Assets, especially those of significant value, such as retirement accounts, bank accounts, trusts, wills, or the death benefit of a life insurance policy, are generally passed onto our loved ones by naming them as primary beneficiaries of those accounts.
Naming a primary beneficiary to valuable assets will ensure that your end-of-life financial plans are carried out and passed on as you wish. In addition to naming a primary beneficiary, you should always consider adding a second type of beneficiary called a contingent beneficiary.
A contingent beneficiary can be a person or entity that would be second in line to receive the benefits of your financial assets if your primary beneficiary cannot. Contingent beneficiaries are not required but can save your family a lot of stress and hardship should your primary beneficiary is no longer available.
For example, let’s look at a typical beneficiary setup involving two spouses. Each spouse owns a life insurance policy, with the other as their primary beneficiary. Should both spouses pass away simultaneously, neither could accept the death benefit proceeds.
In this case, the proceeds are generally paid to the family’s estate and are likely to go through a probate process should any heirs try to claim the proceeds. However, if a contingent beneficiary were named on the life insurance policy, the death benefit proceeds would go to the contingent beneficiary, not the estate.
Having both primary and contingent beneficiaries in place helps avoids the potential of a long and drawn-out probate process in court, ensuring that your assets are distributed according to your wishes. In addition, it’s a great way to ensure your loved ones receive your assets without a long wait.
Read on to learn what you can leave to a contingent beneficiary, who can be a contingent beneficiary, and why it’s always good to include a contingent beneficiary when passing on your assets.
Basics Of A Beneficiary
A beneficiary is any person, company, or organization designated to receive assets such as money, property, or other personally owned belongings after you pass away. For example, the most common assets requiring a beneficiary would be a will, trust, retirement accounts, and life insurance policies.
You can choose individual people as beneficiaries, including your spouse, children, parents, siblings, or business partners. You can also decide to leave financial assets to charities, businesses, funeral homes, or financial institutions as a way to pay off any remaining debt balances left after your passing.
Any named beneficiary must be noted in your will, trust documentation, or life insurance policy. In addition, holders of any financial assets such as life insurance policies, retirement accounts, and any other financial account will often provide a standard beneficiary form which will be used to name both primary beneficiaries along with an optional contingent beneficiary.
You can make changes to designated beneficiaries at any time. For example, many life insurance companies allow you to remove, change, or add beneficiaries online or over the phone. In addition, you can change will and trust documents with the help of a lawyer or other estate planning professional.
What types of assets can you leave to a beneficiary?
Primary beneficiaries and contingent beneficiaries can be named on any valuable asset. This goes beyond real estate, cars, jewelry, and other expensive items. High-value assets can also include items with substantial sentimental value, such as treasured photographs and heirlooms.
Examples of assets you can leave include:
- Stocks and bonds
- Banks accounts and cash
- Retirement accounts such as 401k
- Your home and any other real estate
- Cars, motorcycles, boats, and other vehicles
- Jewelry and clothing
- Artwork
- Furniture
- Photographs, family records, and heirlooms
- Pets
- Personal items such as journals, letters, and scrapbooks
Contingent Beneficiaries Vs. Primary Beneficiaries
- A primary beneficiary is a person or organization who will be first in line to receive any assets you leave behind after your death.
- A contingent or secondary beneficiary is a person or organization receiving your assets if your primary beneficiary has passed away or is otherwise unable to collect the assets.
For example, let’s say a man named Joe purchased a $500,000 life insurance policy with his spouse listed as his primary beneficiary and his son listed as his contingent beneficiary.
If Joe’s spouse died before he did, she wouldn’t be able to receive the proceeds from his life insurance policy. In this case, the proceeds would go directly to Joe’s son, who has been listed as the contingent beneficiary of Joe’s life insurance policy.
Why Should You Name A Contingent Beneficiary?
Naming a contingent beneficiary is never required but is always a good idea. While you might hope that your assets will pass seamlessly to your primary beneficiary, no one can predict the future. There are several reasons why your primary beneficiary could be unable or unavailable to receive your assets.
For example:
- The primary beneficiary could pass before a beneficiary is named
- It might be challenging to contact or locate the beneficiary
- The primary beneficiary might refuse assets
What happens when the primary beneficiary can't inherit financial assets?
Without a secondary beneficiary in place, your assets could end up undergoing a lengthy legal process before re-distribution of assets. This process, called probate, can take months or even years following your death. The court will then distribute assets according to your state’s legal guidelines for inheritance. This might not be in line with your wishes and might cause stress and hardship for your loved ones.
Contingent life insurance beneficiaries and probate
Having a contingent life insurance beneficiary in place can prevent that chance of the death benefit being paid to the estate and going through probate court. Probate can be a long-drawn-out process where a judge will be the one to choose who receives the death benefit payment of the life insurance policy.
In addition to a lengthy probate process, should the death benefit of a life insurance policy be paid to an estate, there is the potential of the proceeds being subjected to estate taxes. However, a death benefit paid to a beneficiary other than the estate avoids estate taxes.
Along with the potential of estate taxes being owed on a death benefit if paid to the estate, the proceeds are also open to creditors. With that said, your loved ones may even wait longer to receive the death benefit proceeds from the estate should creditors require payment to clear any debt balances.
There’s no need for an extended probate process or creditors going after your estate when a contingent beneficiary is listed. The assets will pass to the contingent beneficiary if the primary beneficiary is no longer an option.
Who Cannot Be A Contingent Beneficiary?
The choice of who to name as a contingent beneficiary is up to you. You can leave assets to friends, family members, charities, or organizations or go any other route that makes sense for you. There are only a few things to keep in mind when choosing beneficiaries:
- You can't name pets as beneficiaries. Pets are legally considered possessions, and you can't legally designate them as beneficiaries of any kind.
- You can designate minor children as primary or contingent beneficiaries, but you'll have to take a few additional steps. If you leave assets to your children, especially those under 18, you'll need to specify how and when they'll receive those assets. It can be a good idea to set up a trust or financial guardian to manage assets until the minor turns 18.
- It's not a good idea to make your contingent and primary beneficiaries the same person. Legally, you can list the same person as your primary and contingent beneficiary. However, this wouldn't help your loved ones or speed up the distribution of your assets if your primary beneficiary was unavailable. You'd be left without a backup in this scenario.
- Some states charge inheritance taxes to assets received by non-relatives. It's a good idea to check the rules about inheritance tax in your state, especially if you're considering leaving any assets to friends, business partners, or other people who are not related to you. It's important to note that this rule doesn't apply to charitable organizations. No states require charitable organizations to pay inheritance taxes.
How Many Contingent Beneficiaries Can You Have?
Generally, there is no limit on the number of contingent beneficiaries you can designate to collect on your financial assets. Most financial accounts will allow you to choose as many contingent beneficiaries as you would like as long as the benefit payouts total 100% of the value of the asset split among all parties involved.
Setting Up Your Beneficiary Structure
There is no one correct answer that will fit all situations. Your individual life and financial situation will help you find the correct answer. It’s important to consider the exact factors that would impact you and your family the most.
For example, let’s say the primary beneficiary on your life insurance policy is your spouse, and you have two children. A common beneficiary structure would be to name your spouse as the primary beneficiary, and both of your children contingent beneficiaries with the payout amount split evenly between them.
However, let’s look at another example. Let’s say you’re divorced, and your two children are the primary beneficiaries of your will and life insurance policies. Your estate plan is set up so each child will receive 50 percent of everything as a benefit payout upon death.
You want to set up a second beneficiary for your estate but are not planning to remarry. So you choose that your sister will receive 100 percent of your account proceeds if you pass away, and neither of your children can receive the payout. Keep in mind that if you do get remarried, you can change this plan and add your new spouse as a beneficiary of any type.
As you can see, the right choice depends on your situation. No matter what, there is always a benefit to setting up estate planning and designating both primary and secondary beneficiaries.
How Do I Designate A Contingent Beneficiary?
Assigning a beneficiary is generally a simple process. Often, documents such as life insurance policies will have spaces for you to fill in this information during the initial setup of the policy. Similarly, a will or trust document that is drawn up by a lawyer or estate planner, or that is pre-formatted for you from an online service, will likely have designated areas for you to make both primary and contingent beneficiaries.
Questions About Contingent Beneficiaries
You can read more about contingent beneficiaries by reading the answers to some commonly asked questions below.
What happens if I don't name any beneficiaries?
The state you live in will divide your assets if you pass away and don’t have a will or any beneficiaries. Anything you own, such as your home, stocks, vehicles, and bank accounts, will enter probate and will be distributed according to the laws of your state. In most states, your spouse will be first in line to inherit any assets.
However, this isn’t always the case. It is always in your family’s best interest to have an estate plan. An estate plan allows you to divide your assets, set beneficiaries, and ensure your loved ones are protected after your death.
Do I have to name a contingent beneficiary?
A contingent beneficiary isn’t a legal requirement. You don’t need to put one in place to satisfy any rules or regulations, but having one is a smart idea. Having a backup plan is never a bad thing, and having at least one contingent beneficiary is a great way to add extra security to your estate plan.
How can minors be primary and contingent beneficiaries?
Minors can be named as beneficiaries and can inherit money and property. However, if you’re naming minors as primary and contingent beneficiaries, it’s smart to have a plan in place. Typically, wills and other legal documents assign a child a guardian.
A financial guardian is an adult who can manage the asset left to the minor children until they turn 18. This allows the child to receive the benefits immediately upon the death of their parent, but keeps the money or other assets secure. Alternatively, sometimes an account is set up up to hold the benefit amount until the child reaches a predetermined age.
Can a charity be a contingent beneficiary?
Charity and non-profit organizations can be named as either contingent or primary beneficiaries. People frequently leave a percentage of their assets to a charity, and charities even inherit entire estates. Charitable organizations are exempt from inheritance taxes in every state.
Final Thought
Naming a contingent beneficiary is often overlooked during estate planning, but it’s an important step you can take to make your financial plan stronger. Contingent beneficiaries can ensure your assets are available when your loved ones need them and are never tied up in a lengthy probate process.
You can designate people such as family members, friends, or entities such as businesses and charities as contingent beneficiaries. The right choice depends on you, your situation, and your personal finances.
No estate plan is complete with a solid life insurance plan in place. Life insurance is key to protecting your loved ones and keeping them financially secure, no matter what.
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