What Makes Someone a Contingent Beneficiary?
If the primary beneficiary dies, disappears, or declines to receive their bequest at the time of estate settlement, another individual or entity may be listed as a contingent beneficiary to receive the inheritance.
Wills, insurance policies, and retirement accounts all allow you to name both primary and contingent beneficiaries.
According to a will or other predefined condition, a contingent beneficiary can only receive the insured’s life insurance payout or retirement assets if specific requirements are satisfied when the insured dies.
Principles of Contingent Beneficiary Assignment
In the event that the primary beneficiary decides to accept an inheritance, the contingent beneficiary will not get anything in return.
A contingent beneficiary can be named in a will in almost any circumstance. To illustrate the point, let’s pretend that Claudia names Marcus, her husband, as the primary beneficiary of her life insurance policy. She also names their two kids as contingent beneficiaries.
Marcus will get the insurance money in the event of Claudia’s death, while the kids will get nothing. In the event that Marcus passes away before Claudia, the assets will be divided equally among their children.
Qualities of Contingent Beneficiaries
There are many different types of contingent beneficiaries, including individuals, groups, estates, charities, and trusts.
It is against the law for a minor to accept an assignment of assets. If a beneficiary is a child under the age of 18, a guardian must be appointed to manage the funds until the minor attains the age of majority.
The most typical contingent beneficiaries are members of the immediate family, but close acquaintances and distant relatives are also frequently named.
Life insurance policies and retirement accounts sometimes allow for the designation of several contingent beneficiaries. Everyone who is supposed to benefit from it will get a certain proportion, which will total 100%.
After the principal beneficiary dies, any contingent beneficiaries named in the will will also get their share of the estate. If the primary beneficiary is to get $1,000 monthly for 10 years, and a contingent beneficiary inherits the same amount, then the payments will continue in the same manner.
Always Keep Your Information Up-to-Date
As with primary beneficiaries, contingent beneficiaries should be evaluated and changed following significant life events like marriage, birth, divorce, or death.
In the event that Sebastian and Laura decide to divorce, for instance, Sebastian will modify her life insurance policy such that Chiara, their daughter, would be the primary beneficiary, and Inigo, their other child, will be the contingent beneficiary. This means that Sebastian has prevented Laura from collecting on Sebastian’s life insurance.
Advantages of Designating Contingent Beneficiaries
If a person wants to spare their loved ones the hassle and cost of probate, they could name a contingent beneficiary on their life insurance policy or retirement account. In cases where there is no will, probate is the formal process of giving away a person’s property or assets.
As an illustration, Keira designates Alex, the stepparent of their children, as the primary beneficiary of their life insurance policy, while Keira’s chosen charity is named as the contingent beneficiary. Keira named the organization as the contingent beneficiary of her life insurance policy, so her children won’t have to battle over the money if Alex passes away before Keira does.
Other Requirements
People who own life insurance or savings accounts can set up situations that stop someone from inheriting their money unless they meet specific criteria.
An IRA owner, for instance, may choose a trust as the account’s beneficiary and stipulate that any contingent beneficiary children would not be eligible to inherit the funds until they had finished college.
If a Contingent Beneficiary Is Not Named, What Will Happen?
If a document names just one beneficiary and specifies no alternate, and that person dies, the assets in issue will be subject to probate since they are deemed part of the estate.
How Many People May Be Named as Contingent Beneficiaries?
You are free to divide your estate in any way you see fit, including naming contingent beneficiaries, so long as the total is equal to 100%.
Instead of naming a specific person or person’s family as the primary or contingent beneficiary, you can choose an organization.
Will a Contingent Beneficiary Get Assets Only After All Primary Beneficiaries Have Passed Away?
Yes. If there are many primary beneficiaries and one of them passes away, the residual amount is distributed among the other primary beneficiaries. Prior to the assets passing to the contingent beneficiary, all primary beneficiaries must have died or revoked their inheritances.
Getting to Know the Different Types of Beneficiaries
If you want your life insurance, retirement funds, or assets held in a living trust to go to someone or something specific after you die, you need to choose a primary beneficiary. You should also choose a contingent beneficiary, or the subsequent individual or organization to receive the assets in the event that the primary beneficiary passes away before you or cannot be located. Doing so will ensure that your assets do not go through probate, a costly and time-consuming process that can prevent your beneficiaries from receiving their inheritance.
Whoever or whatever has the strongest claim to the asset upon your death is known as the primary beneficiary. Despite the use of the word “primary,” you are free to name many beneficiaries and specify their respective shares of the estate.
Another type of recipient is a contingent beneficiary, who is the second person who could get the asset. A contingent beneficiary will only get an inheritance from an account or insurance in the event that the primary beneficiary or beneficiaries are either deceased or cannot be located.
If you have a son and a daughter, and you designate your son as the major beneficiary and your daughter as the contingent, then, in the event of your death, only your son would get the assets. However, if he were to predecease you or go missing, then your daughter would receive the entire amount. If you designate both of them as primary beneficiaries, they will divide the assets in the proportions you choose.
If you want, you might designate your spouse as the primary beneficiary and your kids as contingent beneficiaries. In this arrangement, your children would only get an inheritance in the event that your husband passes away before you. If you wanted your husband and children to share in the inheritance equally, you might make sure they were all named primary beneficiaries. For example, your spouse could get half and your two kids each would get a quarter. If your husband were to pass away before you, your children would continue to be the primary beneficiaries on an equal basis.
Deciding On Beneficiaries
With few restrictions, you have the freedom to name virtually anybody as the primary or contingent beneficiary of your living trust, life insurance policy, or retirement account. Depending on your state, a legal guardian would get the assets before the named beneficiary if they are under the age of majority. Life insurance and retirement savings are meant to keep arguments out of probate court, which may happen if a child is named as a beneficiary.
Bear in mind that naming your pet as a beneficiary is not an option, no matter how much you love them. If you want to make sure your pet is taken care of after you die, you may set aside a certain amount of money in a trust that will be established specifically for them in your last will and testament or living trust. You can designate an individual to manage the assets in a “pet trust” for the benefit of your pet during its lifespan in your last will and testament.
It is not necessary for your beneficiary to be an individual. Although there are extra tax considerations to bear in mind, you might also designate your preferred charitable or nonprofit organization as your primary or contingent beneficiary.
You should also consider the unfathomable when making your beneficiary designations: the chance that a catastrophic event may impact each and every one of your selected beneficiaries. To prevent this from happening, you should name a distant contingent beneficiary to get your assets in the event that your other designated beneficiaries do not.
Methods for Updating Beneficiaries
The people named as beneficiaries do not have any claim to your assets while you are alive, and they might not even be aware that they are beneficiaries. Therefore, you are free to change the names on your retirement accounts and life insurance policies whenever you want, with the exception of irrevocable accounts, where changing the beneficiaries is not possible.
Although it is simple to change the designated beneficiary on retirement accounts like IRAs and 401(k)s, doing so could have significant tax implications, especially when spouses are involved. For the best advice, talk to a lawyer or tax expert.
Keep in mind that, strangely enough, an estate plan is a living record. Thus, you should check it often to ensure that all of the clauses still express your wishes about the distribution of your assets when you pass away. It is important to review your will, trusts, life insurance, and retirement accounts after any major life change, such as a marriage, divorce, or death, to confirm that the beneficiaries you have designated, both primary and contingent, have been named. It is also important to revise your beneficiaries if your intentions about the distribution of your assets have changed.
It’s hard to anticipate every conceivable problem, but a professional estate planner can help you organize your affairs so they represent your preferences and make your loved ones’ lives easier when you pass away.
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