A contingent beneficiary is a designated recipient of an inheritance only if the primary beneficiary is deceased, cannot be located, or refuses the inheritance when the estate is settled.
Contingent beneficiaries may be specified in a will, insurance policy, or retirement account. They are entitled to insurance proceeds or retirement assets if specific predetermined conditions are met upon the insured’s death as outlined in a will.
Key Takeaways
- A contingent beneficiary inherits only if the primary beneficiary is deceased, cannot be located, or refuses the inheritance when the proceeds are distributed.
- Multiple contingent beneficiaries can be named, each receiving a percentage of the total amount.
- Contingent beneficiaries, like primary beneficiaries, should be reviewed and updated as necessary.
How a Contingent Beneficiary Assignment Works
A contingent beneficiary will receive nothing if the primary beneficiary accepts the inheritance.
Virtually any conditions may be specified for a contingent beneficiary. For example, Cheryl lists her spouse, John, as the primary beneficiary for her life insurance policy, with their two children named as contingent beneficiaries. If Cheryl dies, John receives the insurance payout, and the children receive nothing. If John predeceases Cheryl, their children each receive half of the proceeds.
A Change in IRA Inheritances
Since the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, non-spousal beneficiaries must withdraw 100% of the IRA funds by the end of the 10th year following the IRA owner’s death.
Characteristics of Contingent Beneficiaries
Contingent beneficiaries can include people, organizations, estates, charities, or trusts.
Minor children cannot legally accept assigned assets. If a minor is listed as a beneficiary, a legal guardian is appointed to oversee the money until the minor reaches legal age.
While it is more common for contingent beneficiaries to be immediate family members, close friends, and other relatives can also be named.
Multiple contingent beneficiaries can be listed on a life insurance policy or retirement account. Each beneficiary is designated a specific percentage, totaling 100%.
A contingent beneficiary who inherits will receive the assets in the same manner stated for the primary beneficiary. For instance, if a primary beneficiary is to receive $1,000 per month for 10 years, a contingent beneficiary will inherit and receive payments in the same manner.
Remember to Update
Contingent beneficiaries, like primary beneficiaries, need to be reviewed and updated after significant life changes such as marriage, divorce, birth, or death.
For example, after Chris and Rain divorce, Chris updates her life insurance policy so their child, River, is the primary beneficiary, and their other child, Riley, is the contingent beneficiary. Thus, Chris ensures that Rain does not receive any life insurance proceeds.
Benefits of Naming Contingent Beneficiaries
Naming a contingent beneficiary for a life insurance policy or retirement account can help avoid unnecessary time and expenses related to probate, the legal process of distributing a deceased person’s assets when there is no will.
For example, Uni lists their children’s stepparent, Alex, as the primary beneficiary and their favorite charity as the contingent beneficiary for their life insurance proceeds. If Alex dies before Uni, the children’s fight over life insurance benefits is avoided since the charity is the contingent beneficiary.
Other Conditions
A life insurance policyholder or retirement account owner can create contingencies that must be met before an inheritance is granted.
For example, an individual retirement account (IRA) owner could establish a child as the contingent beneficiary with the provision that the child may only inherit the money after they complete college.
What Happens If No Contingent Beneficiary Is Named?
If a document names a primary beneficiary but no contingent beneficiary, and the primary beneficiary is deceased, the assets will be considered part of the estate and must go through probate.
How Many Contingent Beneficiaries Can Be Named?
You can name as many contingent beneficiaries as you wish and divide your estate in any ratio, as long as the total adds up to 100%. You can also appoint an organization rather than an individual as a beneficiary.
Do All Primary Beneficiaries Have to Die Before Assets Go to a Contingent Beneficiary?
Yes. If there is more than one primary beneficiary and one dies, the deceased person’s portion is distributed among the surviving primary beneficiaries. All primary beneficiaries must be deceased or disclaim their inheritances before the assets pass to the contingent beneficiary.
The Bottom Line
As long as you have a valid will and your accounts are up to date, your contingent beneficiaries are unlikely to inherit. However, naming them is crucial to protect your family from even the remote possibility of an adverse event.
Related Terms: Will, Insurance Proceeds, Retirement Assets, Probate.
References
- Internal Revenue Service. “Retirement Topics—Required Minimum Distributions (RMDs)”.
- HG.org. “Importance of Naming Contingent Beneficiaries in Estate Planning Documents”.
- Policy Advice. “What Happens When Your Life Insurance Beneficiary Dies Before You?”
