Adding beneficiaries to wills, trusts, insurance policies and bank accounts is an essential part of estate planning. But forgetting to add a contingent beneficiary can be grave, as it leaves you with no control over what happens to a large part of your estate.
Here’s why and how you should add a contingent beneficiary, in detail:
What is a Contingent Beneficiary?
A contingent beneficiary is a ‘backup’ beneficiary. It should be your alternative choice(s) for the person you wish to receive parts of your estate plan.
When you pass away, assets will be distributed via your wishes and instructions. If your primary beneficiary has passed away before you, refuses their inheritance or cannot be contacted, then your contingent beneficiary will be used.
Do I Need a Contingent Beneficiary?
It is highly advised that you name a contingent beneficiary in your estate plan, even though it is quite rare that they’re used.
The risk of not having a contingent beneficiary is that your estate may be forced to go back through probate (which is expensive, lengthy and tiring for your loved ones).
Without a contingent beneficiary, it would also risk your estate’s distribution being determined by the court (and Florida intestate succession laws).
Keep in mind the age and health of a potential beneficiary. For example, imagine you pick an elderly individual; there is a chance they will pass away before they can inherit your asset – which is OK, but it would increase the need to appoint contingent beneficiaries too.
It doesn’t take much to name a contingent beneficiary in your estate plan, so there is rarely any reason not to.
Who Should Be My Contingent Beneficiary?
Determining who should be your contingent beneficiary is a personal choice. There are no rules.
We advise that you put clear instructions over the distribution, such as percentages for shared distributions. For example:
“If my son ‘John (primary beneficiary) is unable to be the primary beneficiary, my estate should be shared with my two nephews ‘Bill’ and ‘Ben’ (50% each).”
Contingent beneficiaries can be:
- People
- Organizations
- Estates
- Charities
- Trusts
Minor children or pets cannot qualify, as they don’t have the legal ability to accept an assigned asset. If you do list a minor, their legal guardian will be appointed to oversee the assets until they reach the legal age.
When to Review Your Beneficiary Selection?
It is advised that you review your beneficiary selection upon major life changes in your family, or significant asset purchase/sales or financial changes.
For example, after:
- Marriage
- Divorce
- Births
- Deaths
- Real estate purchases
- Asset purchase or sales
How Many Beneficiaries Should I Have?
There is no general rule over the number of beneficiaries you should appoint, but some policies or accounts may have limits (such as 10 per asset).
- Name at least one primary beneficiary.
- Name at least one contingent beneficiary, ideally more.
- Consider discussing your intentions with your beneficiaries in advance, if you want to reduce drama and pain for your loved ones after your pass away.
- Do it as soon as possible.
Different Types of Beneficiaries
Trust Beneficiaries
Trust beneficiaries are named to receive trust funds. Trusts often contain assets that are managed (and sometimes sold) in the best interests of the beneficiaries.
The distributions come depending on the terms and conditions of the trust, often at milestones and certain ages. Trust assets avoid probate.
Will Beneficiaries
The beneficiaries named in a ‘last will and testament’ receive assets or money when the will’s creator passes away.
This happens immediately through the probate process. The process will distribute assets via the following order of priority.
- Primary beneficiaries
- Contingent beneficiaries
- Florida intestate succession laws.
Life Insurance Beneficiaries
Life insurance policies distribute insurance proceeds to the named beneficiaries. If the beneficiary predeceases the policyholder, it will pass to a contingent beneficiary or, if needed, the estate (which would make the funds subject to probate).
Retirement Account Beneficiaries
Retirement account beneficiaries receive account funds when the account holder passes away. If the beneficiaries predeceased the account holder, it will pass to a contingent beneficiary or, if needed, the estate (which would make the funds subject to probate).
Retirement account planning should be done carefully as if all funds are received immediately, the beneficiary may face high taxes. Often, a beneficiary will receive it over their lifetime to avoid tax issues.
Payable-on-Death Beneficiaries
Payable-on-death accounts allow the beneficiary to receive funds immediately after the account holder’s death. This includes checking accounts and saving accounts. These accounts avoid the probate process.
However, if there aren’t available beneficiaries listed then the account goes to the probate estate and is not available instantly to heirs.
Changing Beneficiaries
Changing or adding beneficiaries is often as easy as completing a form or speaking to your bank or insurance provider. However, for wills and trusts it can be more complicated. It is advised that you consult a Florida estate planning lawyer when making any changes to trust documents.
Hire an Estate Planning Attorney for Trusts in Riverview and St. Petersburg, FL
If you want to add or change a trust document or will, then our Florida estate planning attorneys can help. We regularly help Floridians amend and draft complicated trust documents, to prevent their loved ones from facing stressful and costly consequences.
Free Consultation
Battaglia, Ross, Dicus & McQuaid, P.A. is U.S. News and World Reports Tier 1 law firm in Florida, specializing in Estate Planning & Probate since 1958. With award-winning experienced estate planning attorneys, they can help you create a will or trust.
