Estate planning is a complex legal task, but there are some aspects of it that you can do. One of the most important tasks you can handle is deciding who you want to receive a part or all of your estate after you pass away.
When setting up a retirement account, living trust or insurance policy, you should name someone as the primary beneficiary, or the first person to receive your assets upon your passing. But what happens if that person passes away before you? Or what if they can’t be located to receive your assets?
This is where a contingent beneficiary comes in.
What is a Contingent Beneficiary?
Simply put, a contingent beneficiary is your backup beneficiary. They will inherit your assets if the primary beneficiary passes away before you do, isn’t legally able to accept it, cannot be found or declines the gift.
For example, if you have two children and you name your eldest as the primary (or the principal) and your youngest as the contingent beneficiary, only your eldest will inherit your assets upon your death — unless he cannot be found or passes away before you. In this case, your youngest child will inherit the full sum.
What’s the Difference Between Primary and Contingent Beneficiaries?
In a discussion of primary vs. contingent beneficiaries, the differences between the two are quite simple.
As its name implies, the primary beneficiary has the first claim to the benefits. You can name multiple primary beneficiaries and decide how they can split the benefits. Going back to the example of your two kids, you can name both as primary beneficiaries. If you want them to split the assets 50/50, they must split the assets 50/50.
On the other hand, a contingent beneficiary is a backup beneficiary. They will only receive part or a full sum of the assets if the primary beneficiary is unavailable.
Here are assets that you should name primary and contingent beneficiaries for:
- Individual retirement account (IRA)
- Life insurance policies
- Non-retirement accounts like Pay on Death (POD) or Transfer on Death (TOD) accounts
Why Do I Need a Contingent Beneficiary?
Naming a primary beneficiary makes it clear who is first in line to receive your benefits after your passing. But there are instances when the primary beneficiary is unavailable. In these scenarios, you need a contingent beneficiary who can inherit the assets.
But what happens when there is no contingent beneficiary?
Your estate might go through probate court, which can take months or years to resolve. It can also lead to arguments among family members and hiring expensive attorneys to address the conflict. Also, without a contingent beneficiary, there’s no certainty that the distribution decision will match your wishes.
Consider this scenario: Mark lists his children’s stepmom Lisa as the primary beneficiary and his favorite charity as the contingent beneficiary of his life insurance. Even if Lisa passes away before Mark, his kids can’t argue over their benefits since Mark named the charity as his beneficiary.
Another important benefit of creating contingent beneficiaries is you prevent an inheritance that doesn’t meet certain qualifications. For instance, if you have an IRA policy, you can establish your child as the contingent beneficiary and attach a restriction that they can only inherit the full sum once they turn 18 or after they graduate from college.
If you don’t want to leave your estate up to chance when it comes to who gets what, it’s best to name a primary beneficiary and a contingent beneficiary.
Who Should Be a Contingent Beneficiary?
Anyone can be a beneficiary. You can name your spouse, children, family members, friends and local non-profit organizations. If you want to name your child as a contingent beneficiary, learn more about the legal requirements for your state first.
Some states require that beneficiaries must be at least 18 years of age, otherwise they need a legal guardian who can control the assets until the beneficiary reaches legal age. If the contingent beneficiary doesn’t have a legal guardian, there’s a chance the estate will go to probate court until a guardian is appointed. This process, however, can be expensive, time-consuming and stressful for everyone involved.
You cannot name a pet as a beneficiary. We’ve heard stories of people leaving behind money for their pets, but they can’t be a primary or contingent beneficiary. If you want to provide for your pet upon your passing, set up a trust fund for them and name someone as the person in charge of the trust.
No matter who you choose to be your beneficiary, the important part here is that your wishes should be clear. Also, choose anything that works well for your family and life dynamics.
Other Contingent Beneficiary FAQs
How Can I Choose Beneficiaries?
Anyone can inherit the assets in your life insurance policy, retirement account or living trust — with one exception: the chosen beneficiary must be of legal age under state law to directly receive their inheritance. If the designated beneficiary is under the age of 21 or 18, depending on your state, the assets will be received first by a legal guardian.
A beneficiary need not always be a person. You can also name your favorite non-profit organization or charity as the primary or contingent beneficiary, but there will be tax implications.
Can the Same Person Be My Primary and Contingent Beneficiary?
Naming one person as both the primary and contingent beneficiary is a common mistake in estate planning. The contingent beneficiary is a backup, so it’s important to name another person for the role.
How Many Beneficiaries Should I Have?
There is no definitive rule on the allowable number of beneficiaries. However, there are insurance accounts or policies that limit policyholders to a maximum number of beneficiaries. The primary beneficiary and the contingent beneficiary are must-haves, but it’s best to have more than one contingent beneficiary.
Before you name beneficiaries, discuss your wishes with potential beneficiaries in advance. If you need to have a conversation with these people concerning your decision, you have time to do so. This reduces the change of conflicts after your pass away.
Can I Change Beneficiaries?
You can. During your lifetime, beneficiaries don’t possess rights to your assets. In fact, they might know they’re your beneficiaries until you tell them. So feel free to change and adjust the designations on your retirement accounts and life insurance policies as you want. Keep in mind that if the account is irrevocable, you can’t change beneficiaries.
Retirement accounts, such as 401(k)s and IRAs, have easy processes when it comes to changing beneficiaries. However, changing the beneficiary could have serious tax consequences, especially if your spouse is involved. Before you change your beneficiary, consult with a tax or legal professional to ensure your affairs are in order.
How Often Should I Review My Beneficiaries?
Relationships change so it’s a good idea to review your beneficiaries at least once a year to ensure your designation is updated. Remember, you can always remove or add beneficiaries. If you don’t have a contingent beneficiary on your policy, add one.
Most people aren’t big fans of estate planning. However, brushing it off might make it more difficult for your loved ones or business partners. Protect your legacy and your loved ones by naming a primary beneficiary, as well as a contingent beneficiary. Doing so ensures that your assets and estate will go to the right people.
If you are uncertain about who to name as a contingent beneficiary or if you want to change your beneficiaries, talk with a qualified attorney today.