A primary beneficiary must be named when you create a living trust, a retirement account, or take out a life insurance policy on yourself. This particular beneficiary is the first person entitled to receive your assets after you die. But if the primary beneficiary dies first or their whereabouts are unknown, your assets will transfer to the person you name as your contingent beneficiary. The contingent beneficiary is the second person in line to receive your assets after you die. It is a good idea to have a contingent beneficiary to avoid having your heirs go to probate court to distribute your assets. The probate process can be lengthy and costly.
An Overview of a Primary Beneficiary and Contingent Beneficiary
The primary beneficiary has the right to inherit and claim your assets upon your death before anyone else. However, there can be multiple primary beneficiaries if you wish to have your assets distributed amongst more than one of your heirs.
The contingent beneficiary only inherits your assets if all the primary beneficiaries die before you do or cannot be located. So even if one primary beneficiary dies or goes missing, the other primary beneficiaries named will still be entitled to the assets before the contingent beneficiary.
In most situations, a person will choose their children as their contingent beneficiaries and their spouse as their primary beneficiary. But if you want your children and spouse to receive your assets upon your death, you would have them all become your primary beneficiaries. The distribution of your assets doesn’t have to be equal among the primary beneficiaries.
For instance, let’s say you have five children and a spouse. You could decide to have your spouse receive 50% of your assets, and each child receive 10% of your assets. But if your spouse passes away first, their percentage of the inheritance would go to the remaining primary beneficiaries. In this scenario, these would be your children.
How to Select the Best Beneficiaries
It is your decision as to who inherits your assets after you die. You can choose whomever you want as the contingent and primary beneficiaries of your retirement accounts, life insurance policy, and living trust. The only stipulation in most states is that your beneficiaries must be at least 18 or 21 years old before receiving the assets. Otherwise, the assets transfer to their legal guardian. But again, it depends on the laws of your state.
Not all beneficiaries have to be people. For example, most states let you assign a nonprofit organization or preferred charity as a primary beneficiary or contingent beneficiary. Just make sure you consult an attorney about the tax implications involved here. Pets and animals cannot be declared primary or contingent beneficiaries. However, what you can do is leave money to your pet in a last will and testament upon your death. Just name someone you trust as the designated trustee to ensure the money benefits the pet throughout their life.
Don’t forget to assign contingent beneficiaries as a precaution in case your primary beneficiaries die or go missing. This will safeguard your assets from ending up in the hands of the state.
Modifying Your Designated Beneficiaries
Your primary beneficiaries cannot use your assets until you pass away. Some people don’t even tell their primary beneficiaries that they have been designated as their primary beneficiaries. The reason is that a person may want to modify their designated beneficiaries on their retirement accounts or life insurance policies at some point in the future. The only situation where you cannot change the beneficiaries is if it is an irrevocable account.
You may wonder why you’d want to change your beneficiaries in the first place if they are family members. Well, things happen in life that might make you want to change your beneficiaries. These events could include divorce, marriage, or the birth of a new child. These kinds of changes to your life will make you want to change the beneficiaries of your retirement accounts and life insurance policies to ensure the right people receive the assets of your state upon your death. Therefore, you must periodically review your estate plan to ensure you still agree with the designated beneficiaries and provisions set forth in it.
Please be aware that severe tax consequences could result from modifying your designated beneficiaries on retirement accounts like 401(k)s and IRAs. That is why you should seek advice from a tax attorney or another tax legal professional to understand the most financially beneficial way to modify your designated beneficiaries.
You can contact Alfano Law Office by calling (603) 856-8411 or at this link.