What Happens if Both the Primary and Contingent Beneficiaries Pass Away?

Posted by Colton Hoisager on Sep 5, 2022

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Beneficiaries are individuals or entities designated to receive distributions from assets (or the assets themselves) when an owner or settlor dies. Retirement accounts, trusts, life insurance policies, and annuities commonly have beneficiaries.  

Going further, the primary beneficiary is the “prime” person or entity that receives the payouts or benefits from the decedent’s assets. A contingent beneficiary (sometimes called the secondary beneficiary) is next in line to receive those proceeds or payouts if the primary beneficiary has died or is unable or unwilling to receive them. 

But what happens if both the primary and contingent beneficiaries die? The answer to this question depends on certain situations. 

The Case of Multiple Beneficiaries  

When it comes to certain assets (think IRAs and life insurance policies), there can be multiple beneficiaries involved. They’re assigned various payout or asset percentages when the owner dies. If there are two primary beneficiaries listed on a life insurance policy and one dies, beneficiary number two would receive the entire payout.   

The same situation can be in play if all primary beneficiaries are dead or are unable to receive the distributions, but there are multiple contingent beneficiaries. If one of those secondary beneficiaries dies, and the primary beneficiaries have passed away, the remaining listed contingent beneficiaries get the payouts, based on pre-determined percentages. 

The Case of No Additional Beneficiaries

Things get a little trickier if the primary and contingent beneficiaries die and there are no other beneficiaries. In that situation, payouts, benefits, or distributions go to the settlor’s estate, where they might be subject to estate taxes. While there are no taxes on life insurance payouts to named beneficiaries, once that payout is part of the estate, it could be subjected to taxes, depending on state law.  

Furthermore, those assets and their proceeds will likely end up in probate, where a judge will decide who receives the assets. This can be a long, drawn-out and expensive process, which can take months to get settled. In a worst-case scenario, if that benefit goes to the estate, it can be seized by creditors, especially if there are debts involved. Anything that is part of an estate (such as life insurance) can also be subject to taxes, depending on state law. This means that any benefits that are left could likely be much smaller than if the recipients had been named as primary or contingent beneficiaries. 

Preventing Confusion 

Life is uncertain. Accidents and illnesses happen, and people become incapacitated or die. The best way to ensure that assets and wealth end up in the hands of beneficiaries rather than under control of an estate is to regularly review primary and secondary beneficiaries and name new ones should things change. Also be sure to review wills, retirement plans, life insurance, and other assets to ensure that they’re up-to-date when it comes to named heirs and beneficiaries. Reviewing these documents every couple of years can help ensure that a payout process goes without a hitch when the time comes for payouts or distributions. 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. 

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