You must select one or more beneficiaries if you just drafted a will or opened a new life insurance policy or retirement account. You may be acquainted with the term primary beneficiary, which refers to the individual or entity that gets your policy’s death benefits following your passing. However, there is another kind of beneficiary, the contingent beneficiary.
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What Exactly Is a Contingent Beneficiary?
Typically, a contingent beneficiary is the individual or entity who will get the benefits if the primary beneficiary has passed away, cannot be identified, or declines the payout for whatever reason. You may conceive of the contingent as a secondary or backup beneficiary, someone who receives benefits if the primary beneficiary cannot.
Normally, many individuals identify several primary and contingent beneficiaries. However, contingent beneficiaries will only get insurance funds if none of the primary beneficiaries are accessible. If even one of the primary beneficiaries claims the death benefit, the contingent beneficiaries do not get anything.
The Working Principles of Contingent Beneficiaries
Generally, when deciding who will receive your assets, you may designate your spouse as the only beneficiary of a certain account. In the event that your spouse dies before you, your two adult children may each get a contingent inheritance of 50 percent. You could alternatively identify your spouse as the primary beneficiary of 50% of the account. Moreover, each of your children is the primary beneficiary of 25% of the account.
Nevertheless, as mentioned above, you can even choose a non-profit charitable organization as a beneficiary. However, you have to consult with a tax expert about the most effective manner to do so. The key is that you are free to distribute your assets in any way you see fit.
In addition, the people you designate must have the legal capacity to accept the asset in the case of your demise. If you neglect to identify a contingent beneficiary and your primary beneficiary cannot or will not accept the account, your retirement savings will go to your probate estate. A legal guardian must be assigned to receive and administer the funds until the child reaches the age of majority. The same rules apply if your recipient is mentally disabled and unable to handle their own affairs.
In any event, you can select a legal guardian in advance. However, if you don’t, the court will do so. This may be a costly procedure. The individual chosen by the court may not be someone you choose to govern your property. Significantly, you are not obliged for life to your beneficiary selections. Unless the account is irrevocable, as could be the case with some insurance plans, contingents and primaries can be added or removed without any difficulty. Filling out a form is frequently all it takes to make a change.
Contingent vs. Primary Beneficiary
Let’s consider these beneficiaries as individuals waiting in line. The primary individual is at the front of the queue. The contingent beneficiary is behind them and can only advance if the primary beneficiary steps aside. Consequently, a contingent beneficiary is plan B.
Advantages and Disadvantages of Contingent Beneficiaries
Advantages of Contingent Beneficiaries
It is helpful if you are trying to get out of the probate process.
These accounts are sometimes referred to as “will alternatives.” They can be quite helpful if you wish to avoid probate for at least a portion of your estate’s assets.
It can modify beneficiaries in response to significant life events.
Your selection of beneficiaries and any modifications you make to them will supersede any provisions you may have included in your will for the same assets. You may wish to periodically reevaluate your designations to ensure they still reflect your current life stage. After significant life events, such as a marriage, a child’s birth, a divorce, or a family member’s death, it is common to need to revise your estate plan.
Disadvantages of Contingent Beneficiaries
It can be expensive to manage.
The greater your probate estate, the more expensive it is to settle, which decreases the value of your bequest to your heirs. Beneficiary accounts might be beneficial to remove from your estate.
It can become troublesome if beneficiaries are not kept up to date.
Your strategy may collapse if you fail to keep your beneficiaries informed. They should recognize that they are either first or second in line. They should be aware of the specifics of what they are designated to get. Typically, they are responsible for filing claims for the assets in question when the time comes.
In short, as we can never be certain that our circumstances when we die will be the same as when we got the policy, it is a good idea to have a contingent beneficiary in mind, even if they are not the first person we’d prefer to get the payment.
Suppose a person chooses a beneficiary but not a contingent beneficiary, and their primary beneficiary passes away. In that case, the assets in issue will be regarded as part of the estate and will be subject to probate.
You may name as many dependent beneficiaries as you desire and divide your estate in any proportion you choose. You may also name an organization as a beneficiary instead of a person.
If there are many primary beneficiaries and one dies, their share is divided among the other primary beneficiaries. All primary beneficiaries must be deceased or have renounced their inheritances for the contingent beneficiary to inherit.
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