What is a Contingent Beneficiary?
A contingent beneficiary is a person, estate or trust that receives the assets of a person who dies if the primary beneficiary, for any reason, cannot receive the assets.
It is commonly recommended by attorneys when their clients are making a will to have at least one contingent beneficiary.
It is possible to have several contingent beneficiaries and they can be listed in a specified order.
After a person dies, his or her assets will usually go through probate. The probate process can be avoided and the assets more efficiently passed to the heirs if primary and contingent beneficiaries are named.
Why It’s Important to Name Contingent Beneficiary
Beneficiaries take precedence over wills. If a beneficiary is assigned to a bank account, that beneficiary has the rights to that account after the owner’s death even if the will states the assets in that account should go to someone else.
Contingent beneficiaries can also be assigned to retirement plans, annuities and life insurance policies. There will be one person as the primary beneficiary on the policy. This is usually a spouse or partner. They receive the proceeds from the policy upon the death of the policy holder. If a contingent beneficiary is named such as a child or other family member or friend of the deceased and the primary beneficiary cannot receive the proceeds, it will pass to the person next in line.
Electing a contingent beneficiary in wills as well as in insurance policies is a simple way of making sure the surviving loved ones are cared for if the primary beneficiary is incapable of doing so. It is also a way to donate to a special cause or charity after the death of the policy holder. The disposition of assets is not complicated by unforeseen events such as the death of the prime beneficiary.
For example, if a will gives all the deceased’s assets to the spouse as the prime beneficiary, but the spouse is incapable of managing the assets, they can be given to the contingent beneficiary, who may be an adult child, on the condition that the child cares for the spouse during their lifetime. After the spouse dies, the assets can go to the child.
Circumstance Where A Second Beneficiary Makes Sense
There may be circumstances or stipulations that must be met before a contingent beneficiary may inherit the assets. The contingent beneficiary may need to finish college, reach a certain age or kick a drug habit, and only then they will receive the assets.
A policy holder and their primary beneficiary may die at the same time. This could happen in a car accident or natural disaster. If a contingent beneficiary has been named, the transfer of assets will be easier. The next in line is usually someone who is financially dependent on the policy holder, but if there is no one dependent, the contingent beneficiary can be anyone else or a charity or cause. It is not advised to make the estate the contingent beneficiary of a life insurance policy because the proceeds would be subject to the deceased’s creditors. Life insurance proceeds paid to a person are not usually subject to creditors.
If the primary beneficiary is the spouse, the contingent beneficiary may be a minor child. Consideration needs to be given as to who will manage the assets until the child reaches 18 or 21 years.
It is recommended to assign two guardians for the children including one guardian to manage the money and one guardian to look after the well-being of the child.
In policies from some of the best term life insurance companies, a person can assign a primary beneficiary, a contingent beneficiary and a tertiary beneficiary. This is another kind of contingent beneficiary and only receives assets or proceeds from the estate or insurance company if all the primary and contingent beneficiaries are unqualified to receive the benefits or are deceased.
When a contingent beneficiary wants to claim assets, they need to provide a certified death certificate for the prime beneficiary and any other contingent beneficiaries that precede them on the list of succession as well as valid personal identification.
Consequences for not Naming Beneficiaries
Insurance proceeds could be subject to huge estate taxes if the policyholder names the spouse as sole beneficiary and there is no contingent beneficiary. If the insured outlives his or her spouse, by a few days if they are both in a car accident, the proceeds will pass to the estate incurring huge unnecessary taxes.
A contingent beneficiary is a safety feature and a control device. It is the most practical way to control the future distribution of wealth.