Contingent Beneficiary

A contingent beneficiary is a person who has been named to inherit an asset (or a group of assets) if the primary beneficiary is no longer available.

Contingent beneficiaries are back-up beneficiaries in a will or other financial instrument, essentially.

They're who, if for whatever reason the first person in line isn't around to accept their inheritance, gets what was owed to the original (primary) beneficiary.

Primary vs. Contingent Beneficiary

When an estate plan (including a last will & testament and/or a trust) is put into place, assets (including money, property, and investments) will be designated for certain named people (such as a spouse or children). These people are known as the primary beneficiaries.

However, sometimes a primary beneficiary has already passed away. In this case, the assets would go to the person or people named the contingent beneficiary. Think of the contingent beneficiaries as being next in line to inherit if the primary beneficiary can't.

How Contingent Beneficiary Assignment Works

When an estate plan is created, at least one primary beneficiary will be named. This is usually the person's spouse, children, or other family members. 

Multiple primary beneficiaries can be named, and they can be assigned a certain percentage of the asset (for example, 70% to the surviving spouse and 10% to each of their three children). 

If one primary beneficiary has died, their portion will be split between the other beneficiaries.

However, even with multiple primary beneficiaries, sometimes no primary beneficiaries are left to inherit.

If this is the case, contingent beneficiaries can be named. For example, parents or siblings could be named as contingent beneficiaries. 

In this way, even if none of the primary beneficiaries are available, the assets are still given to a person or people of the deceased's choosing.

Contingent Beneficiaries in Life Insurance

Contingent beneficiaries can be named on life insurance policies in addition to being included in estate plans. Like the above example, all primary beneficiaries must be unavailable for the contingent beneficiary to receive life insurance proceeds.

However, it's important to remember that life insurance is not typically part of the estate, as it's not paid to the deceased but to their beneficiaries. In addition, life insurance is separate from estate planning documents.

Therefore, if you update beneficiaries in your will, you will need to separately update them with your life insurance policy. Changing the information with one will not automatically change it with the other.

Benefits and Downsides of Naming a Contingent Beneficiary

There are no downsides to naming contingent beneficiaries. They don't have any claim over the estate as long as any primary beneficiary is available. But if no primary beneficiaries are available to inherit, it makes sure that the inheritance is still given to someone that the deceased chose.

Having a contingent beneficiary also makes things much easier for the executor, because they don't have to guess what the deceased would have wanted if the initial estate plan can't be followed as written.

Considerations About Naming Minor Children as Beneficiaries

Adding minor children as contingent beneficiaries may seem like an appealing solution. After all, if they were to lose both parents, wouldn't you want to ensure that they're taken care of?

However, there are some issues that arise from naming minor children as your beneficiaries.

• Minors are unable to directly receive either life insurance payouts or estate assets, since they're underage. Instead, a custodian will need to be appointed by the court. If your spouse is alive, they will probably be named the custodian, but it's likely, if your children are inheriting as contingent beneficiaries, that your spouse isn't available.
• When a child reaches the age of majority (18 or 21, depending on the state), they will have full and unregulated access to the funds. There's no way you can stipulate how a contingent beneficiary spends their inheritance; you can't set aside a certain portion to be used only for education, for example.
• A court may need to appoint a custodian or conservator, and no funds will be available until this happens. It can take months for the court to appoint a custodian, and there's no way to access those funds until this is done. Your children won't have access to your life insurance or assets during the time when they might need them most.
• A conservatorship can cost the estate money. Depending on state laws, the person named as the conservator might be paid a yearly fee (out of the estate) for their service. In addition, there may be other costs to the conservatorship that will remain in place until the child is old enough to inherit. This can decrease how much money your children will eventually receive.

So what's the solution here? It depends on your situation, but a testamentary trust might be the best way to go. A testamentary trust is a system that's written into your will and put into place after your death. This sort of trust allows you to name a trustee (who can be anyone of your choosing) and allows you to make stipulations on how the money in the trust is used.

The trust goes into effect after your death much more quickly than a conservatorship will be established, and you can state how you want the money used. Want to set aside cash to only be used for education? No problem. Want to make sure that an amount can only be used for a down payment? A trust can do that too.

It may be the best way to ensure that your children have access to your assets without giving them the full amount when they may still be too young to know how to handle it. Consult with an attorney or a financial professional to see what the best solution is for your situation.

What Happens if There is No Contingent Beneficiary?

If you don't name a contingent beneficiary and the primary beneficiary isn't available, all assets will go into the estate to be distributed during the probate process.

This is also true of life insurance; while it's typically not part of the estate (and therefore not subject to estate taxes) if no named beneficiary is available, it becomes part of the estate and may be taxed.

Can the Same Person be My Primary and Contingent Beneficiary?

No. The contingent beneficiary is named in case the primary beneficiary isn't available. It wouldn't make sense to name the same person as both.

Mike and Ellen have two adult children, Sarah and Dylan. Mike and Ellen have a will in place, as well as life insurance policies. They are named as the primary beneficiaries for each other. Let's look at a few different scenarios:

• Mike is in a fatal car accident. Since Ellen is the primary beneficiary of the life insurance policy, she receives the payout for it directly, and it doesn't become part of the estate (and therefore isn't subject to estate taxes). She's also named the beneficiary of Mike's estate. She will still need to go through the probate process.
• Mike and Ellen are both killed in a car crash. Each of their primary beneficiaries is now dead. But Mike and Ellen named Sarah and Dylan as their contingent beneficiaries on both their life insurance policies and in their wills. Sarah and Dylan will each receive 50% of the life insurance proceeds (with no estate tax), and the estate will be split between the two of them during the probate process.
• Mike and Ellen are both killed in a car crash, but they have not named contingent beneficiaries. Their primary beneficiaries are dead. Their life insurance gets paid into the estate and is subject to estate taxes. It's also not available for months because it's tied up in the probate process. The lack of contingent beneficiaries could increase the time and level of complexity of probate.