What Is a Contingent Beneficiary?

Definition and Examples of Contingent Beneficiaries

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A contingent beneficiary is someone or something that receives a bequest of a beneficiary-named financial account if the primary beneficiary can't or won't do so. Contingent beneficiaries effectively wait in the wings. They're next in line to inherit if the assets can't go to the primary beneficiary.

You should name the individuals or institutions you want to receive the assets when you die if you invest in an individual retirement account (IRA), a 401(k), or an insurance policy.

What Is a Contingent Beneficiary?

Contingent beneficiaries can only inherit if the primary beneficiary does not. The account manager will release the asset in question to your contingent beneficiary if your primary beneficiary can't be located, declines the inheritance, isn't legally able to accept it, or predeceases you.

How Contingent Beneficiaries Work

You might name your spouse as the primary beneficiary of 100% of an account, and your two adult children as contingent beneficiaries to receive 50% each if your spouse can't or won't take it. 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 your primary or contingent beneficiary, although you'll probably want to talk to an account representative or a tax professional about how to best do this.

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

Your retirement accounts will revert to your probate estate if you fail to name a contingent beneficiary and your primary beneficiary is unwilling or unable to accept the account.

Contingent Beneficiaries vs. Primary Beneficiaries

Think of contingent and primary beneficiaries as individuals standing in line. The primary beneficiary is at the head of the line. The contingent beneficiary is behind that person and can only move forward if the primary beneficiary steps aside. A contingent beneficiary is "Plan B."

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

Pros and Cons of Contingent Beneficiaries

Accounts with beneficiary 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 selection of beneficiaries will override any instructions you might leave in your will for the same assets.

It's not required that you name either primary or contingent beneficiaries, but these assets will end up in your probate estate if you don't, potentially complicating it and costing your estate additional money to settle.

The larger your probate estate, the more complicated and expensive it becomes to settle, and this costs your beneficiaries money. It can be beneficial to take beneficiary-named financial accounts out of your estate and deal with them separately.

Your plan could be foiled, however, if you fail to keep your beneficiaries up to date at all times. They should know that they're beneficiaries—either primary or contingent—and they should have the identifying details of what they're inheriting. It's often up to them to make claims for the assets in question when the time comes.

You might want to revisit your beneficiary elections periodically to make sure they still fit your current stage of life. The need to update your beneficiary information typically occurs after major life changes, such as a marriage, birth, divorce, or a death in the family.

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

Requirements for Contingent Beneficiaries

The individuals you name as contingent beneficiaries must be legally able to take possession of the asset in question in the event of your death. Otherwise, it undoes the whole purpose.

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

A legal guardian must be appointed 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 primary beneficiary is mentally incapacitated and unable to manage their own financial affairs.

It's possible to appoint a legal guardian in advance in either case, but a court is legally obligated to appoint someone if you don't. This can also be a time-consuming and expensive process.

Changing or Adding Beneficiaries

You're not locked into your beneficiaries for life. Contingent beneficiaries and primary beneficiaries can easily be added or replaced unless the account is irrevocable, as some insurance policies are. Otherwise, it's often just a matter of completing a form.

Contact your plan custodian to make any necessary 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 is unwilling or unable to do so.
  • Retirement accounts will commonly revert to your probate estate if you fail to name a contingent beneficiary and your primary beneficiary predeceases you.
  • You can name one or more primary and contingent beneficiaries.
  • Updating beneficiary designations on retirement accounts or insurance policies can be as easy as completing a form.

The Balance does not provide tax or investment advice. This information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor. Always consult with a professional to address your own personal circumstances.

Article Sources

  1. Insurance Information Institute. "What Is a Beneficiary?" Accessed Aug. 5, 2020.

  2. HG.org Legal Resources. "Importance of Naming Contingent Beneficiaries in Estate Planning Documents." Accessed Aug. 6, 2020.

  3. State Farm. "What to Consider When Choosing a Beneficiary." Accessed Aug. 5, 2020.

  4. American Academy of Estate Planning Attorneys. "Modifying an Irrevocable Trust." Accessed Aug. 5, 2020.