If your principal beneficiary cannot receive your assets, you can name a "contingent beneficiary" to get them instead.

When purchasing a life insurance policy, opening a bank account, or putting together an estate plan, one of the most crucial tasks is naming beneficiaries. After your death, your estate is distributed to your beneficiaries.

Your estate may not be as safe as you think if you've designated a primary recipient. Learn about dependent beneficiaries and how they function with this helpful guide.

Contingent Beneficiary Working

The person writing the will gets to decide what requirements, if any, should be in place for a contingent beneficiary. If an inheritance is given to a primary beneficiary instead of a contingent beneficiary, the latter will receive nothing.

Let's pretend that in Cheryl's life insurance policy, John is named as the primary beneficiary, and the couple's two children are named as the contingent beneficiaries. When Cheryl passes away, John gets the insurance money, and the kids get nothing. If John were to pass away before Cheryl, their children would equally split the money.

Contingent Beneficiary vs. Primary Beneficiary

Your estate's primary beneficiaries will receive their share first. Among these assets are money from a living trust, money from a life insurance policy, and money from retirement accounts. Close loved ones, such as spouses, are often the first to benefit from an estate.

Your contingent beneficiaries are the people who will receive your assets if the primary beneficiaries claim them later. Contingent or secondary beneficiaries are typically children, other family members, or charitable organizations. You can divide your estate among several possible contingent beneficiaries.

A common strategy is to specify a primary beneficiary (spouse) and two contingent beneficiaries (children). Your children will share equally in your estate if your spouse predeceases you.

Contingent Beneficiaries Characteristics

Individuals, groups, entities, charities, and trusts are all valid options for contingent beneficiaries. Because of their lack of legal capacity, minor children and pets are unable to receive assigned assets. If the contingent beneficiary is a minor, a guardian must be appointed to manage the funds until the child ages. Although blood relatives make up the majority of contingent beneficiaries, acquaintances and extended family members are also frequently included.

A life insurance policy or retirement account can have multiple contingent beneficiaries. All of the money will be distributed equally among the beneficiaries. The assets are distributed to a contingent beneficiary in the same manner as the primary beneficiary. If the primary beneficiary is to receive $1,000 per month for 10 years, the payments to the contingent beneficiary would also be $1,000 per month for 10 years.

Major life events like marriage, divorce, having a child, or losing a loved one need revisiting and updating contingent beneficiaries. After Chris and Rain's divorce, Chris changed the beneficiaries on their life insurance policy to River, one of Chris' children, and Riley, another of Chris' children. Chris can prevent Rain from inheriting his life insurance money.

Benefits of Naming Contingent Beneficiaries

By designating a secondary beneficiary on your life insurance policy or retirement account, you can save your loved ones the trouble and expense of probate. A deceased individual's assets must go through probate in the absence of a valid will.

For their life insurance, for instance, Uni has named Alex, their children's stepparent, as the primary beneficiary and Uni's preferred charity as the contingent beneficiary. Uni called the organization the contingent beneficiary of her life insurance policy, so her children will not have to argue over the money even if Alex first passes away.

The beneficiary of a life insurance policy or the retirement account owner can establish conditions that would prevent the transfer of assets to a non-qualified heir. An IRA owner, for instance, might name their child as a contingent beneficiary but stipulate that the money can't be distributed until the youngster graduates from college.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which mandates that non-spousal beneficiaries withdraw 100% of the IRA funds by the end of the 10th year after the IRA owner's death, was passed in 2019.

When the primary beneficiary of an individual's assets dies without a designated successor, the assets in question are added to the decedent's estate and subject to probate.

Sum Up

Making plans for the end of one's life can be challenging. However, the burden, uncertainty, and length of time involved in the payout process can be mitigated by constructing a thorough estate plan and specifically naming primary and contingent beneficiaries.