Some people put assets away in trust funds to ensure that their heirs will inherit them. However, if an heir dies before receiving the inheritance, the rules can get complicated. Depending on state laws, your heir's heirs may or may not receive the funds. Your will can provide an alternative beneficiary in the event a beneficiary dies to avoid this problem.
Depends on Will
Your will must clearly explain how to divide benefits if one or more beneficiaries of an account dies before inheriting the account. The estate must pay these benefits according to your will. If your will does not address this issue, the estate must divide benefits according to state law, which means that people who you did not intend to inherit anything may inherit the account based on next-of-kin rules.
If your retirement account or life insurance policy names several beneficiaries, and one beneficiary dies, her inheritance must be split among the remaining beneficiaries unless your will states otherwise. For example, if a policy names four beneficiaries and one dies, the other three each get their own inheritance plus a third of the deceased beneficiary's inheritance. Thus, the beneficiary's children will not automatically get benefits if a beneficiary dies before receiving an inheritance.
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If a sole beneficiary dies, the funds he would have inherited revert to your estate. The executor of the estate then has to distribute the funds according to stipulations in your will or according to state law, should your will not provide for this eventuality. The beneficiary's heirs will not get the account unless your will stipulates it. State law may or may not allow the beneficiary's heirs to receive a portion of the benefits.
If one or more beneficiaries of a policy die before they can inherit the policy, the funds may not be distributed in the manner you intended. Thus, instead of putting funds in a trust to be paid to beneficiaries upon death, you may want to stipulate that certain assets go directly to your heirs. You also may want to consult an attorney before setting up trust funds or other benefit accounts for your heirs to ensure that funds go to where you want them to go if a beneficiary dies.