What Is a Contingent Beneficiary?

Definition and Examples of Contingent Beneficiaries

A family sits around a red table. A woman in a pink shirt dishes our food to an adult man, elderly woman, a small girl, and a small boy.

A contingent beneficiary receives a beneficiary-named account if the primary beneficiary can't or won't do so. They're "second" beneficiaries who more or less wait in the wings, just in case. They're next in line if the asset can't transfer to the first person who's named.

You should name whom you want to receive the asset if you invest in an IRA, a 401(k), or an insurance policy.

What Is a Contingent Beneficiary?

A contingent beneficiary only inherits if the primary beneficiary does not. The account will be released to your second beneficiary if your first beneficiary can't be found, declines the gift, isn't legally able to accept it, or dies before you do.

How Contingent Beneficiaries Work

You might name your spouse as the primary beneficiary of 100% of an account. Your two adult children might receive 50% each as contingent beneficiaries if your spouse can't or won't take the account. You might also name your spouse as the primary beneficiary of 50% of the account, with your children each named as 25% primary beneficiaries. The point is that you can dice it up any way you choose.

You can even name a nonprofit charitable organization as a beneficiary, although you'll want to talk to a tax professional about how to best do that.

You can name more than one primary beneficiary and more than one contingent beneficiary—you're not limited to one of each. You can set percentages for each, citing what portion of the account they should receive.

Your retirement accounts will revert to your probate estate if you fail to name a contingent beneficiary, and your primary beneficiary can't or won't accept the account.

Contingent vs. Primary Beneficiaries

Think of these beneficiaries as people standing in line. The primary person is at the head of the line. The contingent person is behind them and can only move forward if the primary beneficiary steps aside. A contingent beneficiary is thus "plan B."

Contingent Beneficiary Primary Beneficiary
Can only accept the asset if the primary beneficiary does not Their inheritance isn't affected or decreased by naming a contingent beneficiary
Ensures that your asset will go to someone of your own choosing if your first beneficiary doesn't or can't take it Is the individual or entity that you would most like to receive the asset

Pros and Cons of Contingent Beneficiaries

Accounts with these types of designations are often referred to as "will substitutes." They can be very useful if you want to avoid probate of at least some of your assets. Your choice of beneficiaries will override any and all terms you might leave in your will for the same assets.

You don't have to name either type of beneficiary, but these assets will end up in your probate estate if you don't. That could cost your estate more money to settle.

The larger your probate estate, the more costly it becomes to settle, which reduces the value of what you can leave to your probate heirs. It can be helpful to take beneficiary accounts out of your estate.

Your plan could fall apart if you fail to keep your beneficiaries up to date. They should know that they're named as being either first or second in line. They should know the identifying details of what they're named to receive. It's often up to them to make claims for the assets in question when the time comes.

You might want to revisit your designations now and then to make sure they still fit your current stage of life. The need to update your estate plan often occurs after major life changes, such as a marriage, birth, divorce, or a death in the family.

Another reason to update beneficiary data is that you might simply have changed your mind about how you want to pass wealth on to family members.

Requirements for Contingent Beneficiaries

The persons you name must be legally able to accept the asset in the event of your death.

It can create problems if you name your minor children as beneficiaries, because they can't accept the gift until they reach the age of majority in their state.

A legal guardian must be named to accept the money on a minor's behalf and manage it until they reach the age of majority. The same would apply if your beneficiary were mentally incapacitated and unable to manage their own affairs.

You can appoint a legal guardian in advance in either case, but a court must legally appoint someone if you don't. That can be an expensive process. The person named by the court might not be someone you want to have control of your asset.

Changing or Adding Beneficiaries

You're not locked into your beneficiary choices for life. Contingents and primaries can be added or replaced with little to no fuss, unless the account is irrevocable, as might be the case with some insurance policies. Making a change is often just a matter of filling out a form.

Contact your plan custodian to make changes to your IRA. Contact your plan administrator if you want to make changes to a 401(k) or another employer-sponsored retirement plan.

Key Takeaways

  • A contingent beneficiary is second in line to inherit from you if your primary or first beneficiary can't or won't do so.
  • Retirement accounts will often revert to your probate estate if you fail to name a contingent beneficiary, and your primary beneficiary dies before you do.
  • You can name one or more beneficiaries in both roles.
  • Updating your designations on retirement accounts or insurance policies can be as easy as filling out a form.