A beneficiary is any person who gains an advantage or profits from something. In the financial world, a beneficiary typically refers to someone eligible to receive distributions from a trust, will or life insurance policy.
But what if a beneficiary passes away, cannot be located, or does not want to receive the inheritance?
In this article, we’ll discuss the differences between primary and contingent beneficiaries, why both are important when making an estate plan, and more.
What is the Difference Between a Primary and Contingent Beneficiary?
In estate planning, a primary beneficiary is the first in line to receive assets upon someone’s death. They are either named a beneficiary in the person’s will or, if there is no will, they are first to inherit based on intestacy laws.
A contingent beneficiary, on the other hand, is the backup beneficiary. They only receive assets if the primary beneficiary is unable or unwilling to do so.
What is the Difference Between a Primary and Successor Beneficiary?
A contingent beneficiary steps in only if the primary beneficiary cannot inherit initially, while a successor beneficiary takes over the inherited assets after the primary beneficiary's death.
Some people refer to the successor beneficiary as the “beneficiary's beneficiary”, as they are appointed not by you, the testator of the will, but by the beneficiary in their own will.
What Percentage Should a Contingent Beneficiary Receive?
When creating your will, you get to decide how much of your estate to leave to your primary and contingent beneficiaries. You can specify any percentage that you feel is appropriate.
Learn more about beneficiaries in your will →
The Role of Contingent Beneficiaries in Estate Planning
Contingent beneficiaries are key to your estate plan. They ensure your assets are distributed as you wish, even if your primary beneficiaries can't inherit. By naming contingent beneficiaries, you create a backup plan that guarantees everything is handled according to your intentions.
In wills and trusts, designating a contingent beneficiary helps maintain the effectiveness of your estate plan. If a beneficiary denies an inheritance or can’t inherit, it can pass to someone else you’d want to inherit it rather than be placed back into your estate.
You can leave specific gifts or cash legacies in your wills, like a car or a house, and you can choose a contingent beneficiary for those assets too. You can also choose primary and contingent beneficiaries for your residue. Additionally, you can name contingent beneficiaries for the possible scenario that your spouse and issue all pass away before you, which is called an ultimate distribution scenario.
If you don’t name any contingent beneficiaries or don’t outline your wishes for your residual estate, it will be handled according to the inheritance laws of your province. This is why it’s so important to name a contingent beneficiary.
What Happens if You Don't Name a Contingent Beneficiary?
If you don't name a contingent beneficiary, your assets could be distributed according to your provincial intestacy laws, which might not align with your wishes or what is best for your beneficiaries.
Learn about what happens when you don’t have beneficiaries or a will →
How to Choose a Contingent Beneficiary
1. Investigate who should be a contingent beneficiary
Choose someone you trust who can manage the inheritance responsibly. This could be a family member, friend, or charity.
Next, consider who might be a reliable backup beneficiary by looking at different factors like;
- Will this person appreciate the asset and take care of it?
- If it’s something that requires a lot of maintenance, does this person have the time or money to do so?
- Years down the road, will this person be alive and well enough to inherit the asset?
- If they live in another country, will this person face difficulty with taxes or inheritance laws if they inherit this asset?
2. Discuss your wishes with your person of choice
Ask your desired beneficiary if they’d be willing to inherit your assets. Sometimes, life changes can prevent people from accepting an asset, and you won’t know until you ask them.
For example, your brother may have loved to inherit your vacation property, but they’re getting older and may not want to be able to maintain it themselves or pay someone to help maintain it for them.
3. Make your choice official
Update your will, trust, or insurance policy documents to officially name the contingent beneficiary. In doing so, you make sure your backup plan is in place.
4. Review Regularly
Depending on life changes and personal preferences, changing a contingent beneficiary may become necessary in the future. Make sure to review your will periodically and update it as necessary.
With Willful, you can update your will anytime for free!
Frequently Asked Questions
Should I Name My Children as Contingent Beneficiaries?
Naming your children as contingent beneficiaries can ensure that your assets support your family if the primary beneficiary cannot inherit.
Learn more about planning your estate as a new parent →
Can the Same Person Be a Primary and Contingent Beneficiary?
No, a contingent beneficiary must be different from the primary beneficiary to make sure there is a backup plan.
How Many Contingent Beneficiaries Can Be Named?
You can name multiple primary beneficiaries and specify the percentage each should receive. You can also name multiple contingent beneficiaries in the event one or more of your primary beneficiaries cannot inherit.
In the Willful platform, you can easily select people or charities as contingent beneficiaries for your estate.
Do Contingent Beneficiaries Have the Same Rights as Beneficiaries?
As a type of beneficiary named in a will, contingent beneficiaries have many similar rights to primary beneficiaries, such as the entitlement to be notified they have been named as beneficiary, the ability to challenge a will or executor, and the ability to make a claim on behalf of the estate or trust.
Unlike a primary beneficiary, a contingent beneficiary’s rights do not include the entitlement to request financial accounts and information about the estate and its assets unless the will specifically states that they should.
Do All Primary Beneficiaries Have to Die Before Assets Move to the Contingent Beneficiary?
For the asset to pass to a contingent beneficiary, the primary beneficiary must be unable to inherit. This means the primary beneficiary must either decline the inheritance, be unable to be located, lack the capacity to inherit it outside of a Henson Trust, or have passed away prior to inheriting.
However, not all primary beneficiaries need to be unable to inherit or have passed away for a contingent beneficiary to be eligible to inherit. If there is a contingent beneficiary named for each primary beneficiary, then when one of those primary beneficiaries is unable to inherit, the contingent beneficiary for that asset will inherit instead.
For example, let's say your brother is named as the primary beneficiary for your car and your best friend is the primary beneficiary for your house. If your brother is unable to inherit the car, then the car will go to your sister, who you’ve named as the contingent beneficiary for that asset. Meanwhile, the house will still go to your best friend.
The importance of a will, beneficiaries and all
Making a will is about more than just passing on money and property to your beneficiaries.
Even if you don't have significant assets or money, a will allows you to:
- appoint an executor to wrap up your estate,
- assign a guardian for any minor children or pets,
- outline your funeral and burial wishes,
- and more!
Not only does having a will reduce the time your family has to spend settling your estate, it also saves them from facing unanswered questions about your wishes. Life is unpredictable, but having a will can help us prepare for the unexpected and protect our loved ones from future chaos and complications.
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