What is a Beneficiary? (Primary vs. Contingent, and More)
By Pete Benson, Co-founder of Beacon.
Imagine grieving the loss of a loved one and trying to figure out how to honor their last wishes. You’re in the emotional process of planning a funeral, managing expectations of loved ones, possibly coordinating travel arrangements, and so much more. Somewhere down that list is what to do with the deceased person’s assets—and that’s where beneficiaries come into play.
Designating both primary and contingent beneficiaries is a key part of the estate planning process. Just like you wouldn’t want to be left high and dry without a clue about what to do with someone else’s stuff, you don’t want to leave someone else in that position.
If you want to ensure your assets are handled according to your wishes, you’ll want to set up beneficiaries within your life insurance policies, retirement accounts, will and living trust.
What Is a Beneficiary?
A beneficiary—also known as a primary beneficiary—is the first person or entity (like a charity) in line to receive an asset when you die. You should name beneficiaries for your:
- 401(k)s, IRAs, and other retirement accounts
- Life insurance policies
- Checking and savings accounts
By naming beneficiaries, you can avoid the possibility of your money and possessions going into probate, which can not only get expensive for your estate but also hold up the distribution of your inheritance.
What Is a Contingent Beneficiary?
In case your primary beneficiary passes away or can’t be reached, you should also name a contingent beneficiary—which is the next person or entity in line.
Primary vs. Contingent Beneficiary
To put it simply, your primary beneficiary will be the first person entitled to the benefit; whereas the contingent beneficiary is next in line. If something happens to your primary beneficiary and they can’t accept the benefit, then it passes to your contingent beneficiary.
Naming Multiple Beneficiaries
Do you want to divide single pieces of your estate between multiple people? This is pretty common, especially when people have more than one child. You can actually name multiple beneficiaries and assign each of them a percentage of the asset. Designating these percentages will help ensure that a fund or possession is distributed according to your precise intentions.
Naming multiple beneficiaries should never be confused with naming conflicting beneficiaries. For example, when you get married you might name your spouse as the primary beneficiary to your 401(k). You might also get that written into your will. But down the road, if you ever get divorced, you’ll want to change the beneficiary on both the policy and in your will. Here’s why:
If you’ve named a 401(k) beneficiary in your will, for example, but that person is different than the beneficiary you named on the 401(k) account—the beneficiary named on the actual account wins out. The executor of a will defers to the beneficiary designation on the account itself.
There are many reasons you may want to change a previously assigned beneficiary over the course of your life. This is why it’s important to consult with an experienced estate attorney and avoid conflicting directions between the beneficiary designations and the estate plan.
What Happens If You Don’t Name a Beneficiary?
Beneficiaries are important to keep your wishes clear to family members after your passing. It avoids questions, doubts and even fighting over which assets were intended for who.
If you don’t name or update a beneficiary on an existing account, the benefits will be paid to the last beneficiary on file. If there isn’t one, in Tennessee it will default to your estate and get tied up in probate court.
Even if you’re fine with that, it makes it harder for your descendants or those in your blood line to claim their inheritance. During the probate process, assets are frozen, all debts must be absolved, and the will must be validated in court. It’s a bit of a paperwork headache, and it’s very time consuming.
Another mistake we see is if you only name a primary beneficiary with no contingent beneficiary—and the primary beneficiary dies or can’t be reached—it’s unfortunately the same as having no beneficiary.
Assuming a beneficiary will share a benefit out of the goodness of their own heart is an equally alarming mistake. For example, if you have four children and you want them to receive the death benefit on a life insurance policy, it’s critical to legally name all four of them as beneficiaries. If you make the mistake of only naming one of them, or think that naming “my children” covers it, the person named as the beneficiary has no legal obligation to share any of it with their siblings.
Don’t Miss Crucial Details Involving Your Beneficiaries
Even if you have an estate plan in place, it’s a good idea to revisit your named beneficiaries once each year. Have any life changes taken place that would affect your beneficiaries, like divorce, death, criminal activity, or even just a falling out?
You can always confirm your beneficiaries with your financial advisor. If you don’t have one, we’d love to go over your financial goals with you here at Beacon Capital Management. We’re a full-service financial firm that offers financial planning, estate planning, healthcare planning, and more all under one roof. Give us a call today to make sure you’re covered from every angle.