A Real-Life Example: How Contingent Beneficiaries Affect Estate Planning
My estate planning clients’ children were thrown into probate because their mom did not designate a contingent beneficiary. When their mother was employed in the government, she had originally designated her husband as the primary beneficiary to receive her government benefits paid by the Office of Personnel Management (OPM). (Designating pay-on-death beneficiaries, like this, is the first time people usually engage in estate planning!) Their mother had failed to originally designate a contingent beneficiary and had not had the chance to update her revocable trust as the primary beneficiary on her OPM benefits before she passed. Tragically, before her husband could collect the benefits, he too passed away. Consequently, OPM told my estate planning clients’ children, that they would have probate their dad’s estate in order for OPM to pay the children their mom’s benefits.
Aside from planning for your possible decline and incapacity, estate planning involves selecting people to receive your money, property, or other items if you pass away. Creating a revocable trust, which is good elder law and estate planning, can help avoid probate by designating those who will inherit from you. The persons (or entities such as a charity) you choose are the beneficiaries of your trust. In most cases, you’ll choose within your trust, who are primary beneficiaries and who is a contingent beneficiary.
In addition to designating these beneficiaries in your revocable trust, you may select beneficiaries for other types of assets you own. You may have an insurance policy, retirement account, investment account, or even your bank account. All of these accounts offer you the opportunity to designate your pay-on-death (POD) beneficiaries. Typically married people with children, will name their spouse and then their children as the the persons to receive the funds from these kinds of accounts upon your death.
These decisions form your overall estate plan. Whether in the context of a trust, will, POD account, or life insurance policy, the people you pick to receive your assets are known as beneficiaries. They receive the “benefit” of your assets.
By selecting loved ones as beneficiaries, you can help ensure your wishes are honored and provide peace of mind for your family.
Primary vs. Contingent Beneficiary
A contingent beneficiary is a type of beneficiary. If the first or primary beneficiary passes away, cannot be found, or does not want the asset, the contingent beneficiary would be next in line to receive the asset. Your contingent beneficiary is typically your second choice. Think of a contingent beneficiary as a backup beneficiary.
Imagine an individual who is married and has a child. This person might make their spouse their primary beneficiary and select their child as their contingent beneficiary. This ensures that the child would get the assets if both parents died.
Selecting contingent beneficiaries creates a more robust estate plan. You likely have wishes about who would get your money and assets should you pass on. Having second-choice beneficiaries ensures that the distribution of your assets reflects your wishes.
Trust-Based Estate Planning Avoids The Need to Designate Contingent Beneficiaries
A good trust-based estate plan should include these contingencies within the trust plan. Such that when you name a beneficiary in your trust, you will also state what happens if that person is deceased or charity is not in existence. Consequently, if you do not transfer the account (asset) when you are alive to your revocable trust, then when you name your trust as the primary beneficiary, there is no need to name a contingent beneficiary as the contingent beneficiary will be found within the provisions of the trust agreement.
For most assets other than IRA assets, designating your revocable trust will avoid the need for naming a contingent beneficiary. That is the general rule. However, if the asset is an IRA or similar asset, then if married, you name your surviving spouse as your primary beneficiary and your trust as a contingent beneficiary. Financial planners will recommend this approach to ensure that your spouse gets the benefit of a spousal roll-over.
Do Not Confuse Primary and Contingent Beneficiaries with Multiple Beneficiaries
Designating a primary and contingent beneficiary differs from having multiple primary beneficiaries or even multiple contingent beneficiaries.
The primary beneficiary has the first right to receive the assets. If the primary beneficiary cannot or chooses not to take the assets, the contingent beneficiary will then assume ownership.
With multiple beneficiaries, the asset is divided between the individuals, and you can have multiple primary beneficiaries and multiple contingent beneficiaries.
So, for example, you can name your two children as primary beneficiaries, and then name your six grandchildren as contingent beneficiaries.
Beneficiaries Versus Heirs-at-law
A beneficiary is distinct from an heir-at-law. While a beneficiary is someone you choose, an heir-at-law is someone who may have the right to inherit from you if you do not have an estate plan.
If you pass away without creating an estate plan, preferably a trust-based estate plan that avoids probate, you would die “intestate.” States have different rules governing intestacy. These laws determine which family members may be entitled to your wealth if you did not designate beneficiaries, for example as your “pay on death” beneficiaries or engage in any other estate planning.
Stipulating primary and contingent beneficiaries gives you control over who receives your assets rather than letting the government’s one-size-fits-all approach dictate the outcome. By selecting loved ones as beneficiaries, you can help ensure your wishes are honored and provide peace of mind for your family.