As part of your estate plan, it’s important to consider “what ifs?”. While you may have a general plan for your estate, things can happen that can jeopardize these plans. Contingent beneficiaries help create a safeguard in your estate plan so that if something happens to your primary beneficiary, your estate plan is still intact.
Here is what you need to know about contingent beneficiaries and their potential role in your estate plan.
What Is a Contingent Beneficiary?
The contingent beneficiary definition according to Cornell Law School is “a person alternatively named to receive the benefits in a will or trust.” However, a contingent beneficiary can also be named to receive property through a beneficiary designation form, such as for your bank account, individual retirement account (IRA), or life insurance policy.
Primary vs. Contingent Beneficiary
Primary and contingent are two types of beneficiaries. The primary beneficiary named in a will, trust, insurance policy, or other beneficiary designation is the person intended to receive the specified property. For example, Mary may name her spouse as her primary life insurance beneficiary and her two children Sarah and Evan as her contingent beneficiaries. If her spouse dies, her children would receive the insurance payout.
The contingent beneficiary does not have any right to the property unless some condition is met, either one that their inheritance is contingent on or the primary beneficiary cannot receive the property for some reason.
How Does a Contingent Beneficiary Designation Work?
A person names one or more primary beneficiaries in their account or will. If one or more of the primary beneficiaries accept the inheritance, the contingent beneficiary gets nothing. If all of the primary beneficiaries are unable to accept the inheritance, the contingent beneficiary or beneficiaries would receive the payout.
Here is an illustration of how this process would work:
Types of Property Contingent Beneficiaries Can Inherit
The types of property that contingent beneficiaries can inherit are broad. This can include property received pursuant to a beneficiary designation form. It can also include property bequeathed in a last will and testament or trust when contingencies are made in the document.
Some types of property that contingent beneficiaries may stand to receive include:
- Retirement plan proceeds
- Financial accounts
- Annuities
- Securities
- Death benefits
- Real property
- Personal property
When Would You Need a Contingent Beneficiary?
There are various times when you might need a contingent beneficiary, such as:
- Life changes – Life events may occur that change your estate plan. For example, you may have named your spouse as the primary beneficiary. If you divorce, state law may automatically eliminate provisions in your estate plan that benefited your spouse or named them in a fiduciary capacity. In such a case, your contingent beneficiaries might inherit the property you originally designated for your spouse.
- Death – If a primary beneficiary predeceases the testator or policyholder, the property or payout would go to the contingent beneficiary.
- Cannot be located – The life insurance company or other entity holding the property may be unable to locate the primary beneficiary.
- Ineligibility – The primary beneficiary may not be eligible for the property. For example, a trust may state that the primary beneficiary will not receive the trust proceeds if doing so would make them ineligible for public benefits. The proceeds might then go to the contingent beneficiary instead. Or, if your primary beneficiary intentionally killed you, the Slayer Rule would likely result in the contingent beneficiary receiving the proceeds.
- Refusal – A primary beneficiary might disclaim property, meaning that they give up or refuse the inheritance.
Different Types of Contingent Beneficiaries
There are different types of contingent beneficiaries. For example, a contingent beneficiary is typically a person who receives property left in a will or trust initially expected to be given to a primary beneficiary. If the primary beneficiary dies, forfeits the inheritance, or is unable to accept it, the contingent beneficiary steps into their shoes to receive the inheritance. This is also known as a secondary beneficiary.
In life insurance contracts, a contingent beneficiary receives the life insurance proceeds if the primary beneficiary named in the policy is unable to receive the proceeds. For example, a primary beneficiary of a life insurance policy may forfeit their interest in the policy or may predecease the policyholder. In such a case, the contingent beneficiary would receive the life insurance proceeds.
Another type of contingent beneficiary is someone who receives property if a condition is met. For example, a trust may state that the grantor’s property will go to their child if they get married or graduate college.
What Happens If You Don’t Have a Contingent Beneficiary?
If you don’t have a contingent beneficiary, the outcome will depend on the situation and state law. For example, if a person named a primary beneficiary but no contingent beneficiary and something happens to the primary beneficiary, the assets might be considered part of the residue of the estate and would need to go through probate. The assets might then be distributed according to the terms of the person’s last will and testament or according to laws of intestacy if there is no will. The payout may be subject to estate taxes.
If the unreceived asset is part of an insurance policy, the proceeds might go to the closest family members to the policyholder.
If the contingent beneficiary was a minor child, the probate court might have to appoint a legal conservator to take care of the child’s assets.
Responsibilities to Primary Beneficiaries and Contingent Beneficiaries
Fiduciaries such as trustees have a legal and ethical responsibility to protect the beneficiaries’ interests. This includes primary and contingent beneficiaries. If a fiduciary breaches their duty, the contingent beneficiary can have standing to sue. For example, if the fiduciary doesn’t keep property insured or leads to its waste, the contingent beneficiary may be able to sue because their future property interest might be negatively affected.
Who Can Be a Contingent Beneficiary?
Contingent beneficiaries can be basically anyone you want to name, including:
- People, such as family members, close friends, or other loved ones
- Organizations, such as banks or charities
- Estates, including the testator’s own or the estates of others
- Trusts
While minor children can be beneficiaries, they cannot take custody of their property until they are 18 years old in most states, and 21 years of age in others.. That said, you can name a trust, legal guardian, or UTMA account as a beneficiary.
Multiple contingent beneficiaries can be listed. They can split the proceeds equally or at different percentages.
Who Do I Name as a Contingent Beneficiary?
Beneficiaries are commonly people who are closest to a person and who would be most affected by their death, such as family members like a spouse or child. However, it is up to you who you want to name as your primary and contingent beneficiaries.
Designating beneficiaries is an important part of estate planning. These are ultimately the people who will benefit from your careful estate planning. An estate planning lawyer can help with naming beneficiaries, including identifying appropriate people or entities for the purpose of naming contingent beneficiaries.
You may wish to review your primary and contingent beneficiary designations after major life changes and life events, such as marriage, divorce, birth of a child, adoption, relocation, or death.
Takeaway
Naming beneficiaries is an important part of estate planning as these individuals are who will ultimately stand to inherit. While you may be focused on primary beneficiaries, it is worth carefully considering contingent beneficiaries who will step into the position of your primary beneficiary if something happens to them.