments for social security (and SSI) benefits are often payable to a “representative beneficiary” rather than the final beneficiary (the person entitled to receive benefits). The Social Security Administration can designate a representative beneficiary if it considers that the beneficiary cannot manage the funds himself.

Key points to remember

  • A beneficiary is a party to an exchange that receives a payment.
  • Beneficiaries can also be more than one party; sometimes they are the same party.
  • The Social Security Administration can appoint a representative beneficiary if it considers that the beneficiary cannot be trusted to manage its own funds.

A representative beneficiary has rights and powers similar to those of a conventional beneficiary, but a representative must manage the money for the benefit of the real beneficiary. The funds should be spent (or saved) on things that help the recipient.

Representative beneficiaries exist to lighten the burden of managing the money on the recipient’s plate. An effective representative beneficiary should improve the beneficiary’s life. If a representative beneficiary does something that goes against an ultimate beneficiary, the Social Security Administration must be immediately notified.

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