Whether it's a life insurance policy, a bank account, securities account, retirement account, trust, or other asset, designating contingent beneficiaries can avoid probate and help accomplish your estate planning goals.
You can also designate contingent beneficiaries in your will. This will not avoid probate, but can be used to achieve your estate planning goals.
Basic beneficiary terminology
Beneficiary. A person or entity (such as a charitable organization) designated in your will to receive an asset upon your death.
Contingent remainder beneficiary. The beneficiary of a contingent remainder interest.
Contingent remainder interest. A beneficiary's interest in property. The beneficiary will acquire the property in the future, upon the occurrence of a certain event or “contingency" (such as the death of the current owner).
What is a primary vs. contingent beneficiary?
If your will designates a primary or contingent beneficiary, that person or entity is a beneficiary of your will. The asset given to the beneficiary will still need to go through probate, but it will go to the beneficiary rather than being part of your general estate and being subject to division among your other heirs.
Many types of assets also allow you to designate a beneficiary who will receive the asset when you die. These include life insurance policies, bank accounts, IRA and 401(k) accounts, securities brokerage accounts, college savings plans, health savings accounts, and trusts. In some states, a beneficiary may also be designated for motor vehicles and real estate. If a beneficiary is designated for one of these assets, that asset will not need to go through probate.
A primary beneficiary is a person you designate to receive an asset upon your death.
A contingent beneficiary is a person or entity (such as a charity) that you designate to receive an asset upon your death if the primary beneficiary has died before you. A contingent beneficiary can also come into play if the primary beneficiary can't be located or refuses to accept the asset.
A primary beneficiary for one asset can be designated as a contingent beneficiary for a different asset. However, there would be no point in designating someone as both primary and contingent beneficiary for the same asset.
What happens if there is no contingent beneficiary?
If the primary beneficiary is dead, can't be found, or refuses the asset, and there is no contingent beneficiary, then the asset goes into your general estate and will need to go through probate. If you have a will, the asset will go to those designated in the will. If you don't have a will, the asset will go to your heirs as provided in your state's probate laws.
Can a child be a contingent beneficiary?
A child can be either a primary or a contingent beneficiary. It is very common to list a spouse as the primary beneficiary and children as contingent beneficiaries. However, if the child is a minor, a guardian will need to be appointed to manage the asset, at least until the child reaches the age of majority. You could also extend the guardian's management to a later age, for example, until the child graduates from college, or until the occurrence of another event you specify.
Contingent beneficiaries under a will
The discussion above relates to where the “contingency" under which the contingent beneficiary receives the property is the death or unavailability of a primary beneficiary.
Under a will, there are other contingencies that can come into play. Other contingencies commonly include attaining a certain age, or the occurrence of a future event such as graduation from college.
Notifying your beneficiaries. Whether a beneficiary is primary or contingent, you should make the beneficiary aware of their status. They will need to know this, so they can take the necessary steps to receive the asset upon your death.
Multiple beneficiaries. You may designate multiple primary or contingent beneficiaries for the same asset. This would involve designating the percentage of the asset to go to each co-beneficiary.
Changing or adding beneficiaries. Generally, you can change or add primary or contingent beneficiaries at any time. However, there may be restrictions with certain assets (such as retirement plans; and irrevocable accounts, insurance policies, or trusts).