Contingent beneficiary vs. primary beneficiary

When setting up a life insurance policy, retirement account, or living trust, you should name a primary beneficiary, or the first person or entity in line to receive those assets upon your passing. In case that individual dies before you or cannot be located to receive the assets, you should also name a contingent beneficiary, or next person or entity in line. By doing so, you can avoid the possibility of your assets passing into probate, which can become more costly for your estate and also delay the distribution of the inheritance to your beneficiaries.

Understanding types of beneficiaries

The primary beneficiary is the person or entity who has the first claim to inherit the asset after your death. Despite the term “primary," you may name more than one such beneficiary and designate how the assets will be divided among them.

A contingent beneficiary, on the other hand, is the second in line to inherit the asset. The only way a contingent beneficiary inherits anything from the account or policy is if the primary beneficiary or beneficiaries have predeceased you or otherwise can't be found.

For example, if you have two children and name your son as the primary, or principal, beneficiary and your daughter as the contingent, only your son would inherit the assets upon your death unless he predeceases you or can't be found, in which case your daughter would inherit the full sum. If you name them both as primary beneficiaries, they would split the assets according to the percentages you have decided on.

Alternately, you may choose to name your spouse as the primary beneficiary and your children as contingent beneficiaries, in which case your children would inherit only if your spouse predeceases you. If you wanted both your spouse and children to collect the assets, you would name all of them as primary beneficiaries, perhaps with your spouse inheriting half and your two children receiving one-quarter each. In this case, if your spouse dies before you, your children would remain equal primary beneficiaries.

Choosing beneficiaries

You can choose just about anyone to inherit your assets in a living trust, life insurance policy, or retirement account as either a primary or contingent beneficiary—but there are some exceptions. If the designated beneficiary is under the age of majority, depending on your state, the assets would first go to a legal guardian. Naming a minor as a beneficiary could send the issue to probate court—a situation that life insurance policies and retirement accounts are designed to avoid.

Note that no matter how much you adore your pet, they cannot be named a beneficiary. If you are concerned about the welfare of your pet once you're gone, you can take care of them under your last will or living trust by leaving a specific sum of money to a trust that will be created for your pet after you pass. In your last will or trust, you can name someone to act as the trustee of the "pet trust," and that person will be in charge of using the funds for your pet’s benefit for the pet's lifetime.

However, your beneficiary does not need to be a person. You could also name your favorite charity or nonprofit organization as a primary or contingent beneficiary, though there are additional tax implications you should consider with this option.

Another possibility to address with your beneficiary designations is the unthinkable: that a tragedy could affect all of your chosen beneficiaries. You can guard against this by naming a remote contingent beneficiary, which is an entity or person who would inherit your assets should none of your other chosen beneficiaries survive you.

How to change beneficiaries

Beneficiaries don't have any legal rights to your assets during your lifetime—and may not even know they are your beneficiaries—so you can feel free to adjust and change the designations on your life insurance policies and retirement accounts as often as you want, with one notable exception: if the account is irrevocable, you cannot change beneficiaries.

Retirement accounts such as IRAs and 401(k)s make it easy to change designated beneficiaries, but as this could have serious tax consequences, particularly where spouses are involved, it's important to consult a legal or tax professional to make sure your affairs are arranged in the most advantageous way possible.

Remember that an estate plan is, rather ironically, a living and breathing document. That means you should review it regularly to make sure all of the provisions still communicate what you want to happen to your assets upon your death. Whenever you or loved ones experience a life event or change, such as a birth, marriage, divorce, or death, you should revisit not only your will and any trusts but also your life insurance policies and retirement accounts to make sure you have named your chosen beneficiaries—both primary and contingent. Also, if you've had a change of heart about who you want to inherit your assets, it's time to update your beneficiaries.

It's impossible to plan for all possible eventualities, but with the advice of an experienced estate planner, you can make sure you have arranged your affairs to best reflect your wishes and rest easy knowing that your estate will be handled with ease once you're gone.