Why Contingent Beneficiaries Matter | Adler Pollock & SheehanPC
Your will is the foundation of your estate plan. In particular, it provides for the disposition of your material possessions, including your home, investments, and other assets. These go to the beneficiaries named in your will. Additionally, this foundation is usually supported by documents for trusts, pension plan accounts, and life insurance policies. They also have named beneficiaries.
But the process can be a little more complicated than it seems at first glance. Of course, you must list the primary beneficiaries in these documents, but it is also imperative to include “contingent” beneficiaries for peace of mind. In fact, some would argue that the designation of potential beneficiaries is just as important as the primary selections.
A contingent beneficiary in a will or other legal document is the backup of the primary beneficiary. In other words, in the event that the primary beneficiary predeceases you, cannot be found, or refuses the inheritance, the contingent beneficiary is entitled to the assets.
For example, suppose you choose your brother as the primary beneficiary of your vacation home, while naming your sister as the contingent beneficiary. When you die, your brother inherits the chalet. Conversely, if your brother is no longer alive, he automatically reverts to your sister.
As a general rule, prospective beneficiaries must be named in each applicable situation. They act as a safety net in case the primary beneficiary cannot take the distribution.
But what if you opt out of naming potential beneficiaries? If the primary beneficiary inherits the asset, nothing. However, if the primary beneficiary cannot receive the asset, the process can become complicated.
Without a contingent beneficiary, the asset is returned to the estate, where it may be subject to a lengthy and costly probate process. Then, the distribution is made according to the laws of the state in force, even if they go against your wishes. This could lead to conflicts between family members and hotly contested legal actions. In addition, a death benefit from a life insurance policy could be paid to the estate, which could create exposure to estate tax.
Worse, you can easily avoid this common estate planning mistake. While you have time, choose potential beneficiaries. Who should you name as a contingent beneficiary? The choice is purely personal, but there are common themes to observe.
For example, if the primary beneficiary is your spouse, you can designate your children as contingent beneficiaries. You can leave other assets to other family members, friends or charities.
Keep in mind that if a family member listed as a contingent beneficiary is a minor at the time of your death, the court will appoint a legal guardian to manage the assets until the child reaches the age of majority ( 18 in most states). Also note that you cannot legally name a pet as an eventual beneficiary despite your fondness for your animal companion.
Understanding Beneficiary Forms
The rules for trusts generally mirror those for wills. But know that beneficiary forms for retirement plan accounts, life insurance policies, and annuities control the disposition of those assets, no matter what your will says. Thus, be sure to complete the contingent beneficiary assignments for the assets and modify or update them as needed.
Frequently, a retirement account, IRA, or life insurance policy lists multiple potential beneficiaries. Each beneficiary is assigned a specific percentage of the money, so the percentage must add up to 100%. For example, you can name five grandchildren to each receive 20% of an IRA.
Otherwise, a contingent beneficiary receives assets in the same way as the primary beneficiary. So, for example, if the primary beneficiary was to receive $10,000 per year for 10 years, for a total of $100,000, the contingent beneficiary would receive the money on the same payment schedule.
How many potential beneficiaries should you name? Again, the choice is personal, but it’s generally a good idea to have more than one, especially if you have a relatively long lifespan. In some cases, such as a life insurance policy, there may be a limit to the number of potential beneficiaries allowed.
When choosing potential beneficiaries, don’t make these decisions in a vacuum. Consider this an essential part of your overall estate plan. To help you coordinate these important choices, contact your estate planning advisor.