The primary purpose of estate planning after death is to ensure that your estate goes to the people you choose. These people are called beneficiaries. But what happens if your beneficiary dies before you? This article describes a primary beneficiary and then focuses on contingent, alternate, or secondary beneficiaries.
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Simply stated, a primary beneficiary is the person or organization you select to receive your assets upon your death. You can name beneficiaries in wills, trusts, bank accounts, investment accounts, and retirement accounts. If you know who you want to receive your assets upon your death, you can specifically name that person or organization as your primary beneficiary.
Contingent or Alternate Beneficiary
Just as the term implies, a contingent or alternate beneficiary is the beneficiary to receive the asset if the primary beneficiary has died. This often happens with a married couple with no surviving spouse, so proceeds go to a contingent beneficiary.
The practical reason you should consider a contingent beneficiary is so you do not have to amend the beneficiary of your asset to name a new primary beneficiary in the event that the primary beneficiary dies before you do.
Places Where Beneficiaries Matter
When considering leaving money and assets to beneficiaries there are different ways to name beneficiaries and contingent or alternative beneficiaries.
Last Will and Testament
If you have only a primary beneficiary in your will, and that beneficiary survives your death, then the beneficiary will receive the asset described in your will. If your beneficiary dies before you do, and there is no contingent beneficiary, then the probate court will decide who will receive the asset based on state law. If it is important for you to direct the distribution of your assets in your will, be sure to select a contingent beneficiary. It is customary and common to nominate a contingent beneficiary or multiple contingent beneficiaries in a will. If you want to create a will, you can use our state-specific estate planning forms that allow you to name contingent beneficiaries.
Life Insurance Policies
The proceeds of an insurance policy pass directly to the named beneficiary, and as long as the beneficiary is alive, these proceeds pass outside of the will. The beneficiary must provide proof of identity and a death certificate to the insurance company to receive the life insurance proceeds. If the beneficiary survives, then the distribution should proceed with ease. However, things get complicated if the beneficiary does not survive the insurance policy account holder and there is no contingent beneficiary. In that case, no one will receive the policy’s proceeds, and it will instead become part of your probate estate. The result is that an asset intended to provide immediate funds to the beneficiary must go through a probate process to determine the rightful beneficiary. If there is a will in place, then the probate court distributes the proceeds according to the terms of the will. If there is no will in place (dying intestate), the probate court determines the beneficiary under state intestacy laws. Either way, the probate process is costly and public and can easily be avoided by nominating one or more contingent beneficiaries.
A typical example is when a policy holder has a life insurance policy for many years and neglects to select a contingent beneficiary. When the policy holder set up the policy, they chose their spouse as the beneficiary. Many years later, the policyholder has adult children and a deceased spouse. If the policy holder dies without updating the beneficiary designation, the policy proceeds go into the probate estate and are distributed according to a will or intestacy statutes. If the policy holder had updated the policy to include a contingent beneficiary (or a new primary and a contingent beneficiary after their spouse died), probate could have been avoided, saving time and money. Unfortunately, this situation arises all too often, especially among older adults.
Insurance companies have an easy-to-use beneficiary designation form to memorialize your beneficiary designations.
In many states, a divorce automatically terminates or revokes any gifts to the ex-spouse. Some states do not automatically revoke gifts made in a living trust to an ex-spouse upon divorce. Regardless of the varied laws, it is best practice to amend beneficiary designations, including contingent beneficiary designations, after a divorce.
Pay on Death Designation Bank Accounts
A pay-on-death bank designation on your bank account (sometimes referred to as POD or a Totten trust account) is where you designate a beneficiary who will receive the proceeds of your account upon your death. If the beneficiary survives your death, the proceeds pass directly to the beneficiary upon proof of identity and death. If your beneficiary does not survive you, the account proceeds must be probated according to the terms of your will, or if there is no will, under the state intestacy laws. Unfortunately, you usually cannot name an alternate beneficiary for a pay-on-death account. A solution to this is to name multiple beneficiaries, and if one beneficiary dies, the proceeds are equally divided among the surviving primary beneficiaries. Your financial institution will have the forms necessary to make these designations.
Retirement Plan Accounts
Depending on the type of retirement account and the many laws regulating them, you should consider naming a contingent beneficiary if allowed. The IRS and federal law regulate these accounts. Income tax and other tax-related issues are associated with beneficiaries and withdrawals, so it is best to consult with a plan administrator, financial advisor, and other experts if you have questions about financial planning and tax planning. Visit our Retirement Planning site to learn more about retirement planning.
Check Beneficiary Designations
Life events and life changes can happen very suddenly. You want to provide for your loved ones and any minor children. A last will and testament or trust is only part of the estate planning process. The critical message is to review all your beneficiary designations. Whether it is an IRA, bank account, automobile, retirement account, investment account, or other type of ownership with a designated beneficiary, be sure to check to confirm that you are the account owner. Not only will you be assured that you have accounted for all your beneficiaries, but your family members and other loved ones will have much less of a burden when collecting the proceeds on these assets.
Other Estate Planning Tools
If you still need to create an estate plan, visit our Estate Planning site, where you can use our forms to create a Last Will and Testament, Financial Power of Attorney, and Health Care Directive and Living Will.