naming contingent beneficiary

How Important Is It to Name a Contingent Beneficiary?

by Al Meadows

When you create a trust or estate plan or buy a life insurance policy, you choose at least one person or organization to receive the assets or benefits after your death. This is the very goal of naming beneficiaries: to provide financial support for certain individuals after your death. 

However, beneficiaries can die too, and that’s why it’s important to name at least one contingent beneficiary in addition to the primary beneficiaries of your estate or life insurance policy to ensure the generational wealth you’ve worked hard to build is passed down as you intended.

What Is a Contingent Beneficiary?

A contingent beneficiary is specified by the owner of a collection of assets, such as the trustor of a trust, or by an insurance contract holder, as the person or entity to receive proceeds if the primary beneficiary is deceased, unable to be located or refuses the inheritance at the time the proceeds are to be paid. 

A contingent beneficiary is entitled to the assets or insurance proceeds only if certain predetermined conditions are met at the time of the trustor’s or insured’s death. Such information is often found in a will.

The Importance of Contingent Beneficiaries

The fundamental reason to name a contingent beneficiary is to help keep the asset or benefit out of probate court.

Naming a contingent beneficiary ensures that you control where your assets go after you pass away. The primary beneficiaries you name will receive the assets you designate after you die. More than one primary beneficiary can be named, and you can assign percentages or portions of your assets to each of these co-beneficiaries.

However, if all of your primary beneficiaries die before or at the same time as you, the assets or insurance death benefit are distributed to any contingent beneficiaries you named. Just as you can do with primary beneficiaries, you can designate percentages or portions of your assets to each of these contingent beneficiaries. 

If you do not name a contingent beneficiary and your primary beneficiary is unable or unwilling to claim the assets or death benefits, the brokerage firm, asset manager, trust or insurance company that holds the assets transfers the assets to your estate. 

However, once these assets, benefits and proceeds are part of your estate, problems can arise. The estate becomes subject to probate: A judge then decides who gets the payout. This process can take several months and could affect the final amount disbursed because no assets or proceeds are being actively managed. There are also additional legal fees that the estate must pay.

To avoid probate court, keep your primary and contingent beneficiaries up to date. It’s also a good idea to review your beneficiary designations any time there is a major life event, such as marriage, divorce, birth of a child, and death or even life-threatening illness of a loved one. 

Who Should be a Contingent Beneficiary?

Anyone can be named a primary or contingent beneficiary, including:

  • Your spouse
  • Your children
  • Other relatives
  • Non-relatives
  • An organization or charity
  • A trust

A contingent beneficiary should benefit from your financial support but can also serve as support to your family if you die. 

If you name a minor child as a beneficiary, you will also need to designate a custodian who will be able to transfer the funds to the child when they come of age. If a trust is created, the trust can transfer the funds to the child when they come of age.

Final Thoughts

Naming contingent beneficiaries is a way to ensure that your beneficiaries receive financial support after your death and that the assets of your estate are properly distributed without the need for a lengthy, complicated probate process. No matter how you wish to assign and transfer your assets, a wealth advisor can help you select the right options for you and all of your beneficiaries. 

Sources:

https://www.legalzoom.com/articles/contingent-beneficiary-vs-primary-beneficiary

https://www.thestreet.com/retirement/estate-planning/what-is-a-contingent-beneficiary-14843461