End-of-life planning can be a challenging and emotional experience for your clients. As estate planning professionals, we understand that in navigating this complex issue there can often be confusion between the terms “beneficiary” and “contingent beneficiary”.
Ensuring your clients have a thorough understanding of contingent beneficiaries is a vital part of providing a comprehensive estate planning service. It gives your clients the assurance that their assets will be distributed according to their wishes if their primary beneficiaries cannot inherit.
In this article, we’ll cover what contingent beneficiaries are, their importance, and how to help your clients designate them effectively in their estate plans.
In estate planning, a beneficiary is a person or other legal entity your client names to receive their assets after they die.
A beneficiary doesn’t have to be a person; it can be an organization or charity. For example, your client might decide to name a college, animal shelter, church, or museum as a beneficiary of their estate.
A primary beneficiary or beneficiaries are the individuals or entities your client names to preferably and directly inherit their assets. They may designate more than one primary beneficiary, but they must indicate if they want all their designated beneficiaries to receive equal shares of their estate. They also need to specify if any of them should receive priority over others.
Suppose, for example, a mother names her son and daughter in her Will as the beneficiaries of her estate in equal shares. She also specifies that her grandson should receive the estate if her son and daughter do not survive her. In this case, the son and daughter are the primary beneficiaries.
In this case, the grandson is a contingent beneficiary, and he can only receive the estate if both son and daughter predecease the mother.
As this scenario illustrates, in estate planning, a contingent beneficiary is essentially a backup to a primary beneficiary. For your clients, the purpose of including contingent beneficiaries in their estate plans is to ensure their assets are distributed according to their wishes if the primary beneficiary or beneficiaries cannot inherit. This might be the case if the primary beneficiaries have:
Your clients can name multiple contingent beneficiaries. Contingent beneficiaries have no rights to a client’s estate if their primary beneficiaries are alive and willing to take the inheritance intended for them.
Pro tip: A contingent beneficiary is also sometimes referred to as a remainder beneficiary, a remainderman, or a secondary beneficiary.
Contingent and revocable beneficiaries are not one and the same. A revocable beneficiary is a trust beneficiary who is not guaranteed to receive a distribution from a decedent’s estate. In other words, the Trustor can change their mind about giving them a distribution.
Proactively building a comprehensive estate plan—and designating beneficiaries—will minimize the stress, confusion, and length of the estate administration process after your client’s passing.
Ideally, you should recommend that your clients name all their beneficiaries (both primary and contingent) when they first write their Will. They can always change beneficiary designations down the line. Consider this scenario:
Pro tip: If your client wishes to name a minor as a beneficiary, additional factors must be considered. For example, they will likely need to stipulate that the minor’s inheritance be placed in a trust until they become an adult. Alternatively, they could name a trusted guardian as the custodian of the funds until the minor reaches adulthood.
Here are some questions you may want to consider asking your clients when helping them choose their contingent beneficiaries:
Pro tip: When offering your clients advice on selecting contingent beneficiaries, stress the importance of considering factors like these individuals’ financial stability, relationship to them, and the potential impact of this choice on family harmony.
Your clients might ask you if they really need to choose a contingent beneficiary if they have multiple primary beneficiaries. In our experience, it’s a good idea to name at least one contingent beneficiary (even if they have multiple primary beneficiaries and that person is not the first person they’d like to inherit their assets).
Life can sometimes change in ways nobody can predict. Naming a person (or charity or organization) as a contingent beneficiary may make the process of disbursing a client’s estate easier because their wishes are clearly defined.
Having no contingent beneficiaries can be problematic if a primary beneficiary passes away before your client does. In this case, any assets in question may be considered part of your client’s estate and put through probate court.
As discussed earlier, your clients should choose their primary and contingent beneficiaries when they draft their first Will. They must provide detailed identifying information for all primary and/or contingent beneficiaries, including their full legal name, date of birth, relationship to them, Social Security number, address, email, and phone number.
Be sure your clients understand the importance of revisiting their list of beneficiaries if they experience significant life changes. For example, if they:
Pro tip: Remind your clients to notify new beneficiaries when they name them. Beneficiaries should know what they will receive upon the client’s death and whether they are primary or contingent beneficiaries. Most of the time, beneficiaries need to initiate a claim for the asset and complete the transfer. If a client’s heirs are unaware of their status as beneficiaries, don’t make a claim, or cannot be traced, there’s no guarantee they’ll receive the assets as intended.
Carefully selecting both primary and contingent beneficiaries is a vital element of a well-thought-out estate plan. If your clients have only chosen a primary beneficiary, their estates may not be as secure as they think.
By following the guidance shared in this article, you can help your clients avoid legal complications down the line and provide them with peace of mind that their estates will be distributed according to their wishes after their passing.
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