Contingent beneficiaries are the people who will receive your death benefit if your primary beneficiaries pass away or are unable to claim it. When a primary beneficiary cannot accept an asset, and no contingent beneficiary is appointed, the asset will most likely go through the probate process. This means that the court will determine which of your assets will be distributed according to the laws of your state. It is possible that the court would give it to your nearest relatives, which might take more time, and they might not share your initial intent. Thus, to circumvent this situation, one should consider appointing a contingent beneficiary just in case the first one dies or is unable to take up the inheritance.
Primary vs Contingent Beneficiary
When making a will, taking a life insurance policy, or even a retirement account most need to choose the beneficiaries. Typically a beneficiary is the first person or entity to which your assets are directed. A contingent (secondary) beneficiary comes next who is entitled to the assets if the primary beneficiary does not or cannot.
Primary Beneficiary
However, a primary beneficiary is the owner who is addressed as a first in relation to any property or liabilities as the primary beneficiary. Such a person will be the one to benefit or inherit the property should he or she be alive and formally accept the property at any time in the future. For instance, in case you term your spouse as the primary beneficiary in your life insurance cover, then upon your death they will enjoy the benefits provided they are alive.
Contingent Beneficiary
A person who is alternatively designated and can receive property under a will is known as a contingent beneficiary. The need for the disposition of property as in most situations will come up and will be resolved by the contingent beneficiary. To illustrate, if your spouse who is the principal beneficiary dies and you declare one of your children a contingent beneficiary that child will get property or benefits if that parent dies.
Once there are primary and contingent beneficiaries alike, it gives assurance that the assets will be transferred to the intended persons even after a situation has changed.
Types of Accounts That Might Need an Alternate Beneficiary
Most accounts offer the option to name contingent beneficiaries. These accounts include:
Employer-Directed Pension Schemes: This category covers retirement plans such as 401(k), 403(b), 457(b), SIMPLE IRAs, and SIMPLE 401(k).
Self-Directed Retirement Plans: These include IRAs, SEP IRAs, and Solo 401(k)s.
Life Insurance Coverage: This encompasses term insurance and whole life insurance policies.
Consumable Investment Products: This refers to investment products that may require a contingent beneficiary.
Brokerage Accounts: In the event of an account holder’s death, a brokerage account can have a contingent beneficiary. For individual accounts, a TD Indemnity may help register ownership of the account in favor of a named beneficiary after the account holder’s death.
What to Consider When Choosing a Contingent Beneficiary
Trustworthiness:
The person selected must be trustworthy as this person will be tasked with handling or distributing the assets in a manner that will be in accordance with your instructions.
Financial Stability:
Weigh the financial stability of the beneficiary. This can be important in case this is a beneficiaries’ inheritance which may affect their financial situation if some assets are in significant amounts.
Ability to Manage Assets:
Consider whether the beneficiary will be able or willing to manage the assets wisely or if a financial adviser or one to act as a trustee will be required.
Relationship Dynamics:
Think about your potential beneficiaries and how you relate to them. Pick people who share your beliefs and whom you would expect to act the way you have provided in your documents.
Legal Considerations:
Do not forget that the decision made regarding the choice of the beneficiary must be legal. For example, the legal age, legal capacity, and so on.
Future Needs:
Consider the future needs of the beneficiary, including any changes that may happen over time due to the normal use or management of the assets.
Tax Implications:
Be informed of any taxes to be paid by the beneficiary. This is because, on some properties, tax implications may lead to revenues reduced to the earner rather than the owner of the asset.
Who Should You Designate as a Secondary Beneficiary?
Before we deal with contingent beneficiaries, let’s examine the primary (also referred to as basic) beneficiaries first. Most of the time, it is logical to name the people to whom one is closest or charities of the highest interest as the basic beneficiaries. These may include:
- A spouse
- Parents
- Children
- Grandchildren
- Siblings
- Nieces and nephews
- Godchildren
- Close friends
- Preferred charities
- Organizations like a religious institution or educational establishment
So how do you decide who goes where? For example, You may choose your wife as primary on your retirement account or life insurance policy benefits. In turn, you may make an adult child a contingent on such benefits. After the death, divorce, or separation from the spouse, one might make one’s children on primary and nieces/nephews contingent.
In the end, there is no right or wrong in appointing contingent beneficiaries.
Additional Benefits Related to a Contingent Beneficiary
Choosing a secondary beneficiary helps avoid unnecessary delays and frustrations in settling the estate. With a contingent beneficiary in place, assets can be smoothly transferred as soon as the primary beneficiary is no longer able to receive them.
Drawbacks Related to the Selection of a Beneficiary
Naming a contingent beneficiary can have drawbacks. For example, the contingent beneficiary may need to file a claim for the assets, which can be a complex and time-consuming process. Additionally, the specifics of this procedure are governed by the trust or will.
Amending a Contingent Beneficiary Named in the Will
Relieving or Altering a Beneficiary
If circumstances change, you can relieve a contingent beneficiary from their designation and even alter the terms.
Revising the Will or Trust
Therefore, revise the will or the trust document and notify all relevant parties about the changes. This removes ambiguity and avoids future claims.
Advisory on Asset Management
Careful Administration
As a contingent beneficiary, it is necessary to administer the inherited property carefully.
Understanding the Provisions
Therefore, it is better to comprehend the provisions of the will or trust to be familiar with the course of action that goes hand in hand with the title. This understanding will help avoid confusion.
Withdrawal of Beneficiary Designation
Right to Refuse Inheritance
If you disagree with specific provisions in the will or trust, you have the right to refuse the inheritance.
Filing with the Court
However, you must do this within a specific period and under certain conditions. Typically, one must file the case with the relevant court.
Is a Contingent Beneficiary Necessary When There are Several Primary Beneficiaries?
Many financial advisers recommend designating at least one contingent beneficiary, even if you or other family members have multiple primary beneficiaries because anything can happen. Furthermore, to properly select a primary versus a contingent beneficiary, consultation with an authorized financial expert could be of great assistance.
Other Factors to Consider
Contacting your beneficiaries: You should inform the beneficiary, whether they are primary or contingent. Only the beneficiary will need to know this. This way, they would know what to do to receive the asset when you die.
Multiple beneficiaries: It is possible that for a single asset, you may have more than one primary or more than one contingent beneficiary. This would involve allocating the percentage of the asset to each co-beneficiary.
Changing or adding beneficiaries: You can usually add or replace any primary or alternate beneficiary at any time..However, certain restrictions or limitations might be there with certain assets ( retirement plans and planning instruments like irrevocable accounts, trusts, or insurance contracts).
Conclusion
To summarize, appointing a contingent beneficiary is a vital part of estate planning. It ensures the deceased’s intentions are fulfilled, even if the primary beneficiary is unable to receive the assets. Additionally, selecting the right person and clearly defining their responsibilities adds trust to the process. This step also helps prevent potential delays in the estate distribution.
