A big part of estate planning is ensuring your assets benefit the right people. Often, this means naming both a primary and contingent beneficiary.
This guide walks you through the difference between a primary and contingent beneficiaries, tips for selecting both, and the answers to some of the most frequently asked questions about the process.
What are primary and contingent beneficiaries?
A beneficiary is a legal term for the person you designate to receive an asset. To ensure your assets go to the people you want them to go to, it’s essential you name your beneficiaries clearly and accurately as appropriate.
It’s likely you’ll need to designate beneficiaries for any retirement account(s), any life insurance policy (or policies) and any trust(s) you’ve established.
Beneficiaries can be people, trusts, estates, charities, or organizations. Generally speaking you cannot name children or pets as beneficiaries, as neither can legally own property. In general, you want to avoid naming your estate as a beneficiary, as this could trigger tax liabilities.
Primary beneficiary
A primary beneficiary will be the first person or entity to claim and receive your assets. The law enables you to name more than one primary beneficiary, provided you designate how the assets will be divided among them.
Contingent beneficiary
This is the next person to inherit your assets in the event the primary beneficiary cannot collect them. For instance, if the primary beneficiary has died or cannot be located. C
5 Tips to Use When Choosing Beneficiaries
When choosing a beneficiary, it is good to think of the people who depend on you financially. It’s also important to think through any restrictions that will need to be overcome or additional persons you want to take care of before making any decisions.
Here are a few tips to help you navigate the process:
1. Consider family relationships.
If you’re married, you might select your spouse as your primary beneficiary. In this case, take steps to protect your assets in case something happens to both you and your spouse while considering strategies for fair state planning.
For instance, you can name an additional primary beneficiary, add a contingent beneficiary, or you and your spouse can jointly name a secondary beneficiary. Consider your children and people outside your immediate family that depend on you, including aging parents.
2. Check for any restrictions.
In community property states like Arizona, Texas, Nevada, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, a spouse is entitled to receive half of the assets acquired with funds you earned during your marriage. In such states, the spouse has to sign a waiver before you can name a different beneficiary.
Laws governing federal employee retirement plans guarantee that the spouse of a federal employee receives 50 percent of their death benefit, even if they choose someone else as beneficiary.
Check to see if there are any state or federal policies that might restrict who you name as a beneficiary.
3. Name both primary and contingent beneficiaries.
We recommend naming both a primary and contingent beneficiary. As mentioned earlier, the contingent beneficiary acts as a backup beneficiary and will inherit your possessions if the primary beneficiary predeceases you. You may be able to choose more than one contingent beneficiary.
4. Consider a trust.
A trust can help you transfer assets to minor children. You may be able to designate a living trust as the beneficiary to your life insurance policy and retirement plans, as well as any other assets. This allows you to pass assets to minor children when you can’t legally name them as beneficiaries.
You can name other beneficiaries for this type of trust; it isn’t limited to children. With a trust, you can generally specify how assets are divided and distributed among multiple beneficiaries. For instance, you might specify that certain beneficiaries receive specific amounts, a certain percentage of your estate, or predetermined pieces of property.
5. Update your beneficiaries.
Remember to update your beneficiaries to reflect any major life changes. For instance, if you get married, have a baby, get divorced, or lose a loved one, you may need to update the beneficiaries across all of your accounts. (It’s worth noting that if you name a living trust as a beneficiary of your retirement accounts and life insurance policies, you would only need to update the terms of your trust, rather than updating each policy and account individually.)
Some states have laws that automatically invalidate an ex-spouse as a beneficiary in case of a divorce, so check the laws where you live.
A wealth manager or legal professional can help answer any questions throughout the process, and it is always best to ask any and all to make sure you understand how your designations will impact your chosen beneficiaries.
Get Expert Advice on Real Estate Planning
Naming both primary and contingent beneficiaries for your inheritance helps your family avoid delays and expenses related to probate. Notably, naming beneficiaries leaves no room for speculation on the fate of your assets and will also help you eliminate any confusion that may arise when you pass. If you need help to get started with your estate and financial planning, contact Bogart Wealth.
