What Exactly Is a Contingent Beneficiary?

Updating your beneficiary designations is an essential part of a comprehensive estate plan. When you fail to name beneficiaries, you can complicate the probate process. A probate court may need to get involved to distribute assets if you don't name any beneficiaries.

Key Takeaways

• A contingent beneficiary is a backup or alternate beneficiary. They receive benefits from an inheritance or a life insurance policy if the primary beneficiary dies before you, cannot be found, or disclaims the asset.
• Contingent beneficiaries are beneficiaries who only receive benefits under certain conditions.
• You can name several primary beneficiaries and contingent beneficiaries.
• You may need to set up a trust if you want your minor children to be beneficiaries.

Understanding Contingent Beneficiaries

A beneficiary is the person you want to receive your inheritance or death benefits. Your primary beneficiary is the first person you wish to receive your death benefits. You can name primary and contingent beneficiaries. Deciding on your beneficiaries is an important part of your estate plan. People or entities (i.e., charities, nonprofits, trusts, etc.) can be designated beneficiaries.

Primary Beneficiaries Versus Contingent Beneficiaries

There are different types of beneficiaries in estate planning documents. A primary beneficiary is the first person or entity you want to receive your assets upon your death. They stand first in line to receive the proceeds. These can come from a last will and testament, a life insurance policy, a trust, or an asset.

A contingent beneficiary refers to someone who will receive benefits in certain circumstances. Whether you choose to put conditions on your estate depends on your circumstances.

The Rights of Primary and Contingent Beneficiaries

During your lifetime, beneficiaries do not have any legal rights to your assets. While alive, you are free to change beneficiary designations as you see fit. Irrevocable beneficiaries named on a life insurance policy are an exception. The policyholder needs the irrevocable beneficiaries' consent to make any changes.

Primary Beneficiaries

Your primary beneficiaries are first in line to receive your inheritance. They are the people or entities to whom you choose to leave your estate. You may name multiple primary beneficiaries. You must decide what benefits each will receive.

Primary beneficiaries must receive the proper disbursement from the decedent's estate. If they do not, they can compel appropriate payments after your death.

Contingent Beneficiaries

A contingent beneficiary has more limited rights than a primary beneficiary. The contingent beneficiary only has a legal right to assets if the primary beneficiary does not claim them. The primary beneficiary may be unavailable or disclaim the assets.

There are special considerations when naming beneficiaries of a qualified retirement account. Qualified retirement accounts are accounts that receive special federal tax treatment. These include 401(k)s and Individual Retirement Accounts (IRAs). Naming primary and contingent beneficiaries on your retirement accounts is wise. This way, if you were to die before using them, your retirement plan could benefit your loved ones.

Spousal Beneficiaries

Spousal beneficiaries of retirement accounts have special rights under federal law. Surviving spouses may have the right to roll over inherited retirement accounts. The surviving spouse may roll over funds into their retirement account. Doing this can provide tax benefits.

Non-Spousal Beneficiaries

The law is different for non-spousal beneficiaries. They must take distributions for the entire inherited account value within ten years. This is part of a 2019 change in the law called the SECURE Act. Seek legal advice from an estate planning attorney if you plan to leave a retirement account to a non-spouse.

Why Name Contingent Beneficiaries?

When making your estate plan, many “what-if" scenarios might go through your mind. What if you get married, divorced, have more children, and so on? We all know that life comes with surprises. With contingent beneficiaries, you create a backup plan for those scenarios.

Sometimes people name entities rather than natural people as their contingent beneficiaries. They might name a charitable organization, a nonprofit organization, or a trust. Choosing a charity as a contingent beneficiary can simplify your estate plan. It can prevent strife among your loved ones.

Take, for example, a situation where your primary beneficiary is your spouse. You make a charity a contingent beneficiary. When you give to a charity, family members have no reason to be at odds with each other.

Sometimes the best plan is to name a trust as your contingent beneficiary. This can be a good way of creating a financial security net for your loved ones, especially your minor children.

Minor Children as Beneficiaries

Unlike adults, children cannot directly receive life insurance payouts or large inheritances. Benefits could go to their legal guardian until the child reaches legal age. Or it could go into a special account like a conservatorship account until the child reaches the age of majority.

You may want to set up a trust to ensure minor children benefit from the funds shortly after your death. If you already have a living trust, you can list the trust as the contingent beneficiary of your life insurance policy or will. You should ensure that the trust lists your children as the trust's beneficiaries. You will also need to choose a reliable trustee.

Naming Multiple Primary or Contingent Beneficiaries

In some situations, naming multiple primary or contingent beneficiaries might make sense. You should include those who depend on you for financial support.

For example, you might name your spouse and adult children as primary beneficiaries. This way, they both receive life insurance proceeds at your death. You need to state the percentage of the death benefit for each primary beneficiary. The total should add up to 100 percent.

You should still choose a contingent beneficiary even if you name primary beneficiaries. They will receive the proceeds if none of your primary beneficiaries can. You may name more than one contingent beneficiary, too. Your life insurance company will require you to specify each beneficiary's percentage of the proceeds.

In the case of life insurance, if the primary beneficiary is available and willing to receive the death benefit, it will go to them. But if the primary life insurance beneficiary is unavailable, the benefit will go to the contingent beneficiary. If the contingent beneficiary is unavailable, too, the proceeds go to your estate.

They will then be subject to probate. This means your heirs may undergo a lengthy process to receive the funds. To prevent this, consider naming multiple contingent beneficiaries. Or you could name tertiary beneficiaries. Tertiary beneficiaries are the third to receive an inheritance or life insurance proceeds. They would only receive proceeds if the primary and contingent beneficiaries cannot.

Suppose you do not have a will and do not name any beneficiaries, or your primary beneficiary fails. In that case, state law determines who will receive your assets. The laws of intestacy would apply. The rules of intestate succession under your state law control who will receive the proceeds.

How Often Should You Review Beneficiary Designations?

Life has a way of changing quickly. Significant life changes can impact your beneficiary designations. It's prudent to review your beneficiaries regularly. Make sure your selections are current.

A good practice would be to check your beneficiary designations about once a year. You should also review your designations if any of the following life events occur:

• Marriage
• Divorce
• The birth or adoption of children or grandchildren

Keeping your beneficiary selections current may prevent conflicts among your loved ones. Knowing you have a solid plan for their future can also help give you and your family peace of mind.

How an Attorney Can Help

As you plan your estate, you may need to name contingent beneficiaries, set up a trust, or consider tax issues. If you have any questions on these topics, an estate planning attorney can help you plan for the future.