What Is a Donee Beneficiary?

A donee beneficiary is an third party individual or entity that ultimately receives some type of benefit from a contractual arrangement, even though that party was not directly involved in the contract. This type of activity may occur with business contracts, the proceeds from life insurance and other types of policies, and in a number of other types of transactions. In many cases, the benefits to the donee beneficiary may occur as the result of one of the two parties involved in the contract making purchases in order to fulfill the terms of the contract, or the recipient in the arrangement passing something of value on to the third party.

One easy way to understand the concept of a donee beneficiary is to consider a situation in which one party agrees to gift a second party with a bushel of apples. Since the first party does not actually have the apples, it is necessary to buy them from a third party in order to honor the commitment. The first party purchases the applies from the third party, then uses the purchase to fulfill his or her commitment to the second party. In this scenario, the third party who supplies the apples is not actually part of the original agreement, but benefits from the completion of the transaction by means of the payment received from the buyer.

A donee beneficiary may receive some sort of benefit from a contractual arrangement or commitment either on the front end of the transaction or after its completion. Using the same example, the beneficiary is rewarded from the commitment when the apples are paid for, but before they are actually delivered to the second party. At that point, the donee beneficiary has no interest in whether the buyer keeps the applies or follows through on the commitment to gift them to the second party. With either approach, the third party benefits from the original arrangement.

At the same time, a donee beneficiary may not receive any benefit from a contractual arrangement until after the transaction is complete. For example, the beneficiary may not receive a promised reward or payment until after the proceeds from an insurance policy have been paid out to a direct or primary beneficiary, who then uses those funds to provide some type of compensation to the donee. The key characteristic in defining the donee beneficiary is that the party is not part of the actual transaction, but does benefit from that arrangement in some manner.