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What Is a Contingent Beneficiary?
A contingent beneficiary is set to inherit assets only if the primary beneficiary is unable or unwilling to do so. Adding contingent beneficiaries in wills, insurance, or retirement accounts provides a safety net, ensuring that assets are distributed per the account holder’s wishes. Learn how contingent beneficiary designations work, their unique characteristics, and their impact on estate planning.
Key Takeaways
- A contingent beneficiary receives an inheritance only if the primary beneficiary is deceased, unreachable, or declines the inheritance.
- Naming multiple contingent beneficiaries allows for the division of assets in specified percentages, covering all possible outcomes.
- Updating beneficiary designations after life changes ensures your estate plan reflects current wishes and relationships.
- Naming contingent beneficiaries can help avoid probate, saving time and reducing legal expenses for your family.
- Conditions can be set for contingent beneficiaries, such as requiring completion of college before inheriting.
Understanding Contingent Beneficiary Assignment
A contingent beneficiary will receive nothing if the primary beneficiary accepts an inheritance.
Virtually any conditions may be cited for a contingent beneficiary of a will. Cheryl might list John as the primary beneficiary of her life insurance policy, with their kids as contingent beneficiaries
If Cheryl dies, John receives the insurance payout, and the children receive nothing. If John predeceases Cheryl, their children each receive half of the proceeds.
A Change in IRA Inheritances
The SECURE Act of 2019 requires non-spousal beneficiaries to withdraw all IRA funds within 10 years of the owner’s death.
Key Characteristics of Contingent Beneficiaries
Contingent beneficiaries can be people, organizations, estates, charities, or trusts.
Minors can’t legally accept assets, so a guardian manages the money until they come of age. While most contingent beneficiaries are immediate family, close friends, or other relatives can be listed, too
Multiple contingent beneficiaries may be listed on a life insurance policy or retirement account. Each beneficiary is designated a specific percentage of the money, adding up to 100%.
A contingent beneficiary inherits in the same manner as the primary. If the primary receives $1,000 monthly for 10 years, so will the contingent.
Importance of Regularly Updating Beneficiaries
Contingent beneficiaries, like primary beneficiaries, need to be reviewed and updated after major life changes such as marriage, divorce, birth, or death.
After Chris and Rain divorce, Chris updates her policy to make River the primary beneficiary and Riley the contingent one, blocking Rain from the proceeds.
Advantages of Designating Contingent Beneficiaries
Naming a contingent beneficiary helps families avoid the time and costs of probate, the legal asset distribution process for estates without a will.
For example, Uni lists their children’s stepparent, Alex, as the primary beneficiary and Uni’s favorite charity as the contingent beneficiary for their life insurance proceeds. Even if Alex dies before Uni, Uni’s children cannot fight over their life insurance benefits because Uni listed the charity as the contingent beneficiary.
Other Conditions
Policyholders or account owners can set conditions that must be met for beneficiaries to inherit.
An IRA owner might use a trust to ensure a contingent beneficiary inherits only after completing college.
What Happens If No Contingent Beneficiary Is Named?
If a document designates a primary beneficiary but no contingent beneficiary, and the primary beneficiary is deceased, the assets in question will be considered part of the estate and will have to go through the probate process.
How Many Contingent Beneficiaries Can Be Named?
You can name as many contingent beneficiaries as you’d like and portion out your estate in any ratio that you wish, as long as the result adds up to 100%.
You can also appoint an organization rather than an individual as a primary or contingent beneficiary.
Do All Primary Beneficiaries Have to Die Before Assets Go to a Contingent Beneficiary?
Yes. If there is more than one primary beneficiary and one of them dies, the deceased person’s portion is split among the other primary beneficiaries. All primary beneficiaries must be deceased or disclaim their inheritances before the assets pass to the contingent beneficiary.
The Bottom Line
Naming contingent beneficiaries for your estate can ensure assets are directed as intended if primary beneficiaries cannot inherit. This step protects against uncertainties and eliminates potential probate complications, saving your family time and resources. Keep beneficiary designations current, reviewing them after significant life changes to best safeguard your assets and wishes.
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