What Is a Contingent Beneficiary and Do I Need One?

A beneficiary is an individual or entity legally designated to receive assets from a financial product or estate upon someone’s passing. A contingent beneficiary serves as a backup recipient, providing an additional layer of protection for asset distribution.

Defining a Contingent Beneficiary

A contingent beneficiary is a secondary recipient of assets, inheriting them only if the primary beneficiary is unable or unwilling to do so. This can occur if the primary beneficiary predeceases the asset owner, cannot be located, or chooses to decline the inheritance.

Common assets for which contingent beneficiaries are designated include life insurance policies, retirement accounts such as 401(k)s and IRAs, and investment accounts. Annuities and transfer-on-death (TOD) or payable-on-death (POD) accounts also allow for contingent beneficiary designations. Naming a contingent beneficiary helps ensure that assets are distributed according to the owner’s intentions, even if unforeseen circumstances affect the primary recipient.

Primary Versus Contingent Beneficiaries

The distinction between primary and contingent beneficiaries lies in their order of inheritance. A primary beneficiary is the first in line to receive assets or benefits upon the asset owner’s death. There can be multiple primary beneficiaries, and their shares do not necessarily have to be equal, provided their percentages total 100%.

A contingent beneficiary only receives assets if certain conditions are met. These conditions involve all primary beneficiaries being deceased, unable to be found, or refusing the inheritance. If a primary beneficiary accepts the inheritance, the contingent beneficiary receives nothing.

Designating a Contingent Beneficiary

Designating a contingent beneficiary involves contacting the financial institution holding the asset, such as a bank, brokerage firm, insurance company, or an employer’s human resources department for retirement plans. These institutions provide the necessary beneficiary designation forms.

When completing these forms, include their full legal name, relationship to you, date of birth, and Social Security number. For multiple contingent beneficiaries, clearly specify the percentage or share of the assets each will receive, ensuring the total adds up to 100%. After completing the form, submit it to the institution and confirm the designation has been successfully recorded.

Consequences of Not Naming a Contingent Beneficiary

Failing to name a contingent beneficiary, or if both primary and contingent beneficiaries are unavailable, can lead to unintended outcomes for your assets. In such scenarios, the assets typically become part of your estate. This means they may be distributed according to the terms of your will, if one exists.

If there is no will, or if the will does not cover these specific assets, state intestacy laws will dictate how the assets are distributed. Intestacy laws prioritize distribution based on familial relationships, often to a surviving spouse, children, or other close relatives, potentially not aligning with your preferences. Assets passing through the estate, especially without clear beneficiary designations, typically undergo the probate process. Probate is a court-supervised procedure that can be time-consuming, often taking between six months and two years, or even longer for complex estates. It can also incur various costs, including court fees, attorney fees, and administrative expenses, which can range from 3% to 7% of the estate’s total value.