What Is a Contingent Beneficiary?

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).

Primary vs. contingent beneficiary

A primary beneficiary is the person you designate to receive an asset upon your death. A contingent beneficiary is a person or entity (such as a charity) designated to receive that asset if the primary beneficiary has died before you, can't be located, or refuses to accept it.

If your will designates a primary or contingent beneficiary, the asset will still need to go through probate, but it will go to the beneficiary rather than being part of your general estate and subject to division among your other heirs.

Many types of assets allow you to designate a beneficiary who will receive the asset when you die, including:

• Life insurance policies
• Bank accounts
• IRA and 401(k) accounts
• Securities brokerage accounts
• College savings plans
• Health savings accounts
• Trusts
• Motor vehicles and real estate (in some states)

If a beneficiary is designated for one of these assets, that asset will not need to go through probate.

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.

Is a contingent beneficiary the same as a secondary beneficiary?

Yes, contingent beneficiary and secondary beneficiary are interchangeable terms that refer to the same role. Some financial institutions and insurance companies prefer "secondary," while others use "contingent," but both describe the backup person or entity who receives assets if the primary beneficiary cannot.

In more complex estate plans, you may also encounter a tertiary beneficiary, which is a third-level backup.

This creates a hierarchy of beneficiaries: primary → contingent/secondary → tertiary. 

Regardless of the terminology your financial institution uses, the function remains the same: providing a backup plan to ensure your assets go where you intend.

What is a per stirpes contingent beneficiary?

Per stirpes is a Latin term meaning "by branch" and refers to a specific method of distributing assets to beneficiaries. When you designate contingent beneficiaries "per stirpes," you're ensuring that if one of them dies before you, their share passes down to their own descendants rather than being redistributed among the other surviving beneficiaries.

For example, suppose you name your three children as contingent beneficiaries per stirpes, each entitled to one-third of an asset. If one child predeceases you, that child's one-third share would go to their children (your grandchildren) rather than being split between your two surviving children. This approach ensures each family branch receives equal treatment across generations.

The alternative is per capita distribution, where a deceased beneficiary's share is divided equally among the surviving beneficiaries. Using the same example, if one child predeceases you under a per capita designation, your two surviving children would each receive 50% instead of your grandchildren inheriting anything. When setting up beneficiary designations, consider which approach aligns better with your family's needs and your estate planning goals.

Who should you name as your contingent beneficiary?

Choosing the right contingent beneficiary depends on your family situation and estate planning goals. Here are some common approaches based on different life circumstances:

• Married with children. Most people name their spouse as the primary beneficiary and their children as contingent beneficiaries. This ensures assets stay within the immediate family if something happens to both spouses.
• Single with children. Consider naming your children as primary beneficiaries and a trusted family member, such as a sibling or parent, as the contingent beneficiary. Alternatively, you can name a trust as the contingent beneficiary to provide more control over distributions.
• No children. Siblings, parents, nieces, nephews, or charitable organizations are common choices. Think about who would benefit most or who shares your values.
• Blended families. If you have step-children or children from multiple marriages, carefully consider how you want assets distributed. You may want to name specific children rather than using general terms like "my children" to avoid confusion.

If minor children are involved, avoid naming them directly as beneficiaries. Minors cannot legally manage inherited assets, which can create complications. Instead, consider establishing a trust and naming it as the contingent beneficiary, or work with an estate planning attorney to set up a custodial arrangement.

You can also name your estate as a last-resort contingent beneficiary, but be aware this triggers probate. It's generally better to name specific individuals or entities. Finally, remember to review your beneficiary designations after major life events such as marriages, divorces, births, and deaths to ensure they still reflect your wishes. A U.S. Department of Labor report found these are the most common triggers for beneficiary disputes.

Can you name multiple contingent beneficiaries?

Yes, you may designate multiple contingent beneficiaries for the same asset. When doing so, you'll need to specify the percentage of the asset each co-beneficiary should receive, and these percentages must total 100%. Common allocation splits include: 

• 50/50 for two beneficiaries
• 33/33/34 for three beneficiaries

You can customize these percentages based on individual circumstances. For example, you might allocate 60% to one child and 40% to another if their financial needs differ. If you don't specify percentages, most financial institutions will default to equal distribution among all named contingent beneficiaries.

These percentages only come into play if the primary beneficiary can't receive the assets. It's also wise to review your percentage allocations after major life events, such as the birth of a new child or a beneficiary's death. This practice ensures they still reflect your intentions.

How does the contingent beneficiary payout process work?

Sometimes, a primary beneficiary cannot receive an asset due to death, inability to be located, or refusal. In such cases, the contingent beneficiary becomes entitled to the asset. Here's how the process typically unfolds:

Step 1. Establishing the primary beneficiary's status.

The financial institution or insurance company must first confirm that the primary beneficiary cannot receive the asset. This usually requires documentation such as a death certificate, proof of a diligent search effort if the person can't be located, or a written refusal from the primary beneficiary.

Step 2. Notification and claim filing.

Once the primary beneficiary's status is confirmed, the institution contacts the contingent beneficiary (if contact information is on file) or the contingent beneficiary can initiate a claim. The contingent beneficiary will need to complete claim forms and provide identification, such as a government-issued ID and Social Security number.

Step 3. Processing and payout.

After receiving all required documentation, the institution reviews and processes the claim. Retirement accounts and other financial assets may have different timelines depending on the institution and account type.

Keep in mind that contingent beneficiaries should understand potential tax implications. Life insurance proceeds are generally not taxable income, but inherited retirement account distributions may be subject to income tax depending on the account type and distribution method. Because the process varies by asset type and institution, contingent beneficiaries should contact the relevant financial institution directly for specific guidance on their situation.

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, the asset goes into your general estate and will need to go through probate:

• With a will. The asset will go to those designated in the will.
• Without 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 instance, until the child graduates from college or until another event you specify.

FAQs about contingent beneficiaries under a will

What is the legal definition of a contingent beneficiary?

A contingent beneficiary is a person or entity designated to receive an asset upon the occurrence of a certain event or contingency, such as when the primary beneficiary is deceased, cannot be found, or refuses the asset. Sometimes, it's also called a contingent remainder interest.

Can I set conditions for when a contingent beneficiary receives assets?

Yes, particularly in a will or trust, you can establish specific conditions such as reaching a certain age or completing milestones like graduating from college. Consult with an estate planning attorney to ensure these conditions are properly documented.

Should I tell my contingent beneficiary about their designation?

Yes, it's a good idea to inform both primary and contingent beneficiaries of their status. This helps them know what to expect and understand the steps they'll need to take to receive assets upon your death.

Can I change or add contingent beneficiaries later?

Generally, you can change or add primary or contingent beneficiaries at any time. However, certain assets, such as retirement plans, irrevocable trusts, or some insurance policies may have restrictions. So it’s recommended to check with your financial institution or policy provider.

Edward A. Haman, Esq., contributed to this article.