If you’ve had a chance to read our previous blogs on the topic, you already know about beneficiaries. A beneficiary is an individual or an entity eligible to receive distributions from a trust, will, or life insurance policy. We’ve discussed the importance of naming beneficiaries to ensure that your wealth and/or assets go to the designated people or organizations you choose.
Delving a little deeper, it’s important to understand that there are two types of beneficiaries: Primary and secondary. Knowing the difference helps ensure your wishes and instructions are carried out when you die.
Primary Beneficiary: First in Line
As suggested by the name, a primary beneficiary is the individual or entity that is first in line to claim benefits or an inheritance. You don’t have to name just one primary beneficiary; you can name many primary beneficiaries and outline how the benefits/proceeds are split between them.
This practice is common with life insurance policies. If you name multiple primary beneficiaries, you’ll be asked to indicate what percentage each entity receives. When you die, the primary beneficiaries receive allocations, based on the indicated percentages.
Contingent Beneficiary: Just in Case
If your primary beneficiary dies, can’t be located, or refuses the benefits, the contingent beneficiary is in line. Sometimes known as a secondary beneficiary, the contingent beneficiary can be an individual (such as a child or grandchild), multiple people, or an organization.
And yes, there could be times when your primary beneficiary refuses an inheritance because of potential tax burdens. Or the primary beneficiary might be in the middle of a life change (such as a divorce or bankruptcy) or might want someone else to receive the proceeds.
Importance of Naming Both
Naming beneficiaries is important for several reasons:
- It eliminates confusion as to who receives what asset when you die
- It avoids the costly, time-consuming probate process
- It helps ensure that your loved ones are taken care of when you’re no longer around
Is it necessary to name a contingent beneficiary? From a legal standpoint, no. But failure to do so could mean legal woes. Without a primary or contingent beneficiary named in your will or life insurance policies, your distributions could end up in probate court, with the state determining asset allocations. There could be confusion when it comes to which entities are eligible to receive which proceeds.
It’s important to consider where you want your assets to go when you die. It’s a good idea to name primary and contingent beneficiaries to receive those proceeds. While you can make those designations online with many life insurance policies, it’s a good idea to check with your family attorney or financial planner for additional information on other assets.
