Contingent Beneficiary vs. Primary Beneficiary: What’s the Difference?

If you are preparing your assets, you will likely find yourself worrying about your beneficiary. Whether you are preparing your living trust, your retirement account, or even a life insurance policy, you’re probably familiar with the phrase beneficiary –  but how does a primary beneficiary differ from a contingent beneficiary?

What is the definition of beneficiaries?

A beneficiary is someone who receives assets, property, or other benefits from someone who has died. A beneficiary is named as part of a will or trust, and they receive something from the deceased. Typically, the will and trust or estate plan will explain what are entitled to as a beneficiary, such as life insurance benefits, a piece of property, art collection, and more. 

What is a Primary Beneficiary?

A primary beneficiary is exactly as the name suggests: the primary person selected to receive a payout from a life insurance policy or the assets from a trust. A beneficiary also often handles estate management. This is usually someone close to you, like a spouse.

What is a Contingent Beneficiary?

There’s also a contingent beneficiary that you might consider appointing as you are preparing your assets. This person is essentially designated as a backup plan in case something with your primary beneficiary  doesn’t work out. Concerning your benefits, a contingent beneficiary is someone who becomes the beneficiary if your primary choice is unable to fulfill the role.

For example, you might choose your spouse as your primary beneficiary at the time that you prepare your estate, and then name your child as the contingent beneficiary. This means that should you pass away, your spouse is entitled to all of your assets. In the event that your spouse has already passed away or cannot be located in order to receive your assets, then the child – the contingent beneficiary – would inherit your assets.

Difference between primary and contingent beneficiary

The main difference between primary and contingent beneficiaries is the order in which they inherit. A primary beneficiary is the person who is entitled to receive your estate first upon your passing. 

What about secondary beneficiaries?

If you have a primary beneficiary, do not be fooled into thinking that you can only have one person. Primary just refers to the first in line, but it can apply to multiple heirs or beneficiaries. When you establish your primary beneficiary, you can name all of your children, for example, or all of your siblings, and then write out how you want your assets distributed amongst them. 

For example: Linda has one child and two siblings. In her trust, she names all 3 people as primary beneficiaries. Her son is to inherit her home and investments. The rest of her belongings and assets are to be divided equally among all 3 or sold and then divided equally among them.

Who can and cannot be a beneficiary?

You can name anyone you want as a beneficiary. You can name a child, spouse, friend, family member, local non-profit, etc… However, you cannot name a pet. If you want to provide for your pet upon your passing, you can set up a trust for the pet which names someone as the person in charge of that trust. Then it falls to the person, the ‘trustee,’ to use the money accordingly, you can name a person or organization. 

Note: It is important to realize the legal requirements for your state. Some states require that beneficiaries be at least 18 years of age, otherwise they must have a legal guardian who controls the assets until the beneficiary reaches legal age. If a legal guardian is not named, then you risk your estate going to probate court while one is appointed, which can be time-consuming, stressful, and expensive for everyone involved. 

Now consider the example of Linda above but with a contingent beneficiary. 

Linda names her child and two siblings as primary beneficiaries and uses the same rules for distribution of her assets. She names her brother-in-law as the contingent beneficiary, which means the brother-in-law inherits all of her belongings if her child and her two siblings have already passed away or cannot be located. 

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Primary vs Contingent Beneficiary

You might wonder why you need both a primary and a contingent beneficiary, or whether you should just select one over the other. When you prepare your estate, you are under no obligation to name a primary and contingent beneficiary. However, in the event that you do not, and something goes wrong locating the primary beneficiary or they have passed away before you, then your estate has to go to probate court before your assets can be distributed. This can cause family problems, delays to the inheritance your heirs are set to receive, and can cost a significant amount of money, taking away a large portion of your estate in the form of legal fees. 

If you already have a primary and contingent beneficiary established, then you can circumvent all of these problems in the event that the primary has already passed away or cannot be located.

For example: John has a $500,000 life insurance policy and a home valued at $800,000. He also has a small coin collection and one car. His will states that his son and daughter are the primary beneficiaries, and his current spouse is the contingent beneficiary. Therefore, when John passes away, his children get to divide the life insurance policy, home, coins, and car. However, if John passes away after his children, or his children cannot be found, then John’s current spouse would receive all of his estate. 

That said, most people choose to use the opposite approach: the spouse is the primary beneficiary and the children are contingent beneficiaries. This is typically because the spouse might still be in charge of the children, so if one spouse dies, the other can keep the house and car and use any life insurance payouts or other assets to continue providing for the family. 

How to Change Beneficiaries

Your estate plan is a living document to which changes can be made at any time so long as you are still alive and of sound mind. You can always take stock of your situation and change beneficiaries or inheritances in the following situations:

  • You get married
  • You have children
  • You get divorced
  • Your children graduate school
  • You get a new pet
  • You get a new asset
  • etc…

While you are still alive, a beneficiary won’t have any legal rights to your assets. Sometimes, beneficiaries don’t even know that they are a beneficiary, so you can choose to change your beneficiaries at any time on almost all accounts. Such as retirement accounts or life insurance policies. Only in a situation involving  an irrevocable trust or account can you not change your beneficiaries once you choose them. Other factors to consider are certain retirement accounts, such as401ks or IRAs, which might make it easier for you to change the names of your beneficiaries. Keep in mind, though, that with these types of accounts might come tax consequences, especially if you change a beneficiary from your children to your spouse. 

Conclusions

Understanding the contingent beneficiary meaning can help you prepare your estate effectively. By setting up your beneficiaries, both primary and contingent, or changing beneficiaries as circumstances in your life change, you can protect your estate from unnecessary litigation in probate court and ensure that your beneficiaries receive the inheritance as you intended and as they deserve. If you are unsure about how to change your beneficiaries or you have questions about who to name, consider speaking with a qualified attorney.

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