The Importance of Naming a Contingent Beneficiary: Planning for the Unexpected

When you create a will or a trust, you’ll typically name a primary beneficiary who will inherit your assets after your death. But what happens if your primary beneficiary predeceases you or cannot inherit your assets? A contingent beneficiary, also known as a secondary beneficiary, comes in.

Primary vs Contingent Beneficiary

A primary beneficiary is someone named to receive assets, such as property or money, after the account holder’s or policyholder’s death. This is typically done through a legal document such as a will, trust, or beneficiary designation form. The primary beneficiary is usually the first person or entity to receive the assets.

A contingent beneficiary, also known as a secondary beneficiary, is someone named as an alternative recipient of the assets if the primary beneficiary cannot receive them. This could be due to the primary beneficiary passing away, disclaiming their inheritance, or being unable to be located. The contingent beneficiary only receives the assets if the primary beneficiary cannot do so.

For example, suppose a person has a life insurance policy and names their spouse as the primary beneficiary. Suppose the spouse predeceases the policyholder or cannot inherit the assets for any reason. In that case, the policyholder may name a contingent beneficiary, such as their child or another family member, to receive the assets instead.

It’s important to name both primary and contingent beneficiaries to ensure your assets are distributed according to your wishes, no matter what happens. Additionally, it’s essential to regularly review and update your beneficiary designations to ensure that they reflect your current wishes and life circumstances.

What is a Contingent Beneficiary?

A contingent beneficiary is someone who will inherit your assets if your primary beneficiary is unable to. This could be due to the primary beneficiary passing away, disclaiming their inheritance, or being unable to be located. Naming a contingent beneficiary is crucial because it ensures that your assets will be distributed according to your wishes, even if something unexpected happens.

Here are a Few Reasons why Naming a Contingent Beneficiary is Essential

Ensuring your Assets are Distributed According to your Wishes

If you don’t name a contingent beneficiary and your primary beneficiary cannot inherit your assets, your assets will be distributed according to state law. This means your assets may be distributed to people you didn’t intend to inherit. By naming a contingent beneficiary, you ensure that your assets will be distributed according to your wishes, even if your primary heir can’t inherit them.

Avoiding Probate

If your primary beneficiary cannot inherit your assets and you haven’t named a contingent beneficiary, your assets will likely go through probate. Probate can be a time-consuming and expensive process, and it’s best to avoid it if possible. By naming a contingent beneficiary, you can ensure your assets are distributed without going through probate.

Planning for the Unexpected

No one can predict the future, and unexpected events can happen at any time. By naming a contingent beneficiary, you’re planning for the unforeseen and ensuring that your assets will be distributed according to your wishes, no matter what happens.

Providing for your Loved Ones

Naming a contingent beneficiary ensures that your loved ones will be taken care of after your death. This can provide peace of mind knowing that your assets will be distributed according to your wishes and your loved ones will be provided for.

When naming a contingent beneficiary, you must consider who you want to inherit your assets if your primary beneficiary cannot. This could be another family member, a friend, or a charity. Reviewing and updating your beneficiary designations regularly is essential to ensure they reflect your current wishes.

Who can Become a Contingent Beneficiary?

The rules around who can become a contingent beneficiary may vary depending on the asset type or account being considered. In general, anyone can be named as a contingent beneficiary as long as they are legally capable of inheriting the assets.

For example, when naming a contingent beneficiary for a life insurance policy, the policyholder may designate any person or entity they choose, such as a family member, friend, or charity. However, there may be restrictions on naming specific individuals as beneficiaries, such as a minor child not yet of legal age to inherit assets.

Similarly, when naming a contingent beneficiary for a retirement account, such as a 401(k) or IRA, there may be restrictions based on the rules of the plan or account. For example, some plans may only allow spouses or certain family members to be named beneficiaries, while others may allow anyone to be called.

Reviewing the rules and requirements for naming a contingent beneficiary for each specific asset or account is essential to ensure the beneficiary designation is valid and legally enforceable. It’s also important to regularly review and update beneficiary designations to reflect your current wishes and life circumstances.

Ultimately

Naming a contingent beneficiary is an essential part of estate planning. Doing so can ensure your assets are distributed according to your wishes, avoid probate, plan for the unexpected, and provide for your loved ones. Take notice of this critical step in your estate planning process.