What is a contingent or secondary beneficiary?
Understanding Contingent Beneficiaries and Their Importance in Estate Planning
If you've engaged in the process of creating a will or securing a life insurance policy,
you may have encountered the term "contingent beneficiary" and pondered its significance in your estate planning. A beneficiary is an individual or entity designated in your will or revocable living trust to receive property from your estate upon your passing. This encompasses a wide range of assets, including real estate, financial accounts, and more. Additionally, assets that can bypass probate, such as life insurance policies and 401(k) accounts, may also have specified beneficiaries, known as primary beneficiaries.
A contingent beneficiary, sometimes referred to as a secondary beneficiary, steps in to receive assets if the primary beneficiary is unable to do so. This designation applies to both assets within a Will or trust and those capable of skipping the probate process.
The inclusion of a contingent beneficiary typically doesn't impact the status of the primary beneficiary. The contingent beneficiary only receives assets if the primary beneficiary is unable to inherit, for instance, in the event of their passing before yours or if they choose not to accept the inheritance.
Why Designate Contingent Beneficiaries?
There are scenarios where the primary beneficiary may be unable to inherit your assets, such as their predeceasing you or declining the bequest. In the absence of a contingent beneficiary designation, state laws may dictate the distribution of your assets. By naming a contingent beneficiary, you establish clear expectations about who should inherit your property if your primary choice is unavailable.
For example, envision wanting your life insurance payout to go to your spouse as the primary beneficiary. If your spouse predeceases you, the contingent beneficiary designation ensures the proceeds go to your specified charity.
Who Can Be a Contingent Beneficiary?
Any individual or entity eligible to be a primary beneficiary can also serve as a contingent beneficiary. This includes family members, friends, charities, or nonprofit organizations. It's noteworthy that in some states, non-relatives inheriting may be subject to an inheritance tax, which is not applicable when leaving assets directly to a charity.
When selecting beneficiaries, consider the legal status of minors who generally cannot own property until they reach adulthood. For young children named as beneficiaries, it may be prudent to appoint a financial guardian to manage their inheritance until they come of age. Pets, being considered property, cannot be listed as beneficiaries directly, but provisions like a pet trust can be established for their care.
Property Designation for Contingent Beneficiaries
In your will, you have the flexibility to name a contingent beneficiary for each asset within your probate estate. This includes real estate, financial assets, personal property, pets, family heirlooms, and more.
The option to name multiple contingent beneficiaries for a single asset exists, with the ability to specify the percentage each contingent beneficiary should receive. However, contingent beneficiaries only inherit assets if the primary beneficiary is unable to do so.
Importance of Contingent Beneficiary Designation
Failing to name contingent beneficiaries for your assets may lead to the application of state guidelines in determining asset distribution if the primary beneficiary is unable to inherit. This default distribution, prioritizing surviving family members, may differ from your preferred choices.
For non-probate assets, where distribution bypasses probate, failing to name a contingent beneficiary may result in a default designation, potentially impacting tax implications for your estate beneficiaries.
Choosing Contingent Beneficiaries for Assets Skipping Probate
Assets like life insurance policies, 401(k)s, IRAs, pensions, and certain bank accounts often pass directly to beneficiaries outside the probate process. Designating beneficiaries for these non-probate assets is a separate process from naming beneficiaries in your will.
To designate a contingent beneficiary in your Will, create a comprehensive list of your assets and determine the recipient for each item. If using a tool like the FuneralBookings online Will tool it provides, step-by-step instructions are provided, making the process streamlined and straightforward.
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