In today’s day and age, it is important to be abreast of the current trends. These trends not only include everyday happenings of the state, but also procedures about the division of assets after death. The best way to ensure an appropriate distribution of your assets is by assigning a primary and contingent beneficiary.
To help you make a more impartial decision, here is an exhaustive outline of the primary vs contingent beneficiary, their requirements, and other relevant details.
Beneficiaries at a glance
Unprecedented times like these have highlighted the need for individuals to plan ahead of time. In such a case, if you are creating a retirement account or inaugurating a life insurance policy; you should name a primary beneficiary.
What does primary beneficiary mean?
In simple terms, a primary beneficiary refers to the first person in line to receive your assets after your death. So far, there is no such rule that indicates the need to appoint one primary beneficiary. You can choose to name multiple primary beneficiaries and highlight the division of assets between them accordingly.
What does contingent beneficiary mean?
As the name suggests, a contingent beneficiary falls second in line to receive ownership of your assets. However, it is important to note that a contingent beneficiary will only receive anything from the policy or account if the primary beneficiary/ beneficiaries have died or can’t be traced.
Here is an example to clarify the concept of a beneficiary system.
You are a father of two children. While setting up your insurance policy, you name your daughter as the primary beneficiary, whereas your son is appointed as the contingent beneficiary. If you are to die, the amount retrieved from the policy would be given to your daughter until she predeceases you or cannot be tracked by officials. Thus, in such a case, the assets would be transferred to your son, the contingent beneficiary. However, if you name both your children as primary beneficiaries, the assets would be divided amongst them equally.
Requirements for contingent beneficiaries
There is no hard and fast rule for choosing a contingent beneficiary. You can choose almost anyone to be the sole receiver of your assets or money, on one simple condition: The individual must have crossed the majority age under state laws to receive the inheritance amount directly. If your appointed beneficiary is a minor, (under the age of 18 or 21) the assets would be first transferred to a legal guardian.
If you are appointing a beneficiary, you should make a conscious effort to appoint an adult as a minor taking up the role may become problematic at various levels; the issue could be transferred to probate court- circumstances that the insurance policies and retirement accounts are designed to evade.
When choosing a beneficiary, you don’t necessarily have to choose a person. A charity or nonprofit organization can also be appointed as your primary or contingent beneficiary, with the addition of several other tax implications.
However, choosing a contingent beneficiary must lie in the realm of people and organizations only. No matter how much you love your beloved pet, they cannot be appointed as a beneficiary. If you are worried about the well-being of your pet after you’re gone, you can leave a particular amount of money to a trust which will be used for your pet. As far as the pet’s welfare is concerned, you can choose someone to act as the caretaker of the pet, and the funds allocated will be used to improve the well-being of your pet.
Can you change beneficiaries?
During your life, your beneficiaries do not have any legal rights to your assets. They may not even know they are your beneficiaries. Thus, you are not compelled to stick to your beneficiaries forever. If you wish to make a change in your designated beneficiary, you can do so with ease- with one major exception: if the account is irrevocable, beneficiaries cannot be changed.
The processing for changing beneficiaries in retirement accounts like IRA and 401(k)s is fairly straightforward. However, the tax consequences would not only be severely costly but also extremely burdensome, particularly in the cases of spouses. Hence, in such a case, it is imperative to consult a tax professional to ensure the procedure is as seamless as possible.
Primary vs contingent beneficiary
As established above, a primary beneficiary is the first person in line to inherit your assets, whereas a contingent beneficiary falls second in line to receive ownership of your assets. Here is a side-by-side comparison of both beneficiaries for your understanding:
|PRIMARY BENEFICIARY||CONTINGENT BENEFICIARY|
|Inheritance/Ownership of assets remains unaffected by the existence of a contingent beneficiary|
Will only be eligible for assets if the primary beneficiary does not accept
Is the person/organization you’d like the most to be able to receive your assets
Is the person on the second choice, who you’d like the most to be able to receive your assets after your primary beneficiary
So, what does contingent beneficiary mean?
The information highlighted above presents a clear view of the concept of contingent beneficiaries. If you want your assets to be divided amongst your children equally, appoint them as primary beneficiaries. But if you want to leave your valuables to one individual only, appoint him/her as a primary beneficiary and leave a contingent beneficiary- who will only be able to take ownership of the assets if the primary beneficiary does not.
We hope this article helps you to make a more informed decision about the appointment of beneficiaries. Choosing a beneficiary to take ownership of your assets is a crucial matter and thus, it is important to weigh each decision before making the final call.
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