What You Should Know About Primary vs. Contingent Beneficiaries

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    When undertaking estate planning, you must understand who your beneficiaries are and how the process works to make sure your inheritance works as it should. One of the best ways to ensure your assets are handled and managed according to your wishes is to designate both a primary and contingent beneficiary.  Naming both beneficiaries helps you avoid the chances of your assets, passing into costly and time-consuming probates that typically delay the distribution of the assets to your heirs.

    This guide will walk you through everything you need to know about primary and contingent beneficiaries, including key differences, tips for selecting yours, and the answers to some of the most frequently asked questions about the process.

    Defining Beneficiaries

    A beneficiary is a legal term that refers to a person who you designate to inherit assets from you regardless of whether these assets have a beneficiary designation on them or not. To determine how your assets and possessions will go after your death, it is crucial that you name your beneficiaries when planning your estate and making a will. Although a beneficiary will collect what you give to them, they may not have any responsibilities that estate executors have.

    • Primary beneficiary 

    A primary beneficiary will be the first person or entity to claim and receive your assets, including living trusts, life insurance policy, and retirement account after your death. 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 after your death. In the event the primary beneficiary passes on before you or cannot be located to receive your assets upon your death, a contingent beneficiary will be the next person or entity in line. 

    In a nutshell, the only way the contingent beneficiary will inherit your assets is if and when the primary beneficiaries have predeceased you or can’t be located. Contingent beneficiaries may be people, trusts, estates, charities, or organizations. However, the law doesn’t permit children or pets as contingent beneficiaries because they don’t have the legality to accept assigned assets.

    6 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.

    For married people, you may choose your spouse as the primary beneficiary. Likewise, your spouse can also choose you as their primary beneficiary. You can also jointly name a secondary beneficiary just in case something happens to both of you. You are allowed to name more than one primary beneficiary, so consider your children and people outside your immediate family and depend on you. These could be your parents, uncles, nieces, etc.

    1. Check for any restrictions on your preferred beneficiaries.

    It is crucial to check for restrictions on the person you want to name as your beneficiary. Some states and specific federal policies make it mandatory for you to name your spouse as your beneficiary. In such states, the spouse has to sign a waiver before you can name a different beneficiary. 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.

    1. Name both primary and contingent beneficiaries.

    It is advisable that you choose 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. In some cases, the benefit plan and life insurance can allow you to choose more than one contingent beneficiary.

    1. Choose a spouse and a child.

    In the event of your death, your spouse is the immediate person who will suffer financially, and it is best to pass your death benefits to them as quickly as possible. Federal laws that govern most federal employee’s retirement plans, such as the Employee Retirement Income Security Act (ERISA), guarantee that the spouse receives 50 percent of your death benefit even if you choose someone else as your beneficiary. Besides, it is also a good practice to choose your children as your beneficiaries, provided they are of age. But if your children are underage, you may have to choose someone else as your beneficiary.

    1. Designate a trust.

    The surest way to ensure your minor children receive the benefits of your assets, life insurance, and retirement plans is to designate a living trust as your contingent beneficiary. A living trust enables you to determine how your proceeds of death will be distributed without naming minor children as the beneficiaries. If you are not married or you have spousal consent, you can also name your favorite charity as your primary beneficiary.

    1. Change beneficiary after the divorce.

    Should you go through a divorce, it is essential to change your beneficiary designation on your life insurance and other retirement accounts if you don’t want your ex-spouse to claim your inheritance. Typically, some states have laws that automatically invalidate ex-spouses as beneficiaries. However, other states and some federal retirement plans do not, and in such scenarios, you have to make changes by contacting your plan administrator and Life Insurance Company.

    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. 

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    FAQs On Estate Beneficiaries

    The process of choosing primary and contingent beneficiaries can be complicated, leading to many concerns or questions. Here are answers to some of the most common queries that arise throughout:

    Who should be a contingent beneficiary?

    Contingent beneficiaries may be people, trusts, estates, charities, or organizations. However, the law doesn’t permit children or pets as contingent beneficiaries because they don’t have legal to accept assigned assets.

    Can you have two contingent beneficiaries?

    In specific states, you can list multiple contingent beneficiaries on a life insurance policy or retirement account. Ideally, each beneficiary will be designated a given percentage of your benefits, adding up to 100%. 

    What are the mistakes to avoid when naming your beneficiaries?

    There are a few things to consider and avoid when naming a beneficiary. These include:

    • Naming your estate as beneficiary, as this results in steep taxes.
    • Naming old beneficiaries, which may ultimately give your assets to unintended persons.
    • Naming minors as beneficiaries, as doing so will delay asset deliverability while they wait until they turn 18 or 21 years of age to receive their inheritances.

    It is also best to avoid naming special needs individuals, as doing so means they could be disqualified from aid that they were receiving previously.

    Can I list a child as a contingent beneficiary?

    It’s a common practice for most people to name immediate family members as contingent beneficiaries. Close friends and other relatives can also be listed. However, where you list a minor as a contingent beneficiary, you are required by law to appoint a legal guardian to oversee the money until the minor reaches legal age.

    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.

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