What Is a Contingent Beneficiary, and Why Would You Need One?

Contingent Beneficiaries Are Something Like a Backup Plan

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A contingent beneficiary is someone or something that receives the benefits of an account if the primary beneficiary can't or won't do so after the account owner's death. Contingent beneficiaries stand in the wings, next in line to inherit assets if something should go wrong. Think of them as a backup plan.

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.

Primary Beneficiaries

When you invest in a beneficiary-named financial account, such as an individual retirement account (IRA), a 401(k), or an insurance policy, you should name the individuals or institutions you want to receive the assets in the account when you die. These are designated as your primary beneficiaries.

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.

For example, you might name your spouse as the primary beneficiary of 100% of the account, and your two adult children as contingent beneficiaries to receive 50% each. You might also name your spouse as the primary beneficiary of 50% of the account, with your children each named as 25% primary beneficiaries.

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 tax professional about how to do this. The point is, you can dice it up any way you choose.

Restrictions on Beneficiaries

Keep in mind that the individuals you name as contingent beneficiaries must also 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 well, because they can't accept the gift until they reach either 18 or 21, depending on state law.

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. It is possible to appoint a legal guardian for minors who are deemed to be the beneficiary of any gifts prior to the account owner's passing. However, if a guardian has not already been appointed, the courts must appoint one, which is time-consuming and can be expensive.

Changing Beneficiaries

You're not locked into your beneficiaries for life. Contingent beneficiaries and primary beneficiaries can easily be changed unless the account is irrevocable (some insurance policies and trusts are). But if you want to change the beneficiaries on an IRA or 401(k), it can be done quickly and easily—sometimes even online. It's usually just a matter of completing a form.

For an IRA, contact your plan custodian to make any necessary changes. Contact your plan administrator if you want to make changes to a 401(k) or other employer-sponsored retirement plan.

Keep Your Beneficiaries in the Loop

It's important to keep your beneficiaries up to date at all times. They should know they're beneficiaries—either primary or contingent—and they should have the 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.

What If You Don't Designate Any Beneficiaries?

Accounts with beneficiary designations are often referred to as "will substitutes." Your selection of a beneficiaries overrides any instructions you might leave in your will for the same assets. It's not required that you name either primary or contingent beneficiaries. However, it will help you avoid having these assets end up in your probate estate if something goes wrong, 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, which costs your beneficiaries money.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Article Sources

  1. Insurance Information Institute. "What Is a Beneficiary?" Accessed April 27, 2020.

  2. State Farm. "What to Consider When Choosing a Beneficiary." Accessed April 27, 2020.

  3. American Academy of Estate Planning Attorneys. "Modifying an Irrevocable Trust." Accessed April 27, 2020.

  4.  Enea, Scanlan & Sirignano, LLP. "The Importance of Beneficiary and Contingent Beneficiary Designations for IRAs, 401ks, Life Insurance Policies and Annuities." Accessed April 27, 2020.