Estate planning is one of the few areas in life where you can almost always have your own way – provided you take the time to make your wishes known. Whether you create a will, create a trust, or pass your property to others by contract – such as with a life insurance policy – you have the ultimate right to name who you want your assets to go to. These are your beneficiaries.
Order of Inheritance
Naming primary and contingent beneficiaries establishes a pecking order for your bequests. Your primary beneficiary is first in line. Your contingent beneficiary inherits only if your primary beneficiary dies before you do, or if he decides he doesn't want the inheritance. If either of these events occurs, you've named a second person to receive the bequest. Your contingent beneficiary essentially acts as your backup plan. Contracts such as life insurance policies and many retirement accounts usually require you to select both primary and contingent beneficiaries.
Specific Vs. Unnamed Beneficiaries
You can specify your primary and contingent beneficiaries by name, or you can designate them as a group – but it's more common to use the latter approach with your contingent beneficiaries. For example, you might want to leave everything to your spouse, then to your children if your spouse predeceases you. Likewise, you could leave a sizable inheritance to your siblings, then to their children as contingent beneficiaries if any of your siblings don't want the bequest or die first. If you name beneficiaries as a group, it's important to also state exactly how you want everyone to inherit. A "per stirpes" bequest breaks the inheritance down into family groups. For example, your sibling's children would divide his share equally among them. A "per capita" bequest is broken down to individuals. Each of your siblings and your sibling's children – the one who didn't want the bequest or who predeceased you – would all receive an equal share.
If you don't name contingent beneficiaries, you could lose some control over where your assets go when you die. In the case of a contract such as life insurance, the proceeds usually become part of your residuary estate if your primary beneficiary can't take them and you haven't named anyone else. Your residuary estate is made up of whatever is left over after all other gifts have been transferred under the terms of your will. If you named someone to receive your residuary estate, this person will inherit the contract proceeds by law; otherwise, the proceeds usually get divvied up among your named beneficiaries. Some states, such as California, have special laws that dictate where a bequest should go if the primary beneficiary in your will has died or disclaims the inheritance. If you haven't named a contingent beneficiary for that bequest, these anti-lapse laws typically give the bequest to your primary beneficiary's children or descendants – which might not be what you intended. If your primary beneficiary wasn't a relative, the bequest could revert to your residuary estate, just like a contract inheritance.
Just as you can name as many primary beneficiaries as you like in your will or by contract, you can also name multiple contingent beneficiaries. The difference is that – unless you name a group of people as contingent – these beneficiaries usually inherit in a line of succession. For example, you might name your spouse as the primary beneficiary, your children as contingent beneficiaries, and your brother as a second contingent beneficiary in case you don't ultimately have any children. You can even name his children as a third contingent beneficiary in case he predeceases you. This can be a particularly useful approach if you're young and you're planning your estate well into the future.
- MassMutual Financial Group: Understanding Life Insurance Beneficiary Designations
- Paladin Registry of Financial Professionals: Beneficiary Designation Planning – Not as Simple as You Think
- Legacy APC: To Stay in Control of Your Estate Plan, Name Contingent Beneficiaries
- Nolo Plain-English Law Dictionary: Residuary Estate
- Life Insurance Beneficiary Rules
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